K SHANMUGANATHAN Vs. COMMISSIONER OF GIFT TAX

JUDGEMENT

(1.) This is reference under GT Act and the questions of law referred to us read as under :

(2.) THE assessee, one M. Kathiresan, was carrying on the business in jewellery in the name and style of M/s Sujatha Jewellers from 1977. He continued the business upto 5th May, 1982, and from 6th May, 1982, the proprietary business was converted into partnership concern by taking in one Savithri, M.S. Kumaraguruparan and another K. Shanmugavelayutham as partners. The assessee's share of profit was 40 per cent and the other three partners were entitled to 20 per cent share each in the profit. The GTO was of the view that the assessee had given up 60 per cent of his rights in the firm in favour of the new partners and also transferred the stock at closing stock value instead of market value. Hence, he held that there was a deemed gift within the meaning of S. 4 of the GT Act. The GTO computed the value of the interest gifted by the assessee at Rs. 77,648 on the basis of the super profits method by taking average maintainable profits after giving deductions for salary and interest on capital and capitalising it at 3 years' purchase price. The GTO also found that by transferring the stock of gold jewellery and silver at less than the market value, the assessee had made a deemed gift of Rs. 5,95,613 which was 60 per cent of the market value of the stock as on 5th May, 1982. In this view of the matter the GTO computed the total value of the gift at Rs. 6,73,261 made up of Rs. 5,93,613 and Rs. 77,648 and after deducting the basic exemption, he levied the gift-tax.

(3.) WE heard Mr. V.S. Ramakrishnan, learned counsel for the assessee, and Mrs. Pushya Sitharaman, learned senior standing counsel for the Revenue. We find from the order of the GTO, that the GTO had considered the entire matter regarding the levy of gift-tax from two different angles and at two different heads. As far as the introduction of the partners, he held that the assessee has given up 60 per cent of his rights in favour of the new partners and, therefore, there was a deemed gift. However, the GTO as well as the Tribunal overlooked the fact that the new partners have contributed a sum of Rs. 20,000 each as capital when they became partners and the capital contribution by the new partners would be adequate consideration when they became partners in the firm. The three partners have received the share of profits by virtue of their capital contributions and, therefore, there is no question of any gift when the new partners have contributed their capital and their share of profits is also fixed with reference to the capital contributed by them. As a matter of fact, it was found that the new partners were to share the profit only at the rate of 20 per cent each though the new partners have contributed a capital of Rs. 40,000 and Rs. 30,000 each. Therefore, we hold that it cannot be held that transfer was made without any consideration, as there was adequate consideration by way of capital contribution by the new partners and they were taken as partners and shared the profit of their contribution of capital. The fact that one of the partners availed the loan facility from the firm subsequently after she became a partner is not a ground to hold that the transfer was made without any consideration. We hold that as a partner she was entitled to draw loan from the partnership and when it was granted, it cannot be said that the transfer itself was made without consideration.