TMI Blog1980 (12) TMI 25X X X X Extracts X X X X X X X X Extracts X X X X ..... was a taxable gift by the assessee when his share in the profits of the firm was reduced from 28% to 19% and 9% share was given to his son, Shri Kiran D. Shah ? In T.R.C. No. 1 of 1977: " Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that there was a taxable gift by the assessee when his share of profit in the firm was reduced from 5% to 3% and 2% was given to his brothers?" In T.R.C. No. 10 of 1977 "Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that on the assessee's retirement from the firm in which he had 9% share, which was given on his retirement to his 3 sons, viz., P.Y. Nagaonkar, A.Y. Nagaonkar and V.Y. Nagaonkar in equal shares of 3% each, there was a taxable gift under the Gift-tax Act, 1958? " In T.R.C. No. 11 of 1977: "Whether, on the facts and in the circumstances of the case, the Tribunal, was right in holding that there was a taxable gift by the assessee when his share of profit in the firm was reduced from 5% to 4% and 1% was given to his brothers ?" In T.R.C. No. 18 of 1977: " Whether, on the facts and in the circumstances of the case, the Tribunal was right in l ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l in the business of the firm. It is on this basis that the AAC held that there was no gift and there was adequate consideration for K. D. Shah becoming a partner in the firm. The department preferred further appeals to the Income-tax Appellate Tribunal. The Tribunal was of the opinion that the consideration cannot be said to be adequate. It agreed with the conclusion reached by the AAC in regard to there being a transfer of property. Accordingly, it reversed the decision of the AAC and held that the levy of gift-tax was correct and remanded the matter to the AAC as he had not gone into the question of evaluation of the gift. By a document dated November 19, 1968, there was a further reconstitution of the firm. One of the partners, namely, Raghunath Gundappa Nagaonkar died on November 13, 1968. Two other partners, namely, Bhaichand Chhaganlal Shah and Yeshvant Gundappa Nagaonkar retired from the partnership. The firm was reconstituted, in the light of these circumstances, inducting four new persons, namely, Uday Bhaichand Shah, Satej Bhaichand Shah, Prafulla Yeshvant Nagaonkar and Anil Yeshvant Nagaonkar and also admitted four minors to the benefits of the partnership. They were ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... persons and they had to attend to the business of the partnership and thus had to render service. The decision of the Supreme Court in CGT v. P. Gheevarghese, Travancore Timbers and Products [1972] 83 ITR 403, and of the Gujarat High Court in CGT v. Karnaji Lumbaji [1969] 74 ITR 343, that of the High Court of Allahabad in CGT v. Sardar Wazir Singh [1975] 99 ITR 104, and of the Bombay High Court in CGT v. Smt. V. Lalita B. Shah [1979] 118 ITR 794, and other cases referred to therein and that of the High Court of Madras in CGT v. Ali Hussain M.Jeevaji [1980] 123 ITR 420, and other cases referred to therein are relied upon for the petitioners. The learned counsel for the department sought to place reliance on the decision of the High Court of Madras in CGT v. V.A.M. Ayya Nadar [1969] 73 ITR 761, and the decision of the same High Court in CGT v. K. P. S. V. Duraiswamy Nadar [1973] 91 ITR 473, which followed the former. Before proceeding further, we may refer to one submission made by the learned counsel for the department. He contended that it had been admitted that there was a transfer of property by the alleged donor D. C. Shah, to K.D. Shah who was inducted as a partner and the st ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... firm is a valuable right and capable of transfer. Accordingly, distribution of a part of that right involves transfer of property. If the transfer is gratis or there is inadequate consideration, the same would amount to a gift chargeable to tax under the Gift-tax Act. The assessee's contention on this issue is accordingly rejected. The Gift-tax Officer's finding that there is a transfer of property when a part of the right to share in profits of the firm is transferred to another is upheld." The Tribunal agreed with this conclusion of the AAC in para. 4 of its order: "We have considered the rival contentions. The first question is whether there was a gift of right to 9% share in the profits of the firm by D. C. Shah to his son, Kiran D. Shah. The Appellate Assistant Commissioner has answered this question in the affirmative relying on the Madras High Court ruling in CGT v. V. A. M. Ayya Nadar [1969] 73 ITR 761. The Madras High Court has held the same view in [1973] 89 ITR 219 (CGT v. A. M. Abdul Rahman Rowther). We have followed this ruling in G.T.A. No. 20 (Bang) 74-75 dated 11-11-1975. Following these rulings, we hold that the Appellate Assistant Commissioner was correct in h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s as partners with specified shares under the name and style of Shah Chhaganlal Ugarchand, Akkolkar, at Nippani, under an instrument of partnership executed on 29-10-1962. WHEREAS partners Nos. 1 to 11 have decided to admit Shri Kiran Devchand Shah as a capitalist partner from 1-1-1964 and carry on the said business in partnership as before by taking over all the assets and liabilities as on 31-12-1963. As a result of this, a change has occurred in the constitution of the firm from 1-1-1964. Hence, this new deed of partnership is executed on the terms and conditions hereinafter set out below ........" The names of all the 12 partners are mentioned and it was stated that the partnership had commenced from January 1, 1964, and its duration shall be at will. In cl. 6, the shares of all the 12 persons were specified. In para. 9 the constitution of the firm earlier to January 1, 1964, was mentioned. Claus 10 stated that D. C. Shah, as the managing partner, shall be paid a sum of Rs. 1,000 per month in addition to the other benefits he was entitled to enjoy as a partner. He was to be managing partner for his life. Clause 12 of the deed mentioned that all other partners should devot ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nto by the parties. Having regard to the recitals in the deed of partnership, it is not at all possible to make out any transfer of property as such by any particular individual in favour of another so as to result in any gift. By the contract evidenced by the deeds, persons are admitted as partners or to the benefits of the partnership (in the case of minors). It is, as a consequence, that the respective shares are specified. The rights accruing to them are incidents of they having become partners and not by virtue of the transfer of any such property. In Gheevarghese's case [1972] 83 ITR 403 decided by the Supreme Court, the assessee who was the sole proprietor of a business, converted it into a partnership consisting of himself and his two daughters. The capital of the partnership was Rs. 4 lakhs out of which the contribution of the assessee was Rs. 3,50,000 and contribution of the capital in a sum of Rs. 25,000 each by the two daughters was effected by transfer of Rs. 25,000 from the assessee's account to the account of each of the daughters. The assessee had filed a return in respect of the gift of Rs. 50,000 in favour of his daughters representing the share capital contribu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or the department suggested that there is no such categorical enunciation by the Supreme Court. The criticism made by the Supreme Court is clear enough and clearly implies that mere inducting of persons as partners would not result in a transfer as such, resulting in a gift. The Gujarat High Court also had to consider a similar case in CGT v. Karnaji Lumbaji [1969] 74 ITR 343, where fresh persons were admitted as partners in an existing firm. There was a reduction of the share in regard to one of the persons as a consequence of the redistribution of the shares among all the partners. The GTO had come to the conclusion that to the extent of 19 np. share in the goodwill of the firm, there was a gift. The contention of the assessee was that there was no transfer by the assessee of any existing property and even if there was a transfer it was not without consideration in money or money's worth. The Tribunal had upheld the claim of the assessee. The contention put forth by the assessee before the High Court was that there was no transfer as such of any property and there was no liability to any gift-tax, while the contention on behalf of the department was that on account of the reduc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o the decision in CED v. Kantilal Nemchand [1978] 115 ITR 89 (Bom). That was a case where a father had taken his son as a partner in a business, and subsequently increased his share in the profits also. The question that arose was whether it amounted to a gift as that question became material in the estate duty proceedings as to whether the property transferred was liable to estate duty under s. 10 of the E.D. Act. Tulzapurkar J., who delivered the judgment, observed as follows (p. 791); ".. ...... both initially as well as on the occasion when the profit-sharing proportion was reshuffled, the parties intended that for whatever share was granted to the son, the son will have to work in the business as working partner, which business was carried on by the father as the sole proprietor till 9th November, 1950; in other words, the son was under an obligation to devote his time and energy for the partnership business and such business was carried on by both the partners in consultation with each other. Devoting time, energy and attention by the son to the partnership business will have to be regarded as sufficient consideration for taking the son as a partner and giving him initially ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... om that, the clauses in the deed made it obligatory upon them to participate in the business and work for it diligently. That would also constitute adequate consideration. We have noticed that at the time of the reconstitution of the firm in 1968, there was no further capital introduced by K. D. Shah, but his share in the profits was increased by 5 paise, as also that the share of D. C. Shah was reduced to 14 paise in a rupee. It is obvious that K. D. Shah had been in the business for nearly four years and it is reasonable to assume that the increase in the share was made on account of his capacity to shoulder more responsibilities on account of his having gained further experience. Merely because the share of D. C. Shah came to be reduced by 5 paise and there was a corresponding increase so far as K. D. Shah was concerned, it cannot be assumed that 5 paise share of D. C. Shah came to be transferred to K. D. Shah. The Tribunal rejected the contention that there was adequate consideration from K. D. Shah at the time he was introduced as a partner in 1964. It observed that he was a creditor to the extent of about 2.35 lakhs and had advanced moneys and it was the very same money tha ..... X X X X Extracts X X X X X X X X Extracts X X X X
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