B.N.Srikrishna - (1.) THE appellant is a charitable institution registered as a public trust which spends its receipts on charitable purposes and is partner in a firm known as 'Chandrika Enterprises'. By a partnership deed dated 1-4-1980 the appellant was inducted into the said partnership upon contribution of Rs.1,000 to the total capital of Rs. 1,61,000 and given a share of 45% in the profit of the said firm. THEre were in all 8 partners apart from the appellant and the partnership deed recited the contribution of each partner towards the capital of the firm as also the varying share of profit/ loss of each partner. With effect from 1.10.1982 the partnership was reconstituted by a deed dated 1.10.1982. A new partner, Smt. M.U. Indira was inducted into the partnership. Consequent upon the induction of said new partner, who contributed a sum of Rs. 25,000 towards the capital, the shares of the profit/loss of all the partners were reshuffled, being increased in the case of some and reduced in the case of the others. THE share of profit/loss of each partner prior to 11.10.1982 and thereafter is as under: JUDGEMENT_48_SUPREME4_2003Html1.htm
(2.) CLAUSES 9, 10 and 11 of the said partnership deed provide that all the partners had a right to carry on the business of the firm for the common advantage of the firm, though C.K. Jinan (Partner No. 3) was to be the managing partner and in overall charge of the affairs of the firm and C.N. Purushuthaman (Partner No. 1) was to be the administrative partner and incharge of the day to day affairs of the firm and allowed a salary of Rs. 1000 per month until otherwise decided by other partners. The bank accounts of the firm were to be operated by the Managing partner C.K. Jinan or administrative partner C.N. Purushuthaman. As a result of the reconstitution of the firm w.e.f. 1.10.1982, the appellant's share in the profit/ loss of the firm was reduced from 45% to 30%. The Gift Tax Officer, taking the view that the reduction of the share of the profit/ loss of the appellant from 45% to 30% and redistribution in favour of the other partners amounted to a gift, issued a notice under section 16 of the Gift Tax Act calling upon the appellant assessee to file a return of a gift. The assessee filed a return showing the value of taxable gift at nil for the assessment year 1983-84. By an assessment order dated 31.12.1985 the Assessing Officer held that relinquishment of 15% of the share of the profits of the firm by the appellant-assessee amounted to a gift and, therefore, attracted the provisions of the Gift Tax Act. He took the average profits of the firm for the year 1982-83 to 1978-79 at Rs. 7,36,650 and, after reducing therefrom interest on capital @ 12% and managerial remuneration, arrived at 3 years purchase price at Rs.21,16,000. He worked out that 15% of this amount i.e. Rs. 3,17,400 had been surrendered without consideration by the assessee. Consequently, after giving exemption under section 5(2) he held that amount of Rs. 23,12,400 was liable to tax and directed payment of tax thereupon at Rs. 59,600. The appellant-assessee challenged the assessment order by appeal before the Commissioner of Gift Tax (Appeals). Two contentions were urged by the appellant assessee. First, that there was no goodwill of the firm which was capable of being assessed in terms of money, and second, that inasmuch as M.U. Indira had made a capital contribution and was inducted as partner, there was no situation of a gift at all. The appeal was dismissed.
(3.) THE assessee carried the matter in appeal to the Income Tax Appellate Tribunal. Before the tribunal the assessee did not seriously canvas the question of goodwill and the issue was held against the appellant -assessee. THE tribunal took the view that the question, whether there had been a gift of a share by the assessee in the goodwill of the firm, would depend on whether the value of the assets of the firm exceeded its total liabilities. Since there was no material on this aspect of the matter, it would normally be necessary to remand the matter, but since the assessee was liable to succeed on another contention there was no need to remand the matter to the Assessing Officer. THE tribunal took note of the fact that the incoming partner, Smt. M.U. Indira, had contributed Rs. 25,000 as her share of the capital; the usefulness of her service to the firm had not been disputed by the Revenue. Though the Revenue was of the view that the incoming partner had been given her share only on account of the reduction of the share of the appellant, it was only partly true. THE Tribunal pointed out that it was not a case of mere reduction of the share of the appellant, the difference being allotted to the incoming partner, but it was a case of complete realignment of the shares of all the partners consequent upon reconstitution of the firm and that unless and until interest of the concerned partner is ascertained and quantified it could not be said that the consideration for transfer is adequate or not. Relying upon the judgment of this Court in Sunit Siddharthbhai vs. Commissioner of Income-tax, Ahmedabad [156 ITR 509], the tribunal held that even though there was a transfer by the assessee in favour of the incoming partner and the existing partners, inasmuch as the consideration for the transfer, which is the right to get the value of his share for the partner, cannot be valued during the subsistence of the partnership, it was not possible to consider and quantify the question of adequacy or inadequacy of consideration. In such an event, it could not be held that there was any gift exigible to tax. The Revenue sought for and obtained a reference of the following two questions to the High Court under Section 26(1) of the Gift Tax Act. The two questions referred to the High Court were : "1. Whether on the facts and in the circumstances of the case the Tribunal is right in law and fact in holding that even though the reconstitution of the firm resulted in the reduction of the share of profit of the assessee-trust, there was no gift exigible to tax in its hands ? 2. Whether, on the facts and in the circumstances of the case the Tribunal is right in law and fact in holding that even though there was a transfer by the assessee in favour of the incoming partner and existing partners, the consideration for the transfer could not be evaluated during the subsistence of the partnership and so the question of adequacy or inadequacy of consideration could not be quantified and so there was no gift exigible to tax?" ;