- (1.) THE Tribunal, Allahabad, has referred the following question of law under Section 26(1) of the GT Act, 1958, hereinafter referred to as the Act, for opinion of this Court : 'Whether, on the facts and in the circumstances of the case, the Tribunal was legally correct in holding that there was no deemed gift of the share, of the goodwill in favour of the new partners ?'
(2.) THE present reference relates to the asst. yr. 1976 -77. M/s Chowdhary Sweet House was a firm consisting of the following four partners : Name of the partner Extent of share1. Shri Shyam Lal 28%2. Shri Ram Chand (Ram Lal) 28%3. Shri Nand Lal 24%4. Shri Ashok Kumar 20% This firm was constituted under the partnership deed dt. 13th April, 1970. All the partners as per Clause 6 of the above deed were working partners and were also entitled to salary. Clause 10 of the above deed is relevant for our purpose. It reads as under: '10. That, business assets, business premises and its goodwill, shall remain vested in partners Shri Shyam Lal, Shri Ram Chand and Shri Nand Lal in ratio of 28 per cent. 28 per cent and 44 per cent, respectively. Partner Shri Ashok shall have no right, title or interest therein.' There was a change in the constitution of the above firm w.e.f. 1st Oct., 1975. The firm was running its business in two adjoining premises, one being the old shop where sweets were sold and the other being annexe which was primarily run as restaurant. The area of both the shops is equal. As per the change in the constitution, Shri Nand Lal and Shri Ashok Kumar took over the main shop, while Shri Shyam Lal and Shri Ram Chand (Ram Lal) took over the business carried on in the annexe. There was also division of various other assets belonging to the old firm. Since there was separation of the business between two groups, it became necessary for them to have their separate identities. With regard to the main shop, a new firm came into existence on 1st Oct., 1975 for which a partnership deed was also executed on the same date. Besides Shri Ashok Kumar and Shri Nand Lal, four new partners were taken into this business. The constitution of the new firm was as under: Name of partners Extent of shares1. Smt. Kavita, W/o Shri Shyam Lal 20% R/o Way Lane, Lucknow2. Smt. Meera, W/o Shri Ram Chand, 20% R/o Way Lane, Lucknow3. Smt. Parmeshwari Bai W/o 16%Late Shri Verhomal, R/o 10 -Nazar Bagh, Lucknow4. Shri Ashok Kumar, S/o 20% Shri Nand Lal, R/o 5 -RanaPratap Marg, Lucknow5. Shri Raj Kumar S/o Nand Lal, 14% R/o 5 -Rana Pratap Marg,Lucknow6. Shri Nand Lal, S/o Teoomal, 10% R/o 5 -Rana Pratap Marg, Lucknow Clauses 5, 6 and 9 of the above deed are important, which read as under: '5. That the partners shall get interest @ 15 per cent p.a. on their investment in the firm. 6. That the partners shall draw salary as they mutually decide from time to time. 9. That Smt. Parmeshwari Bai shall not be entitled to goodwill of this partnership business.' Similarly, with regard to the business carried on in the annexe, another firm was constituted in which, besides Shri Shyam Lal and Shri Ram Chand (Ram Lal), three new other partners were admitted. The constitution of this firm vide partnership deed dt. 8th March, 1976 w.e.f. 1st Oct., 1975 was as under: Name of partners Extent of shares1. Shri Shyam Lal, S/o 28% Late Shri Verhomal Chowdhury,R/o Way Lane, Lucknow2. Shri Ram Chand (Ram Lal) 28% S/o Late Shri Verhomal Chowdhury R/o Rana Pratap Marg, Lucknow3. Smt. Kalpana, W/o ShriAshok Kumar, R/o Rana 20% Pratap Marg, Lucknow4. Smt. Anuradha, W/o Shri Raj Kumar, 14% R/o Rana Pratap Marg, Lucknow5. Smt. Dropadi, W/o Shri Nand Lal, 10% R/o Rana Pratap Marg, Lucknow The goodwill of the old firm consisting of four partners belonged to Shri Shyam Lal, Shri Ram Chand (Ram Lal) and Shri Hand Lal in the ratio of 28 per cent, 28 per cent and 44 per cent. Their shareholdings underwent a change. Shri Shyam Lal and Shri Ram Chand (Ram Lal) retired from the business carried on in the main shop. The GTO was of the view that with their retirement, they had given up their interest in the goodwill, which had vested in the new partners. According to the GTO, this amounted to a deemed gift. He similarly, held that with Shri Nand Lal leaving interest in the business of annexe could be deemed to have made a gift of his share in favour of the new partners as per the partnership deed dt. 8th March, 1976 relating to annexe business. Since his own shares in the main shop was reduced to 10 per cent from 44 per cent in the old shop, the GTO was further of the view that the balance of 34 per cent in the goodwill of the old firm falling to share of Shri Nand Lal could also be treated as a gift by him.
(3.) IN pursuance of the above findings, the GTO levied gift -tax on Shri Shyam Lal, Shri Ram Lal and Shri Nand Lal, respectively. For this purpose, he computed the value of the goodwill of the old firm and then determined the taxable gift in the hands of the respective partners, i.e., the assessees before us. He rejected the claim of the assessee that the gifts were exempt from tax under Section 5(1)(xiv) of the GT Act.;