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TMI Blog1986 (11) TMI 390X X X X Extracts X X X X X X X X Extracts X X X X ..... e 7 of the very same deed they also decided not to close the firm's accounts on the date of death of Kantilal Raychand Mehta, but they wanted to determine the profit of the firm on time basis, in proportion to the number of days he was a partner in the year to the total number of days in the year and to allocate the profits up to the date of demise of the deceased partner. There was reconstitution of the firm and the said reconstituted firm came into force from 24-12-1977 as per the partnership deed of even date. Admittedly, the assessee is one of the partners both in the original as well as in the reconstituted firm and as per the reconstitution she was having 30 per cent share both in profits and losses. There was change in the said firm again as per the deed dated 1-4-1978. Under this new partnership apart from the four partners under the reconstituted deed dated 24-12-1977, one Mrs, Surajben K. Mehta, wife of late Kantilal Raychand Mehta joined the partnership in her capacity as the trustee of Mehta Trust. This reconstituted firm took over the business of the old firm with all the assets and liabilities as on 31-3-1978 and determined to carry on the business as a going conc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eld that the incoming partner brought a capital of ₹ 10,000 as a consideration for the allotment of a share to the trust. Taking into consideration that the share transferred by the assessee is only 5 per cent, the AAC held that there is no justification to sustain the gift-tax imposed and hence, he cancelled the assessment. 4. As against the said order of the AAC the present appeal is filed by the revenue and the matter stands for our consideration. It was contended by the learned departmental representative that the AAC erred in holding that the capital contributed by the incoming partner was adequate consideration for her admission into the partnership. The alleged consideration did not pass to the assessee and, therefore, the capital contribution cannot he taken to be consideration for the reduction of share of the assessee in the firm. The learned departmental representative invited our attention to the Madras High Court decision in M.K. Kuppuraj v. CGT [1985] 153 ITR 481, in which on a consideration of the case-law, the Madras High Court held that where a partner relinquishes a portion of his profit-sharing interest in the partnership in favour of another, the transact ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ss and he sought to give 50 per cent of his interest to his son. The son who was introduced into the partnership contributed ₹ 1 lakh. The Tribunal found that the sum of ₹ 1 lakh paid by the son was towards consideration for the assets transferred and the Tribunal having accepted that the amount of ₹ 1 lakh should be taken as consideration for the assets transferred, held that there was no gift and set aside the order of the Commissioner. In that case, approving the Tribunal the Hon'ble High Court held that consideration in a slim of ₹ 1 lakh passed from the son to the father for the benefits conferred on the son by being admitted into the partnership. They further held that the balance amount of ₹ 44,787 can only be considered as the amount on which tax was payable. Firstly, in our opinion, the case decided by the Kerala High Court is not on all fours with the case before us. In that case, the proprietary business was, for the first time, converted into a partnership business. In those circumstances, their Lordships held that the amount of ₹ 1 lakh brought by the son can be considered as a consideration paid to the father for foregoing 50 pe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... artners are introduced in an existing firm such new partners not only have share in the profits of the firm but subject to the contract to the contrary may be liable to share the losses of the firm. They may have to contribute capital or they may be taken as working partners. When they contribute capital or when they are taken as working partners there is adequate consideration. So the question of transfer of the right to share future profits by the existing partners in favour of the new partners does not arise. Merely because the share in the profits and losses allotted to one or other person is reduced, compared to the position obtaining earlier, in the reconstitution of the firm because of the allotment made to the new partners, it cannot be assumed that the allotment of shares to the new partners is by the reduction effected in the shares of the existing partners. During the subsistence of a partnership no partner can deal with any portion of the property as his own. Nor can he assign his interest in any specific item of the partnership property to any one. His right is to obtain such profits, if any, which may fall to his share from time to time and upon the dissolution of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng inducted as partners and there was no taxable gift as a result of the reallocation of shares. In CGT v. Chalasani Subbayya [1983] 144 ITR 295, the Andhra Pradesh High Court held that on the retirement of a partner there is no gift of any property. It was further held that it is not open to the department to pick out one of the assets of the firm, namely, the goodwill, and say that a retiring partner had relinquished his share in the goodwill and levy gift-tax thereon. This Bench of the Tribunal by its orders in GT Appeal No. 11 (Coch.) of 1983 dated 28-6-1983 and GT Appeal No. 33 (Coch.) of 1983 dated 7-8-1985 held that contribution of capital by the new partner is adequate consideration and no gift is involved. The order of the Tribunal, Madras Bench 'B' in C.V. Jacob's case (supra) is distinguishable. Firstly in that case the contribution of capital of ₹ 6,000 was found to be inadequate for giving share of 20 per cent. The Tribunal directed the GTO to take the value of gift at 10 per cent instead of 20 per cent taken by him. Even this order on these facts would go to show that contribution of capital by new partners in proportion with others is adequate consi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... deed dated 1-4-1978, Mrs. Surajben K. Mehta, widow of late Shri Kantilal R. Mehta, joined the firm as a partner in her capacity as the trustee of Mehta Trust, by contributing ₹ 10,000 as her capital. The partners agreed to share the profits and losses of the business as follows: 1. Mrs. Saralaben S. Mehta 25 per cent 2. Mrs. Madhuben M. Mehta 25 per cent 3. Mrs. Geetaben D. Mehta 25 per cent 4. Shri Narotham M. Shanghvi 10 per cent 5. Mrs. Surajben K. Mehta 15 per cent Under clause 8 of the partnership deed dated 1-4-1978, all the partners agreed to conduct and manage the business of the firm jointly and severally. 3. The GTO was of the view that the assessee, Mrs. Saralaben S. Mehta, had surrendered 5 per cent of her profit-sharing right in the business of the firm in favour of Mrs. Surajben K. Mehta without adequate consideration and so the case involved liability to gift-tax under section 4(1)(a) of the Act. A notice under section 16 was, therefore, issued to the assessee requiring her to file the return of gift for the assessment year 1979-80. The assessee filed a nil return contending that there was no gift in favour of Mrs. Surajben K. Mehta. The GTO reject ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ench of the Tribunal in GT Appeal No. 11 (Coch.) of 1983 and GT Appeal No. 33 (Coch.) of 1983. 7. It is against this background that the case has been referred to me for resolving the point of difference between the two Members of the Cochin Bench. 8. Before me, the representative of the department reiterated the arguments advanced by the learned Judicial Member and strongly relied upon the decisions of the Madras High Court in CGT v. V.A.M. Ayya Nadar [1969] 73 ITR 761, CGT v. K.P.S.V. Duraiswamy Nadar [1973] 91 ITR 473 , CGT v. A.M. Abdul Ragman Rowther [1973] 89 ITR 219, CGT v. T.S. Shanmugham [1977] 110 ITR 237 and M.K. Kuppuraj's case (supra). He urged that the assessee had surrendered her 5 per cent right in the firm in favour of the incoming partner without adequate consideration and so there was a taxable gift within the meaning of section 4(1)(a). 9. The representative of the assessee, on the other hand, emphatically contended that the reduction of the assessee's share in the firm on the admission of Mrs. Surajben K. Mehta as a partner did not tantamount to a gift inasmuch as she had contributed ₹ 10,000 as capital apart from her agreement to share the los ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... urt in Chhotalal Mohanlal's case (supra). In the case of Karnaji Lumbaji (supra) ex-employees were taken as partners who agreed to work for the partnership without any remuneration and to share in the assets and liabilities of the firm and also future losses. On these facts t was held by the Gujarat High Court that there was no gift in the transaction. Similar view has - been taken by the Karnataka High Court in D.C. Shah's case (supra). In that case, the partnership was enlarged by admission of new partners, who contributed capital and agreed to work for the partnership business. The Karnataka High Court held that the decrease in the share of the existing partners as a result of rearrangement or reallocation of the shares did not amount to a transfer without adequate consideration and, consequently, there was no taxable gift. At this stage, I may also refer to the view taken by the Kerala High Court in the case of V.M. Philip (supra). In that case, the assessee had entered into an agreement with his son for the purpose of running the plantation business. According to the deed of partnership, each of the two partners contributed ₹ 1 lakh to the capital of the firm. Af ..... X X X X Extracts X X X X X X X X Extracts X X X X
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