TMI Blog1978 (8) TMI 8X X X X Extracts X X X X X X X X Extracts X X X X ..... hip deeds dated July 15, 1960, and February 18, 1961. By the former deed of partnership, a partnership was formed between the assessee and one A. P. Sheth, with effect from the first day of Vaisakh, Samwat year 2006 (June 1, 1950). Under this deed of partnership, the two partners were to share the profits and losses in equal proportions. There was a change in the constitution of the firm with effect from February 15, 1961, and the terms of the said change of the constitution were put into writing by a new instrument of partnership executed on February 18, 1961. The new instrument of partnership provided that the assessee and A. P. Sheth, who were the partners under the earlier deed, offered to admit Manubhai Amritlal Sheth as a partner of the firm on the terms and conditions contained in the said partnership deed and Manubhai Amritlal Sheth in his turn accepted the said offer and joined as a partner from February 16, 1961. It further provided that the assessee, A. P. Sheth, and M. A. Sheth agreed to admit three minors, Manharlal Premji Jobanputra, Arvind Premji Jobanputra and Pankaj Amritlal Sheth, to the benefits of the partnership from February 16, 1961, upon the terms and condit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the gift at Rs. 69,184. In an appeal by the assessee before the AAC, the quantum of the goodwill was disputed by him, but the AAC, for the reasons given in his order, enhanced the value of the gift to Rs. 93,398. In a further appeal by the assessee before the Tribunal, one of the contentions taken up by the assessee related to the valuation of the goodwill. However, the Tribunal did not decide this point as it took the view that no gift-tax was attracted by the admission: of the minors to the benefits of the partnership. Before the Tribunal, the main contention on behalf of the assessee was that in law no gift-tax could be charged since the goodwill solely belonged to the adult partners and to the minors who were admitted only to the benefits of the partnership. This contention on behalf of the assessee was not accepted: by the Tribunal because under the Partnership Act a minor also would be entitled on the dissolution of a firm to a share of the surplus assets which would include the value of the goodwill. However, the Tribunal took the view that no gift was made by the assessee to his minor sons by admitting them to the benefits of the partnership. Firstly, it held that the ad ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... two minor sons, Manharlal and Arvind, were admitted to the benefits of the partnership, with the share in profits as provided in the said deed. He submitted that there was a gift of 3/5ths share of the assessee in the goodwill in the earlier partnership. He pointed out that, as indicated by the AAC, the assessee had 50 per cent. share in the goodwill under the deed of partnership dated July 15, 1950, and upon the reconstitution of the firm, there was a gift of 3/5ths share in the goodwill by the assessee in favour of his two minor sons. He submitted that the matter has to be looked at the, point of time when the reconstitution takes place and the Tribunal was in error in really emphasising the rights and liabilities of the partners as well as the minors after the reconstitution of the firm when it started functioning and doing business. In short, his submission is that the Tribunal was in error in taking the view that at no stage the ownership of any particular portion of the goodwill could be said to be assigned to the minor sons when they were admitted to the benefits of the partnership which would attract gift-tax in the material year. Mr. Mehta, on the other hand, on behalf of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e context otherwise requires, " gift " means the transfer by one person to another of any existing movable or immovable property made voluntarily and without consideration in money or money's worth. In order that a gift is made within the meaning of the Act, the following essentials are to be fulfilled.: (1) there must be a transfer by one person to another; (2) the transfer should be of any existing movable or immovable property ; (3) the transfer must be made voluntarily; and (4) the transfer must be made without consideration in money or money's worth. If all these essentials are fullfilled, then there will be a gift within the meaning of the Act as defined in cl. (xii) of s. 2. As mentioned in cl. (xxii) of s. 2, " property " includes any interest in property, and by this inclusive definition the goodwill of a partnership will be " property ". The expression transfer of property " is defined in cl. (xxiv) of s. 2 as under: " Transfer of property means any disposition, conveyance, assignment, settlement, delivery, payment or other alienation of property and, without limiting the generality of the foregoing, includes (a) the creation of a trust in property; (b) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and each one of them has been given 15 per cent. share while Pankaj, who is the son of the other partner, A. P. Sheth, has been given 10 per cent. share. What we have to consider is whether by such reconstitution of the firm in the manner indicated above was there any gift of the goodwill of the earlier firm by the assessee to his two minor sons, Manharlal and Arvind, who were admitted: to the benefits of the partnership it cannot be disputed, that under I the earlier deed of partnership, which consisted of only two partners, since the two partners had an equal share in the profits and losses including the assets of the firm, each one of them had 50 per cent. share even in the goodwill of the business. When the old firm was reconstituted in the manner indicated above, the share of the assessee was reduced from 540 per cent. to 30 per cent., while the share of the other partner, viz. A. P.Sheth, was reduced from 50 per cent. to 20 per cent. By the reconstitution of the firm two erstwhile partners decided to take a third partner, Manubhai Amritlal Sheth, and he was given 10 Per cent. share. Thereafter, the three major partners in their turn agreed to admit the minors to the benefits, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... artners. Out of the, three minors, two are the sons of the assessee while the third minor is the son of another partner. If regard be had to the provisions of the deed of partnership dated February 18, 1961, which was to have effect from February 16, 1961 it is quite clear that the newly constituted firm has taken over not only the assets of the old firm but also the liabilities thereof. When such is the position, whether the net result of the transaction will amount to a gift by any partner in favour of any other person will depend upon the facts and circumstances of each case. If the value of the assets including the goodwill of the earlier firm is less than the liability thereof then there can be no question of gift upon a reconstitution of the firm because the liability exceeds the value of the assets. It is only when the value of the assets including the goodwill exceeds the total liabilities of the earlier firm, that the question of gift of the goodwill can arise. However, it will depend upon the facts and circumstances of each case whether there has been a gift in respect of the goodwill. If upon the reconstitution of a firm, an erstwhile partner or even a minor who has been ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pears to be erroneous because the well-recognized distinction which has been pointed out earlier has been overlooked by it. The Tribunal was substantially carried away by the effect of a reconstituted firm carrying on business and thereafter sharing profits or losses or sharing their rights in the property upon the dissolution of a reconstituted firm. Our attention was invited to the two decisions of the Gujarat High Court and a decision of the Madras High Court. On behalf of the assessee reliance was placed upon the decision of the Gujarat High Court in the case of CGT v. Chhotalal Mohanlal [1974] 97 ITR 393. This was a case where the assessee and two other persons, G and P, were partners of a firm having seven annas, four annas and five annas shires, respectively. P retired from the partnership and a new partnership deed was executed on November 9, 1960, between the assessee, G, and the assessee's son, R, each of them having 26 per cent. share. The assessee's two minor sons, K and D, were admitted to the benefits of the partnership, their shares being 12 per cent. and 13 per cent., respectively, in the profits. In the assessment year 1963-64, the GTO held that there was a gift ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ners have been diminished and new partners after reconstitution have been given. Some shares, there can be no question of a transfer of property within the meaning of s. 2(xxiv) of the Act. It will depend upon the facts of each case whether there has been transfer or not, and whether such a transfer amounts to a gift as defined in s. 2(xii) of the Act. It is also equally difficult to accept the proposition therein laid down that it cannot be said that when the minors are admitted to the benefits of the partnership, a transaction was entered into between the minors and the adult partners of the firm. The definition of the expression " transfer of property" as defined in s. 2(xxiv) is wide enough to include within its scope, inter alia, any assignment or alienation of property. If upon a proper Scrutiny of a particular transaction it appears that the share of a major erstwhile partner is reduced and the share so reduced has been given to his minor children who are admitted to the benefits of the partnership, there may result assignment or alienation of property. In such a case, a transfer of property takes place; if such transfer is effected voluntarily, and without consideration in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... admitted to the benefits of the partnership there was a capital contribution by each one of them. ..Secondly, so far as the major son was concerned, he agreed to render services as well as agreed to share the loss. In such a case, as consideration in money or money's worth exists, the concept of a gift of the goodwill does not come into play. Mr. Mehta, however, relied upon the observations at p. 577, where it is stated that as far as the minor sons are concerned, there was absolutely no transfer of any assets as such so that there could be no gift of any goodwill in their favour. This is merely a passing observation and is not the ratio of the case. As we have indicated earlier, since there was a capital contribution not only by the major son who was taken up as a partner but also by the minors who were admitted to the partnership, there was consideration in money or money's worth and one of the essential ingredients to make the transfer, a gift, is lacking in the case. This case, in our opinion, is, therefore, of no assistance to Mr. Mehta. In our, opinion, it is not possible to lay down general rule in a case like this which will be applicable to all cases where there is a chan ..... X X X X Extracts X X X X X X X X Extracts X X X X
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