MANI K THOMAS Vs. COMMISSIONER OF GIFT TAX
HIGH COURT OF KERALA
Mani K Thomas
COMMISSIONER OF GIFT TAX
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P.R. Ramachandra Menon, J. -
(1.) Would the transfer of shares effected by some partners of the firm in favour of a newly inducted partner, virtually suffering a reduction in the share of profit; simultaneously facilitating extension/increase of profits to the incoming partner by itself will result in exigibility to tax under Sec.4 of the Gift Tax Act' If the additional contribution pumped in by the newly inducted partner, coupled with the liability undertaken to discharge the liabilities to financial institutions and other creditors and also the undertaking to work for the common good of the firm, besides offering personal guarantee in respect of various financial transactions could be taken as sufficient consideration for the purpose of the exemption under Section. 5(1)(xiv) of the Act' These are the main points to be answered by this Court in the reference made by the Tribunal, at the instance of the assessees.
(2.) The sequence of events reveals that the assessees were doing business under the name and style as 'Paragon Rubber Industries' by constituting a partnership firm, wherein 4 partners were there. Later, by virtue of the partnership deed dated 1.11.1986, there was a change in the constitution of the firm and two more partners were brought in, virtually making the number of partners as 'six', instead of four. As a natural consequence, 25% of the share possessed by each of the partners came down, virtually suffering a reduction of 8.33%, which in turn was assigned in favour of the incoming partners. The reduction of shares to the said extent, according to the assessing authorities, amounted to 'gift' at the hands of the assessee in favour of the newly inducted partners and hence it was sought to be taxed by issuing proceedings under Secs.154(3) and 16(1) of the Gift Tax Act.
(3.) On receipt of the proceedings as above, return was filed by the assessees pointing out that there was no incidence of any gift and that there was no reduction in the contribution made by the existing partner, but for a reallocation of the ratio for sharing the profits, which by itself would not attract any tax liability. The matter was heard elaborately by the Assessing Officer, when the judicial precedents, particularly the decisions rendered by this Court, the Karnataka High Court, the Madras High Court and also the Madhya Pradesh High Court were sought to be relied on from the part of the assessees. The contention raised by the assessees was rebutted from the part of the Department to the effect that the additional capital contribution made by the newly inducted partners was only to an extent of Rs.25,000/-, which was quite inadequate in all respects and further that the subsequent contribution made to an extent of 3.5 lakhs by newly inducted partner by name Sri.Vijoo Zacharia and another extent of 3.15 lakhs by the other partner by name Smt.Thara Thomas subsequently could not be considered for the purpose of deciding the issue. It was also pointed out that the said extent of consideration was quite inadequate, in so far as transfer of goodwill, which was of high value, in view of the extent of profit which was being generated for the past 5 years, which is at the rate of about Rs.4 lakhs per year.;
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