B. L. Chhibber, A. M. - (1.) THE short but important issue raised in this appeal by the Revenue pertains to bringing to the charge of gift-tax, gift of Rs. 2,91,407 on the ground that the assessee-HUF ceded 9 per cent share of profit in the partnership firm M/s Vadilal Dairy Frozen Food Industries and consequently to that extent share in goodwill was gifted away in favour of new partner on reconstitution of the firm.
(2.) The assessee-HUF was a partner in M/s Vadilal Dairy Frozen Food Industries from 29th April, 1971. Originally the firm was constituted with the partners with profit-sharing ratio as under : JUDGEMENT_1151_TLIT0_19960.htm There was a change in the constitution of the firm as per partnership deed dt. 25th Aug., 1981 and for the accounting year ended on 31st Dec., 1981 the constitution was as under : JUDGEMENT_1151_TLIT0_19961.htm Further, w.e.f. 1st Jan., 1982 the firm was reconstituted with Vadilal Ice-Cream (P) Ltd. joining as new partner and the profit-sharing ratio was derived as under for the year ended on 31st Dec., 1982 : JUDGEMENT_1151_TLIT0_19962.htm Thus the share of profit of the assessee was reduced from 34 per cent to 25 per cent and the Assessing Officer (AO) came to the conclusion that the assessee ceded 9 per cent share in the goodwill of the firm in favour of the new partner M/s Vadilal Ice-Cream (P) Ltd. which amounted to gift as per provisions of s. 2(xii) r/w s. 2(xxiv) of the GT Act. The AO, therefore, served a notice under s. 15(1) of the GT Act in response to which return of gift was filed declaring the value of taxable gift at Re. Nil. During the course of the assessment proceedings, the AO informed the assessee that by virtue of the Supreme Court decision in the case CGT vs. Chhotalal Mohanlal (1987) 166 ITR 124 (SC), goodwill of a partnership firm was an asset and when minors are admitted to the benefit of partnership resulting into reduction of the share of an existing partner, the right to the value of goodwill stands transferred and such a transaction constitutes a gift under the GT Act. The AO, therefore, called upon the assessee to explain as to why the value of the assessee's 9 per cent share in the goodwill of the firm be not ascertained and charged to the levy of gift-tax. A written reply dt. 18th Dec., 1990 was filed before the AO contending that the new partner, namely, M/s Vadilal Ice-Cream (P) Ltd. has contributed substantial capital and, therefore, there was adequate consideration. It was pointed out that in the new partnership deed, it was stipulated that M/s Vadilal Ice-Cream (P) Ltd. would bring in capital of at least Rs. 3 lakhs. For this consideration, the new partner was given 25 per cent share resulting into proportionate reduction in the share of the existing partner. In this reply, it was also contended that at the relevant point of time, a company namely, M/s Creata Ice-Cream Ltd. entered the ice-cream market as a tough competetor and during the very first six months of its existence, this new company was able to achieve a turnover of Rs. 39 lakhs and it established a network of as many as 225 dealers/distributors. It was pointed out that the induction of M/s Vadilal Ice-Cream (P) Ltd. in the partnership firm gave a much needed corporate support to the firm to cope with the increasing competition. The Supreme Court decision in the case of Chhotalal Mohanlal (supra) was also distinguished and certain other High Courts' decisions were cited in support of the contention that when a major partner is admitted and there is consideration in the form of capital contribution coupled with other business considerations, such a transaction cannot be said to be a gift chargeable to tax. The AO was not convinced with these arguments. According to him, the Supreme Court decision was relevant and further the Karnataka High Court in CGT vs. Ganapathy Moothan (1972) 84 ITR 758 (Ker) had held that capital contribution was only for the purpose of working the partnership and the same cannot be regarded as consideration. Accordingly, the AO determined the value of the goodwill of the firm as per annexure to the assessment order and the value of the 9 per cent share was estimated at Rs. 2,96,407. After allowing initial statutory exemption of Rs. 5,000 taxable gifts were determined at Rs. 2,91,407. On appeal, the CGT(A) held that giving away of 25 per cent of the share to the new partner was not without adequate consideration because the new partner viz. M/s Vadilal Ice-Cream (P) Ltd. had contributed substantial capital and hence there was no gift chargeable to tax as contemplated under the GT Act. He accordingly reduced the value of taxable gifts to Re. Nil. In support of his finding he relied upon the judgment of the Gujarat High Court in the case of CGT vs. Karnaji Lumbaji (1969) 74 ITR 343 (Guj); Karnataka High Court decision in the case of CGT vs. C. S. Patil (1989) 180 ITR 97 (Kar); and the decision of the Madhya Pradesh High Court in the case of CGT vs. Smt. Kamla Devi Bhanot & Ors. (1988) 171 ITR 398 (MP). He further held that the Supreme Court decision in the case of CGT vs. Chhotalal Mohanlal (supra) was not applicable to the facts of the present case.
(3.) SHRI K. V. Trivedi, the learned Departmental Representative, relied upon the order of the GTO and submitted that the GTO rightly applied the ratio laid down by the Supreme Court in the case of Chhotalal Mohanlal (supra) and rightly worked out the value of taxable gifts at Rs. 2,91,407.;