TMI Blog1980 (4) TMI 22X X X X Extracts X X X X X X X X Extracts X X X X ..... the said partnership. The said partnership was constituted under a partnership deed dated 12th Jan., 1960. It was a partnership at will. Clause 7 of the said partnership deed provided that the net profits and losses of the partnership business shall be divided as under : (a) Bhavanidas Harjivandas Mehta 50% (b) Vasantrai Bhavanidas Mehta 25% (c) Jekisandas Bhavanidas Mehta 25% ----- 100% ----- Clause 8 of the said partnership deed provided that the capital of the partnership business shall be contributed by the parties thereto in such proportions as may be mutually agreed upon by them from time to time. Clause 16 of the said partnership deed provided that retirement, insolvency or death of any of the partners shall not dissolve the partnership as to its other partners in the said firm. Clause 17 of the said deed set out that it had been expressly agreed between the parties to the said partnership deed that in the event of death or retirement of a partner for whatsoever reasons, the right in the go ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l be divided as under : (a) Bhavanidas Harjivandas Mehta 10% (b) Vasantrai Bhavanidas Mehta 25% (c) Jekisandas Bhavanidas Mehta 25% (d) Navnitrai Bhavanidas Mehta 25% (e) Rameshchandra Bhavanidas Mehta, the minor, entitled to the benefits of the partnership 15% The losses, if any, of the partnership shall be divided among the partners hereto as under : (a) Bhavanidas Harjivandas Mehta 25% (b) Vasantrai Bhavanidas Mehta 25% (c) Jekisandas Bhavanidas Mehta 25% (d) Navnitrai Bhavanidas Mehta 25% Provided that the said minor Rameshchandra on his attaining majority and agreeing to remain as partner in the firm shall also share the loss in his profit sharing proportion, i.e., at 15%, and in that event the share of loss being borne by the party of the first part shall be reduced proportionately : 8. the capital of the partnership business shall be contributed by the parties hereto in such proportions as may be mutually agreed upon by them from time to time." Clause 9 of the said partnership deed, inter alia, prov ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be divided among the four major partners in equal shares and on the minor, Rameshchandra, attaining majority and agreeing to remain as a partner in the firm, he would also be made liable to share the losses in his profit-sharing proportion. These considerations by way of money and money's worth mentioned in the partnership deed constituted the consideration for the introduction of the new partners. It could not, therefore, be said that any property was transferred to the deceased other than for adequate consideration" Apart from this, the Tribunal held that the ratio of the decision of the Gujarat High Court in CGT v. Karnaji Lumbaji [1969] 74 ITR 343, wherein, according to the Tribunal, it was held that a reduction of a partner's share on the reconstitution of the firm did not amount to a gift, was applicable to the facts of the present case. The Tribunal held that neither of the two Explanations to s. 2(15) of the said Act applied to the facts of this case. The Tribunal held that there was no transfer of any property involved in the case, that even if there was a transfer of any property it was not made without consideration and such a transfer did not operate as gift within s. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tinguishment at the expense of the deceased of a debt or other right shall be deemed to have been a disposition made by the deceased in favour of the person for whose benefit the debt or right was extinguished, and in relation to such a disposition the expression 'property' shall include the benefit conferred by the extinguishment of the debt or right : " Sub-section (1) of s. 9 runs thus: " (1) Property taken under a disposition made by the deceased purporting to operate as an immediate gift inter vivos whether by way of transfer, delivery, declaration of trust, settlement upon persons in succession, or otherwise, which shall not have been bona fide made two years or more before the death of the deceased shall be deemed to pass on the death...." There is a proviso to this sub-section which is not material for the purpose of this case. The submission of Mr. Joshi, the learned counsel for the applicant, is that the action of the deceased of taking his major son as a partner in the said reconstituted partnership and admitting his minor son to the benefits thereof had the effect of reducing the share of the deceased from 50% to 40% and of giving to the major son a share of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... R was given commission at the rate of half per cent. on the total sales of the firm in addition to his share. A third partnership deed was executed on December 18, 1959, between N and his two sons, R and D, by which their shares were respectively 55 paise, 30 paise and 15 paise in the rupee. The provision giving commission to R was omitted. By clause 5, D was also given salary at the rate of Rs. 125 per month in addition to his share. Clause 6 of the earlier deeds regarding goodwill was omitted. Clause 7 provided that all the three partners were entitled to attend and conduct the business in the mutual interest and would do so diligently. It was held by the Division Bench that the question whether the provisions of s. 10 of the said Act were attracted or not must principally depend upon whether the relinquishment by N of his rights in the goodwill and tenancy rights on the occasion of the reshuffling of the profit-sharing proportion amounted to gifts or not; unless the relinquishment amounted to gifts in the sense that it was without adequate consideration, the further question as to whether the donor had not entirely excluded himself from possession and enjoyment of the goodwill ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ership or interest in property and whether having regard to the facts and circumstances of the case, there was a gift by the assessee in respect of his share in the goodwill of the firm when his two minor sons were admitted to the benefits of the partnership as a result of which the assessee who had prior to this transaction 60% share in profits got it reduced to 30% and his two minors were given 15% share each. The Division Bench has observed as follows (p. 326): "If upon reconstitution of a firm an erstwhile partner or even a minor who has been admitted to the benefits of a partnership, has contributed any capital or a major partner has agreed to pay something, then it will not be possible to take the view that so far as the goodwill is concerned there has been a gift, because in such a case there has been consideration, if not in money at least in money's worth." We have to consider the facts of this case in the light of the aforesaid decisions regarding the question of consideration and the adequacy thereof We find that as far as the major son, Navnitrai, is concerned, as against his being admitted as a partner in the reconstituted firm, by reason of cl. 9 of the partnershi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ) of sub-s. (1) of s. 27 of the said Act for agreeing to admit Navnitrai as a partner in the reconstituted firm and for reducing his share in the said partnership. As far as the minor son, Rameshchandra, is concerned, it is true that he could not be expected to attend to the business of the partnership and was not liable for the losses of the partnership firm. However, we find here as a fact that Rameshchandra brought into the reconstituted firm, as his share of the capital, the same amount, viz., Rs. 10,000 just as was brought in by the four partners of the reconstituted firm as against which Rameshchandra has been given the benefits of the partnership only to the extent of 15%. As we have already pointed out, the deceased as well as the other partners of the reconstituted firm had the benefit of the capital contribution brought in by Rameshchandra and, hence, it must be held that there was full consideration moving from Rameshchandra to the deceased in money or money's worth as contemplated by cl. (a) of sub-s. (1) of s. 27 of the said Act. In view of what we have observed earlier, we are of the opinion that even assuming that there was a disposition by the deceased in favour o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... even then, it could not be said that when the firm was reconstituted and the minor sons were admitted to the benefits of the partnership business there was consequently a relinquishment or abandonment of any debt, contract or other actionable claim or any interest in the property of any person. It: cannot be said that when a firm is reconstituted and as result of its reconstitution, the shares of some partners who have continued after the reconstitution have been diminished, and the new partners who joined have been given some shares by the adjustment of the shares amongst the old partners, there is a transfer of property within the meaning of s. 2(xxiv) of the G.T. Act. It could not be said that when the minors were admitted to the benefits of the partnership, a transaction was entered into between the minors and the adult partners of the firm and s. 2(xxiv)(d) was not applicable. It was held that giving benefits of partnership to the minors, Kiritkumar and Deepakkumar, did not constitute a gift under the G.T. Act. It appears to us that this submission is not altogether without force. As held in CGT v. Karnaji Lumbaji [1969] 74 ITR 343 (Guj), during the subsistence of a partnershi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re admitted to the benefits of the partnership and given a share in the profits thereof, if the real nature of the transaction which has been entered into as a result of the reconstitution of the firm shows that so far as the goodwill is concerned, the assessee has parted with a share in the goodwill in favour of his minor children and the circumstances do not show that there was any consideration for the same, then naturally such transfer of goodwill in favour of the minor son or sons would amount to a gift in favour of the minors for the purposes of the G.T. Act. It was, inter alia, submitted by Mr. Trivedi that this decision does not lay down good law and the matter should be considered by a larger Bench. In our view, it is unnecessary to go into this controversy or to consider whether to refer the matter to a larger Bench, because the reference is capable of being disposed of on the question of full consideration having been passed in favour of the deceased, as we have already held earlier. It was contended by Mr. Trivedi that apart from all other considerations and even assuming that there was a disposition by the deceased in favour of Navnitrai and Remeshchandra , as conten ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... partnership, the departmental authorities never treated all the assets and property of the assessee which were transferred to the partnership as the subject-matter of gift. Nor was it claimed before the Supreme Court that the property and assets valued at Rs. 4 lakhs were the subject-matter of the gift. All that the department did and persisted in was to pick out only one of the assets of the assessee's proprietary business, viz., its goodwill, and regard that as the subject of the gift. This approach was wholly incomprehensible. No gift-tax was payable on the goodwill of the assessee's business. As against this, Mr. Joshi placed strong reliance on the decision of the Madras High Court in CGT v. A. M. Abdul Rahman Rowther [1973] 89 ITR 219. In that case, the assessee who was carrying on business as sole proprietor converted his business on 9th June, 1954, into a partnership consisting of himself and his two daughters and this firm was recognised as genuine and entitled to registration under the I.T. Act. On 2nd November, 1960, the assessee transferred Rs. 25,000 each to his daughter and son from his share capital account and on the next day a new partnership was entered into with t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ar as we are concerned, we do not think it necessary to go into this controversy at all. It is true that the decision of the Supreme Court in Gheevarghese's case has been distinguished by the Madras High Court in Abdul Rahman Rowther's case [1973] 89 ITR 219, on the ground that all the assets of the proprietary business of the assessee were transferred in that case to the partnership and in those assets the assessee and his daughters were entitled to shares in proportion to their share capital. Further, the assessee in that case had already shown in his return a sum of Rs. 50,000 as taxable gift. The point of distinction made by the Madras High Court appears to be that in the case before the Supreme Court all the assets of the firm including the goodwill were estimated at Rs. 4 lakhs which equalled the capital brought in by the partners including the daughters in the reconstituted firm and the parties had shares in its assets in accordance with the capital brought in by the partners, although there was a different proportion for sharing the profits. On the other hand, in the case before the Madras High Court it was the admitted position that the capital of the reconstituted firm wa ..... X X X X Extracts X X X X X X X X Extracts X X X X
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