The main legal point established in the judgment is that if there is any capital contribution by or on behalf of the minors who are admitted to the benefits of the partnership, there can be no gift in respect of the goodwill.

K.A. Nayar, J.

1. The main question to be considered in the income-tax referred case and the original petitions is the same, and that is, when minors are admitted to the benefits of a partnership with contribution by the minors towards capital resulting in redistribution of capital in accordance with the profit-sharing proportion, whether there is a gift involved in the said reconstitution. In the income-tax referred case, we are concerned with the assessment year 1975-76. The assessee therein was a partner of the firm, Messrs. K. A. K. P. Kunhamoo and Co. On January 1, 1975, the assessee gifted Rs. 2,500 to each of his four minor sons. The return of gift for this transaction was filed by the assessee for the assessment year 1975-76 wherein the taxable gift shown was Rs. 5,000. Prior to January 1, 1974, the assessee's share in the partnership firm was 25 per cent. On January 1, 1974, the four minor sons of the assessee were admitted to the benefits of the partnership by a deed entered into on that day. According to this, the four minor sons were together allotted 20 per cent. share in the profits of the firm while the assessee's share in the firm was reduced to 5 per cent. While completing the assessment, the Gift-tax Officer considered that the assessee had surrendered 20 per cent. of his interest in the firm with effect from January 1, 1974, and such surrender amounted to a gift taxable under the Gift-tax Act, 1958. He worked out the goodwill of the firm at Rs. 2,13,972 and 20 per cent. of the same, viz., Rs. 42,794, was treated as the proportionate value of the goodwill transferred by the assessee in favour of his four minor sons. Adding this to the cash gift of Rs. 10,000 and allowing the deduction under Section 5(2) of the Gift-tax Act, 1958, the taxable gift was fixed at Rs. 47,794. The assessee objected to the Gift-tax Officer's views before the Appellate Assistant Commissioner. The assessee's contentions were that there was no goodwill for the firm at the time of reconstitution on January 1, 1974, and that this is not a case where the assessee's share in the firm was reduced without reducing the share of the capital proportionately since there was contribution towards capital by the four minors when they were admitted to the benefits of partnership and hence no gift was involved in the reconstitution. It was also contended that the manner of evaluating the goodwill by capitalisation of the average profit at three times by the Gift-tax Officer was excessive. The Appellate Assistant Commissioner did not allow the first contention of the assessee. He held that the firm must be considered to have a goodwill in view of the fact that the net profit of the firm for the earlier years from 1970-71 onwards have been in excess of Rs. 2 lakhs and due to the number of years of standing in the particular line of business, the business competition that existed in the locality and the reputation the firm enjoyed in the particular centre. He held that there was a diminution in the share of interest of the assessee and a consequent increase in the shares of the four minors and, therefore, there was a liability to gift-tax to the extent of the value of the rights surrendered in favour of his minor children. The Appellate Assistant Commissioner, however, allowed a reduction of Rs. 9,374 in the value of the goodwill assessed by the Gift-tax Officer. In further appeal before the Tribunal, the assessee raised the same contention. Following the decision of this court in V.O. Marhose v. CIT [1975] 98 ITR 504, the Tribunal held that there is a gift exigible to gift-tax in this case. The Tribunal also held that the firm, Messrs. K.A.K.P. Kunhamoo and Co., was possessed of goodwill at the relevant time. The Tribunal, however, held that the method of evaluation of the interest forgone by the assessee in the firm adopted by the Gift-tax Officer and the Appellate Assistant Commissioner is not proper as they confined their attention only to on