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U Bhat, R Gupta
Commissioner Of Gift-Tax
vs
Laxminarayan Mahawar
Decided on : 8 March, 1995
GIFT TAX - Whether the assessee was liable to pay gift-tax on the reduction of his share in the firm due to the admission of new partners - Held, no.
Fact of the Case:
The assessee was a partner in a firm with a 20 paise share. Due to a change in the constitution of the firm, new partners were admitted and the assessee's share was reduced to 10%. The Gift-tax Officer held that the assessee had surrendered a moiety of his share in favor of the incoming partners and this constituted a gift. The Appellate Assistant Commissioner allowed the assessee's appeal, holding that there was no gift involved. The Tribunal dismissed the Revenue's further appeal.
Finding of the Court:
The court held that the admission of new partners and the reduction of the assessee's share did not constitute a gift as there was sufficient consideration for the transfer. The introduction of share capital by the new partners strengthened the foundation of the firm and helped in sustaining and enhancing its business, thereby promoting the interest of the firm as a whole, including the assessee.
Issues: Whether the reduction of the assessee's share in the firm due to the admission of new partners constituted a gift for the purposes of the Gift-tax Act.
Ratio Decidendi: The court held that a gift is a transfer of existing movable and immovable property made voluntarily and without any consideration by the donor to the donee. In this case, the reduction in the assessee's share was not voluntary as it was a result of the admission of new partners and the introduction of share capital. The introduction of share capital provided sufficient consideration for the transfer, as it strengthened the foundation of the firm and helped in sustaining and enhancing its business.
Final Decision: The court answered the question referred to it in the affirmative, holding that the assessee was not liable to pay gift-tax on the reduction of his share in the firm.
1. The following question of law has been referred to this court by the Appellate Tribunal at the instance of the Revenue under Section 26(1) of the Gift-tax act, 1958 :
"Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in law in holding that the assessee was not liable to pay gift-tax ?"
2. The assessee is a partner in a firm. Initially, he had a 20 paise share in the firm. In the assessment year in question, there was a change in the constitution of the firm and new partners who introduced share capital were admitted. Consequent on the change in the constitution of the firm, the assessee's share in the property of the firm was reduced from 20 to 10 per cent. The Gift-tax Officer held that the assessee had surrendered a moiety of his share in favour of the incoming partners and this constituted gift. He valued the gift at Rs. 44,650 and completed the assessment. The Appellate Assistant Commissioner, on an appeal filed by the assessee, allowed the appeal and held that there was no gift involved. Further appeal to the Tribunal by the Revenue was dismissed. These facts led to the reference.
3. The Tribunal referred to two decisions of the Karnataka High Court in D.C. Shah v. CGT [1982] 134 ITR 492 and of the Bombay High Court in CGT v. J.N. Marshall [1979] 120 ITR 613 for holding that there was no gift involved in the transaction. Learned counsel for the Revenue points out that against the judgment of the Karnataka High Court, the Revenue filed special leave petition before the Supreme Court and the same has been admitted. The fact that the special leave petition has been admitted would not preclude this court from considering the matter.
4. Goodwill of a firm is undoubtedly an asset. It is a property of the firm in which the partner is entitled to his share. If he transfers his share in the firm by gift the subject-matter of the transfer would include the share in the goodwill also (see Khushal Khemgar Shah v. Mrs. Kharshed Banu Dadiba Boatwalla, AIR 1970 SC 1147 ; [1970] 3 SCR 689 and CGT v. Nani Gopal Mondal [1984] 150 ITR 469 (Cal). If a partner gifts his share in the firm or in the goodwill of the firm, it can be regarded as a gift for the purposes of the Gift-tax Act, unless it attracts any of the exemptions provided therein. The question has to be decided on the facts and circumstances of each case and on the terms of the contract of each case.
5. In D.C. Shah's case [1982] 134 ITR 492 (Kar), on two occasions, new partners joined the firm leading to reallocation of shares and reduction of shares of the pre-existing partners. The new partners introduced share capital and were obliged to participate in the business and work of the firm. The Karnataka High Court held that the contributions in the share capital and participation in the business of the firm constitute adequate consideration and, therefore, there is no taxable gift.
6. In J.N. Marshall's case [1979] 120 ITR 613 (Bom), the firm originally consisted of an assessee and his son--the assessee alone was entitled to goodwill. The firm took three new partners and a new partnership deed was executed giving goodwill to only three of the partners. The new partners admitted were the son and two daughters of the assessee. The Gift-tax Officer took the view that the assessee who had been till then the sole owner of the goodwill gifted his goodwill to his son and two daughters for no consideration. The Appellate Tribunal took a contrary view. The Bombay High Court held that the burden of proving that a particular transfer is a gift is on the Revenue by showing that the transfer was without consideration. A partnership is the result of a contract between persons who come together for the purpose of carrying on business and each one undertakes obligations which are of a contractual nature and, subject to contract to the contrary, are governed by the provisions in the Partnership Act and these obligations form the consideration for t
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