ORDER
Per Joginder Pall, AM.
This is a bunch of 8 appeals, filed by the different assessees, directed against the respective orders of Commissioner Gift Tax (Appeals)(C), Ludhiana for the assessment year 1993-94. Since the issues involved in all these appeals are common, these were heard together and are being disposed of by this consolidated order for the sake of convenience.
2. In all the 8 appeals, assessees have raised identical grounds. The grounds raised in the case of M/s. Bliagyoday Investments Pvt. Ltd. are as under: .
1 . That the learned Commissioner Gift Tax (Appeals)(C) has wrongly held that the reduction in assessee’s share in profit/losses in partnership concern styled as M/s. Munjal Castings, results in taxable gift.
2. That the learned Commissioner Gift Tax (Appeals)(C) has wrongly held that while calculating value of taxable gift, both goodwill and market value have to be considered.
3(a). That the learned Commissioner Gift Tax (Appeals)(C) while calculating goodwill, has wrongly confirmed that no salary is allowable to any partner. Business has actually been conducted by the partners.
(b) That the learned Commissioner Gift Tax (Appeals)(C) has wrongly not considered that the turnover of the partnership concern increased from 5 crores to 7 crores.
4. That the learned Commissioner Gift Tax (Appeals)(C) has wrongly rejected the assessee’s case that while working out capital employed in the firm for allowing interest on that capital, the amount of goodwill and appreciation of assets, is to be considered as part of capital.
5. That the learned Commissioner Gift Tax (Appeal)(C) while confirming the addition on account of goodwill has wrongly not allowed deduction in respect of
(a) Interest on partners capital at market rate.
(b) Salary to all the partners at market rate and commensurate with their experience and expertise.
6. That the learned Commissioner Gift Tax (Appeals)(C) while quantifying the amount of goodwill, has wrongly confirmed 3 years purchases.
7. That in any case, the quantum of gift held to be chargeable to tax, is highly excessive.
8. That the learned Commissioner Gift Tax (Appeal)(C) has wrongly held that copy of account of Shri Om Parkash Munjal, one of the partners was not filed. Actually, it was filed under letter dated 12-3-1996.
Similar grounds have been taken in all the other remaining appeals. The main issue raised in all these appeals relates to charging of gift tax in respect of reduction in assessees’ profit sharing ratio in favour of new partners. The facts of the cases M/s. Bhagyoday Investments Pvt. Ltd., M/s. Bahadur Chand Investments Pvt. Ltd., M/s. Thakurdevi Investments Pvt. Ltd. and M/s. Dayanand Munjal Investments Pvt. Ltd. were partners in the firm of M/s. Munjal Castings. Up to 31-3-1992, these partners had share of profit at 10%, 15%, 15% and 14% respectively. There was a change in the constitution of the firm with effect from 1-4-1992 as per which share of profit of these four assessees was reduced to 5%,8%,8%, and 8% respectively. Five new partners, namely S/Shri Om Parkash Munjal, Brij Mohan Lal Munjal, Smt. Pushpawati Munjal, Smt. Sobima Munjal were given 5% share of profit each and Master Aditya Munjal admitted to the benefit of partnership was also given 5% share of profit in the said firm. M/s. Bhagyoday Investments Pvt. Ltd. filed the return of gift tax declaring therein taxable gift of Rs. 6,00,715 being 5% share in the goodwill of the firm given in favour of the incoming partners. This assessee also paid gift tax of Rs. 1,80,226. However, in all the remaining cases, returns of gift were filed declaring therein taxable gift at nil. The assessing officer observed that up to 31-3-1992, there were 15 partners and from 1-4-1992,5 new partners including a minor were admitted. The share of profit was reduced only in respect of these four assessees. The share of profit of the remaining 11 partners continued to be the same. The reduced share of these partners was given in favour of the 5 new partners.
3. During the course of assessment proceedings, the assessing officer called upon the assessees to furnish details of the capital brought by the new partners and the requirements of labour by the firms in which they were partners. Assessees were also asked to furnish details of the market value of assets as on 1-4-1992 and share of profit credited to the capital accounts of the partners at the end of the year. The assessing officer observed that as per the judgment of Punjab & Haryana High Court in the case of CWT v. Vipin Kumar (Individual) (1993) 203 ITR 941 (P&H, it was held that each partner of a firm had got a right in every asset of the firm to the extent of his profit sharing ratio. Therefore, in view of this judgment, share in the assets of the firm relinquished in favour of the incoming partners was liable to gift tax. He further referred to the judgment of Supreme Court in the case of CGT v. Chhotalal Mohanlal (1987) 166 ITR 124 (SC), where the Supreme Court has held that goodwill is an asset of the firm and reduction in profit sharing ratio in favour of the minor sons of the partners admitted to the benefits of partnership amounts to gift by father to his two minor sons as per sub-section (xii) of section 2 of the Gift tax Act. The assessing officer further, examined the copies of accounts of new partners and found that they had not introduced any capital at the time of entry on 1-4-1992. However, subsequently in the months of July and August, these partners had introduced capital varying from Rs. 2 lakhs to Rs. 2.75 lakhs, out of which sufficient amounts were immediately withdrawn. He also observed that investment allowance reserve was distributed among the partners including the new partners. Besides, interest and share of profits were also credited. Considering the extent of share capital introduced, the assessing officer found that in the case of new partners, namely, Shri Om Parkash Munjal, interest of Rs. 27,622, share of investment allowance reserve of Rs. 48,950 and share of profit of Rs. 1,57,152 all aggregating to Rs. 2,33,724 were credited. He had introduced the capital of Rs. 35,000 and Rs. 2 lakhs on 21-7-1992 and 6-8-1992 respectively, out of which he withdrew amounts aggregating to Rs. 1,98,242 in March, 1993. The balance carried forward was only Rs. 2,79,484. Same was the position in regard to the other three new partners. The minor partner had not brought any capital. Thus the assessing officer observed that by reducing their share of profit in the firm, these assessees had gifted their share in the goodwill and assets of the firm in their profit sharing ratio. He also found that the book value of the assets was much less than the market value of assets owned by the firm. The market value was taken as per wealth tax returns. Thus, the assessing officer computed the difference between the fair market value of assets and the book value and included the same in the investment allowance reserve as on 31-3-1992 and goodwill and allocated the same in the proportion of reduced profit sharing ratio and determined the net taxable gift. In this manner, the taxable gift in the hands of the M/s. Bhagyoday Investments Pvt. Ltd., M/s. Bahadur Chand Investments Pvt. Ltd., M/s. Thakurdevi Investments Pvt. Ltd. and M/s. Dayanand Munjal Investments Pvt. Ltd. was computed at Rs. 8,63,850, Rs. 12,09,390, Rs. 12,09,390 and Rs. 10,36,620 respectively. While doing so, the assessing officer also referred to the provisions of sub-section (xxiv) of section 2 of the Gift Tax Act which defines “transfer of property” as to mean transfer, delivery of other alienation of property and other modes provided under clauses (b), (c) and (a) of the said section. The assessing officer further observed that reduction in profit sharing ratio of these partners resulted in transfer of their rights in the movable and immovable properties in favour of incoming partners and, therefore, the same constituted a gift liable to gift tax.
4. The Assessing Officer further observed that M/s. Bahadur Chand Investments Pvt. Ltd. and M/s. Thakurdevi Investments Pvt. Ltd. were also partners in the firm of M/s. Munjal Sales Corporation. There was a similar change in the constitution of the firm admitting new partners and resulting in reduction in their share of profit to the extent of 7% and 9% respectively. Like in the case of M/s. Munjal Castings, the Assessing Officer determined the value of reduced share in the assets and goodwill of M/s. Munjal Sales Corporation at Rs. 24,25,594 and Rs. 31,18,625 respectively. This was also included in the taxable gift of these assessees. The assessing officer further observed that M/s. Thakurdevi Investments Pvt. Ltd. and M/s. Hero International Pvt. Ltd. were also partners in the firm of M/s. Munjal Steels. There was also a change in the constitution of the firm resulting in reduction in share of profit of 10% each in the cases of M/s. Thakurdevi Investments Pvt. Ltd. and M/s. Hero International Pvt. Ltd. The assessing officer worked out the value of taxable gift at Rs. 4,32,352 each and included the same in the taxable gift in the hands of the respective assessees.
5. Apart from the above cases, the assessing officer also observed that M/s. Hero International Pvt. Ltd., M/s. Munjal Investments Pvt. Ltd., M/s. Om Parkash & Sons (HUF) and Shri Sudhir Munjal were partners in the firm of M/s. Munjal Gases. There was also a change in the constitution of the firm introduced w.e.f. 1-4-1992 whereby share of profit of M/s. Hero International (P.) Ltd. was reduced from 20% to 10% and in the remaining cases from 7.5% to 5% each. The assessing officer also observed that reduction in share of profit in these cases was without any adequate consideration. He, therefore, computed the value of taxable gift in the hands of each of the four assessees by taking proportionate reduced share of profit in the difference in the market value and book value of the assets and the goodwill. The same was also included in the net taxable gift in the respective hands.
6. It may, however, be mentioned that the basis of computing the taxable gift, i.e., goodwill and difference in the fair market value of the assets and the book value were duly confronted to the assessees. The authorized representatives of the assessees had initially agreed to the value of the taxable gifts computed by the assessing officer. However, on 29-3-1996, the assessees filed letters disputing the computation whereof but conceded that gift tax would be leviable in respect of reduced share of profit on distribution of investment allowance reserve to the extent minors have been admitted to the benefits of partnership.
7. Aggrieved, the assessees filed appeals before the Commissioner Gift Tax (Appeals). It was submitted before the Commissioner Gift Tax (Appeals) that new partners had brought in capital and also labour required by the firms. This issue was examined at length by the Commissioner Gift Tax (Appeals) in the respective cases. In the case of M/s. Bhagyoday Investments Pvt. Ltd., the learned Commissioner Gift Tax (Appeals) observed that four new partners and one minor were taken as new partners. No capital was contributed by the minor Shri Aditya Munjal. However, his capital account was credited by share of development rebate reserve of Rs. 48,950 and share of profit in the firm amounting to Rs. 1,57,152 both aggregating to Rs. 2,06,102. He further observed that in none of the cases capital was introduced as on 1-4-1992. However, Shri Brij Mohan Lal Munjal, a new partner, introduced a sum of Rs. 25,000, Rs. 2,50,000 and Rs. 86,000 aggregating to Rs. 3,61,000 during the period from 21-7-1992 to 18-3-1993. Out of the same, he withdrew a sum of Rs. 1 lakh on 26-3-1993 and Rs. 1,80,824 on 31-31993. His capital account was credited by interest, development rebate reserve and share of profit from the firm all aggregating to Rs. 2,38,133 and the balance carried forward was Rs. 3,18,309. Smt. Pushpawati Munjal also a new partner introduced capital of Rs. 2 lakhs on 11-8-1992 and out of the same she withdrew a sum of Rs. 73,854. Her capital account was credited by investment allowance reserve, interest and share of profit aggregating to Rs. 2,33,724 and the balance carried forward was Rs. 3,55,229. Similarly, Smt. SobIma Munjal brought in capital of Rs. 2 lakhs on 11-8-1992 out of which she withdrew a sum of Rs. 73,853 on 31-3-1993. Her capital a/c was credited by way of interest, development rebate reserve and share of profit from the firm aggregating to Rs.2,29,083. The balance carried forward was Rs. 3,55,229. By analyzing these details, the learned Commissioner Gift Tax (Appeals) observed that the submissions of the assessees that new partners had brought in additional capital was without any merit. There was also no evidence that new partners had put in labour also. He also noticed that old partners whose share of profit was reduced did not get any additional benefit on admission of the new partners. In fact, the investment allowance reserve in the books of account was also distributed among all the partners including the new partners. He further observed that the reduced share of goodwill in the partnership firms also amounted to gift as the assessees had abandoned their rights and interest in respect of investment allowance and goodwill. The case was fully covered by the judgment of Supreme Court in the case of Chhotalal Mohanlal (supra). He further observed that partners had definite interest in the assets of the firm for which he relied on the judgment of Punjab & Haryana High Court in the case of Vipin Kumar (supra). By introduction of new partners without any corresponding consideration, the partners have transferred their interest in such assets to the incoming partners and this also amounted to gift. He further observed that the market value of assets as adopted for wealth tax assessments was much higher than the book value. The difference therein was also liable to be included in the taxable gift. He also held that the cases of the assessees were not only covered in the definition of “gift” mentioned in sub-section (xii) of section 2 but the cases were also covered under sub-sections (xxii) and (xxiv) of section 2 and section 4(1)(a) and 4(1)(c) of the Gift Tax Act. He thus observed that by reducing the profit sharing ratio the assessees had transferred their right to that extent in the properties and assets which amounted to gift under sub-sections (.xxii), (xxiii) and (xxiv) of section 2 of the Gift Tax Act. He also rejected the submissions of the assessees that reduction in share of profit was for an adequate consideration. No evidence was led in support of the contention that incoming partners had brought in any labour justifying share of profit allotted to them. Thus, the learned Commissioner Gift Tax (Appeal) upheld the orders of the assessing officer.
8. Similarly, the learned Commissioner Gift Tax (Appeals) examined the case of reduction in the profit sharing ratio in the partnership firm of M/s. Munjal Sales Corporation, where the assessee had contended that new partners were admitted because they had introduced their capital and assessee (M/s. Bahadur Chand Investments Pvt. Ltd.) wanted to withdraw the funds for repaying the loan to M/s. Hero Cycles Ltd. In this case, new partners introduced in the firm were Smt. Charu Munjal who had introduced a sum of Rs. 3.50 lakhs as her share of capital, out of which she withdrew a sum of Rs. 1,12,931. The Commissioner Gift Tax (Appeals) further observed that share of profit and interest credited to her capital account were more than the capital introduced in the firm. He further observed that capital contribution was not the criteria for fixing the profit sharing ratio. He observed that the opening credit balance in the account of M/s. Bahadur Chand Investments Pvt. Ltd. and M/s. Thakurdevi Investments Pvt. Ltd. as on 1-4-1992 was Rs. 44.09 lakhs, Rs. 39.92 lakhs respectively and the closing balance was at Rs. 47.26 lakhs and Rs. 37.52 lakhs respectively as on 31-3-1993. As against the same, opening debt balance in the account of Smt. Sudershan Kumari Munjal was Rs. 1.81 lakhs and closing balance was Rs. 5.56 lakhs as on 1-4-1992 and 31-3-1993 respectively and still she was given 16% share of profit in the firm. Similarly, M/s. Hero Investments Ltd., whose share was reduced in the firm, had also opening balance of Rs. 33.80 lakhs and closing balance of Rs. 49.80 lakhs respectively. Therefore, there was no justification for reducing her share of profit. He also observed that even in the account of other partners, the credit balance in their capital account was nominal and still they were given much higher share of profit in the firm. He, therefore, observed that reduction in the share of profit of the firm was not justified on this account and the incoming partners had not brought any substantial capital to justify share of profit allotted to them vis-a-vis old partners. Thus, Commissioner Gift Tax (Appeals) upheld the orders of the assessing officer.
9. Similarly, the claim of assessees (M/s. Hero Investments Ltd. and others) that change in the profit sharing ratio was brought because the assessees wanted more labour was also examined by Commissioner Gift Tax (Appeals). It was submitted that in the case of M/s. Hero Investments Pvt. Ltd., Shri Satyanand Munjal, Director was 80 years of age and, therefore, could not devote time to conduct business of the firm. He observed that in this case, four new partners had been introduced. Out of the same, three new partners contributed some capital and one minor, namely, Master Avishek, admitted to the partnership had not brought in any capital. It was noted that fresh partners, namely, S/Shri Naveen Munjal, Satyanand Munjal and Briinath Munjal, had not introduced any capital on 1-4-1992. However, they introduced capital of Rs. 2,25,000, Rs. 2,50,000 and Rs. 2,75,000 in July/August respectively. These partners withdrew sums of Rs. 71,984, Rs. 1,45,374 and Rs. 48,061 respectively. Their capital accounts were credited with share of profit and interest aggregating to Rs. 86,489, Rs. 86,489 and Rs. 94,403 respectively. Thus he observed that the capital brought in by the new partners was very nominal and, therefore, the claim of M/s. Hero Investments Pvt. Ltd. that he wanted to withdraw amount for repayment of loan was without any merit. In these cases also, the orders of the assessing officer were upheld.
10. Similarly, the learned Commissioner Gift Tax (Appeals) examined the case of M/s. Munjal Gases where share of profit of the assessees was reduced. The submission of the assessee that adjustment in the share of profit was made with a view to make equal distribution of share of profit between the two families of Hero group, namely, Shri Sadanand Munjal family and Hero group family. The Sadanand family insisted on increase in their profit sharing ratio for the hard labour put in by them. Here also, learned Commissioner Gift Tax (Appeals) examined the case and found that capital contribution was not the criteria for allocation of share of profit. In fact, balance in the capital accounts of partners was in negative and still their profit sharing ratio was not changed. After examining the relevant facts, learned Commissioner Gift Tax (Appeals) also upheld the order of the assessing officer. The detailed analysis of the capital accounts of the partners is at pages 9 to 14 of the impugned order of the Commissioner Gift Tax (Appeals) in the case of M/s. Hero Investments (P.) Ltd.
Assessees are aggrieved with the orders of the Commissioner Gift Tax (Appeals) and hence these appeals before us.
11. The learned Counsel for the assessees, Shri Subhash Aggarwal, submitted that the issue, which requires to be considered by this Bench, is whether there is any gift when there is a change in the profit sharing ratio among the partners. He submitted that the incoming partners had contributed capital and, therefore, change in the profit sharing ratio did not result in gift. He relied on the following judgments:
(i) Sree Narayana Chandrika Trust v. CGT (2003) 261 ITR 279 (SC);
(ii) CGT v. D.C. Shah (2001) 249 ITR 518 (SC);
(iii) CGTv. TM. Louiz (2000) 245 ITR 831 (SC);
(iv) CGT v. P.K. Somarajan Pillai (2003) 127 Taxman 632 (Ker.);
(v) CGT v. Maneklal Hargovandas Patel (2002) 124 Taxman 55 (Guj.);
(vi) CGT v. T Abdul Wahid (2000) 242 ITR 665 (Mad.).
Apart from the above, the learned Counsel has given a gist of various High Court judgments in support of his contention that mere change in the profit sharing ratio or retirement of a partner and induction of new partners does not result in gift. He also relied on the two decisions of ITAT, Chandigarh Bench in the cases of Shri Brij Mohan Lal v. GTO (1983) 5 ITD 558 (Chd) and Shri Brij Mohan Lal v. GTO (GT Appeal No. 13 (Chd.) of 1988) for the assessment year 1980-81. He also relied on certain judgments of the various Bench of the ITAT reported in TTJ Copies whereof have not been made available to us. Therefore, we are unable to refer those decisions.
12. The learned Departmental Representative Smt. Saroj Deswal, on the other hand, heavily relied on the orders of authorities below. She submitted that the detailed reasons given by the assessing officer and the Commissioner Gift Tax (Appeals) in their respective orders support the case of the revenue. She further submitted that the various judgments relied upon by the learned Counsel were distinguishable on facts. She further relied on the judgment of Madras High Court in the case of M.K. Kuppuraj v. CGT (2002) 258 ITR 412, where it has been held that relinquishment of a share of profit in favour of the incoming partners constitutes a gift chargeable to tax. She further relied on the judgment of Madras High Court in the case of M.K. Kuppurajv. CGT (1985) 153 ITR 481. Where it has been held that relinquishment by the partners of a portion of their shares in favour of the minor admitted to the benefits of the partnership without consideration was held to constitute a gift. She submitted that the judgment of Hon’ble Madras High Court in M.K. Kuppurajs case (supra) 258 ITR 412 (Mad) is directly applicable to the facts of the present cases.
13. We have heard both the parties at some length and given our thoughtful consideration to the rival submissions. We have also examined the facts, evidence and material on record. We have also carefully perused the orders of the authorities below. Now the main issue which requires to be considered by this Bench is whether, in the facts and circumstances of the present cases, the authorities below were justified in charging gift tax in respect of reduced share of profits of the respective partners in the aforesaid firms as a result of reconstitution of the firms? Before we answer this question, it would be necessary to reproduce herein the relevant provisions of the Gift Tax Act. Sub-section (xii) of section 2 of the Gift Tax Act defines “gift” as under:
“(xii) “Gift” means the transfer by one person to another of any existing movable or immovable property made voluntarily and without consideration in money or money’s worth, and includes the transfer or conversion of any property referred to in section 4, deemed to be a gift under that section.”
Sub-section (xxii) of section 2 of the Gift Tax Act defines “Property” as under:
“(xxii) ‘property’ includes any interest in property” movable or immovable.”
Sub-section (xxiv) of section 2 of the Gift Tax Act defines “transfer of property” as under:
“(xxiv)’transfer of property’ means any disposition, conveyance, assignment, settlement, delivery payment or other alienation of property and, without limiting the generality of the foregoing includes-
(a) the creation of a trust in property;
(b) the grant or creation of any lease, mortgage, charge, easement, licence, power, partnership or interest in property;
(c) the exercise of a power of appointment whether general, special or subject to any restrictions as to the persons in whose favour the appointment may be made of property vested in any person, not the owner of the property, to determine its disposition in favour of any person other than the donee of the power; and
(d) any transaction entered into by any person which intent thereby to diminish directly or indirectly the value of his own property and to increase the value of the property of any other person.’
Apart from the definition of “gift” given in sub-section (xii) of section 2 there are certain deeming provisions, which also include gifts in certain cases. The relevant provisions are sections 4(1)(a) and 4(1)(c) of the Gift tax Act, which are reproduced as under:
“4.(1) For the purposes of this Act,-
(a) where property is transferred otherwise than for adequate consideration, the amount by which the market value of the property at the rate of the transfer exceeds the value of the consideration shall be deemed to be a gift made by the transferor:
Provided that nothing contained in this clause shall apply in any case where the property is transferred to the Government or where the value of the consideration for the transfer is determined or approved by the Central Government or the Reserve bank of India;
(b)** ** **
(c) where there is a release, discharge, surrender, forfeiture or abandonment of any debt, contract or other actionable claim or of any interest in property by any person, the value of the release, discharge, surrender, forfeiture or abandonment to the extent to which it has not been found to the satisfaction of the assessing officer to have been bona fide, shall be deemed to be a gift made by the person responsible for the release, discharge, surrender, forfeiture or abandonment.”
Thus, a bare reading of the aforesaid sections shows that the definition of “gift” under the Gift Tax Act is wide enough to cover transfer of movable or immovable property made voluntarily without consideration of money or money’s worth, and includes the transfer or conversion of any property referred to in deeming provisions of section 4 of the Gift Tax Act. Subsection (xxii) of section 2 defines “property” as to include any interest in property, movable or immovable. Thus, it is clear that provisions of Gift tax Act are attracted in regard to transfer of property or any interest in property movable or immovable. Sub-section (xxiv) o section 2 defines “transfer of property” as to mean any disposition, conveyance, assignment, settlement, delivery, payment or other alienation of property. It further includes the creation of trust in property, creation of any lease, mortgage, charge, easement, licence, power, partnership or interest in property. It also includes transaction entered into by any person with intent thereby to diminish directly or indirectly the value of his own property and to increase the value of the property of any other person. Thus, it is obvious that the expression “transfer of property” in the Gift Tax Act is very wide and comprehensive and covers all transactions of property and rights thereof in favour of any other person. Section 4 of the Gift Tax Act further includes certain situations, which provide for treating the gift as deemed in a case where the property is transferred otherwise than for adequate consideration and sub-section (c) of section 4(1) also covers transaction if there is a release, discharge, surrender, forfeiture or abandonment of any debt, contract or other actionable claim or of any interest in property by any person to the extent such discharge has not been considered to be bona fide by the assessing officer. Thus, the issue whether, there is a transfer of property or rights therein are to be decided with reference to the facts and circumstances of each case. This proposition finds support from the following judgments
(i) CGT v. CS. Patil (1989) 180 ITR 971 (Karn)
(ii) CGT v. Smt. Kamla Devi Bhanot (1988) 171 ITR 398 (MP);
(iii) CGT v. Vinod Kumar Agarwal (1990) 185 ITR 5073 (MP); and
(iv) Subhash Dhanraj Choudhari v. CGT (1991) 192 ITR 2984 (Bom).
The learned counsel for the assessee has also given a list of several judgments of the various High Courts where on the facts and circumstances of those cases, it has been held that where the incoming partner has brought in sufficient capital, the same does not amount to gift because capital brought in by the incoming partner is for adequate consideration. This is the view taken by the following Courts:
(i) CGT v. K.A. Abdul Razac (1992) 196 ITR 578 (Ker);
(ii) D.C. Shah v. CGT(1982) 134 ITR 4921 (Kar);
(iii) CGTv. C.S. Pati1(1989) 180 ITR 97 6 (Kar);
(iv) CGTv. Ali Hussain M. Jeevaji (1980) 123 ITR 4207 (Mad);
(v) CGT v. N. Palaniappa Mudliar (1978) 113 ITR 440 (Mad);
(vi) Addl. CGT v. A.A. Annamalai Nadar (1978) 113 ITR 574 (Mad);
(vii) CGT v. Laxminarayana Mahawar (1996) 217 ITR 551 (MP);
(viii) CGT v. Mannalal Surana (1986) 162 ITR 6889 (Raj);
(ix) CGT v. Premji Trikamii Jobanputra (1982) 133 lTR 317 (Bom);
(x) CED v. Vasantrai B. Mehta (1982) 133 ITR 4111 (Born).
The other judgments given in the list also support the same view. But the issue whether the transfer is for adequate consideration or not has to be decided on the facts of its own case. For example, in a case where the firm has been making losses and the liabilities of the firm are more than the assets of the firm, the admission of new partner with capital contributions resulting in reduction in profit sharing ratio of the existing partners would not amount to a gift without adequate consideration. However, in a case where the firm has been making substantial profits and commands substantial goodwill and other assets whose fair market value exceeds far above the book value, the induction of new partners resulting in reduction in profit sharing ratio of the existing partners would amount to a gift and hence liable to tax.
14. Before coming to the conclusion whether reduction in profit sharing ratio of the assessees in favour of the new partners could be considered as a gift or not, we consider it necessary to highlight the following important aspects of these cases :
(i) In all the cases, partnership firms were making substantial profits. In none of the cases the firm was found to suffer a loss.
(ii) All the partnership firms had earned substantial amount of goodwill based on average profit of the last five years. Besides, all the firms owned movable and immovable assets in the form of shares, investment allowance reserve and other movable and immovable properties. The market value of these assets far exceeded the book value thereof. We have also noted that market value of these assets was taken as per value shown in the respective balancesheets and as declared in the wealth tax returns for the assessment year 1992-93. The difference between the fair market value and book value of the assets owned by the firms and the goodwill is as under
Firm
Difference in Market value and Book value of assets
Goodwill
M/s. Munjal Casting
72,47,968
1,24,15,048
M/s. Munjal Sales Corpn.
1,45,62,601
2,02,81,795
M/s. Munjal Gases
6,32,234
18,19,569
M/s. Munjal Steels
42,33,528
–
In fact, in the case of M/s. Munjal Castings, the assessee itself had shown the value of goodwill at Rs. 1,24,15,048. Even in regard to the remaining cases, the basis of working of goodwill and the difference between the fair market value of assets and the book value was confronted to the assessees during the course of assessment proceedings and assessees had initially agreed. Later, the assessees had retracted but conceded that reduced share of profit in the investment allowance reserve in favour of the minor children admitted to the benefits of partnership amounted to gifts. In fact, no worthwhile arguments have been advanced before us disputing the value of taxable gift determined by the lower authorities.
(iii) As against the existing partners, the incoming partners have introduced a very nominal capital varying from Rs, 2 lakhs to Rs. 3.50 lakhs. No capital was introduced by the minors admitted to the benefits of partnership. Even those partners who brought in their capital were free to withdraw the same. in fact in most of the cases substantial withdrawals were made in the accounting year relevant to assessment year under reference.
(iv) Investment allowance reserve standing at the credit on the last day of the previous year was distributed among all the partners including the new partners and minor children. In fact, capital accounts of the new partners were credited with share of profit, interest and investment allowance reserve almost equal to the capital brought in. In any case, looking to the considerable worth of the firms and goodwill, the capital introduced by the existing partners was nominal.
(v) There was no stipulation in the new partnership deed to the effect that new partners shall not be entitled to withdraw from their capital accounts any amount up to certain period of time. Thus, the incoming partners were given full rights to withdraw their capital at any time as they wished.
(vi) The assessees have not been able to justify their claim that new partners were inducted because the firm needed more capital. In fact, in none of the cases, the assessees have been able to justify such claim. The claim that there was a requirement of labour also remains unsubstantiated. Minors admitted to the benefits of partnership could have not contributed any labour. There is nothing to show that ladies inducted as new partners were more useful to the firms. Moreover, these are the cases of investment companies and in cases where assessees have been carrying on business, the transactions are with sister concerns. Looking to these facts, the justification of extra labour needed by the firms also remain unsubstantiated. In fact, in the case of M/s. Munjal Gases, the assessees have made contradictory claims. In any case, such claim also remains unsubstantiated.
(vii) Further, it is observed that profit sharing ratio among the partners has not been linked with their capital contribution. Even though in some cases capital contributed was much higher, share of profit allocated to them was comparatively lower vis-a-vis other partners. Thus share of profit given to them did not commensurate with their capital contribution. We find in the case of M/s. Bhagyoday Investments Pvt. Ltd. a partner in the firm of M/s. Munjal Castings, the opening balance in the capital account was Rs. 41,75,263. After withdrawals during the accounting year under reference, the closing balance as on 31-3-1993 was Rs. 52,88,086. Similarly, in the case of M/s. Bahadur Chand Investments Pvt. Ltd., the opening balance was Rs. 34,28,239 and after taking into account the withdrawals of Rs. 19 lakhs or so, the closing balance was Rs. 26,14,670. M/s. Dayanand Munjal Investments Pvt. Ltd. was also partner in the said firm. The opening balance in the capital account was Rs. 34,45,388 and after taking into account the withdrawals of Rs. 21 lakhs or so and fresh credits, the closing balance as on 31-3-1993 was Rs. 24,17,860. Even in the case of M/s. Bahadur Chand Investments Pvt. Ltd., a partner in the firm of M/s. Munjal Castings, the opening balance was Rs. 37,91,652 and after withdrawals and fresh credits, the closing balance was Rs. 27,30,971. In spite of the fact that there was huge credit balance in the capital account of the old partners, their reduced share of profit varied from 5% to 8%. The new partners who had brought in very nominal capital or in case of minors, in whose cases no capital at all was introduced, they were also given share of profit of 5% each. Even in the past, profit sharing ratio was never linked with the amount of capital contributed by them. In fact, Smt. Sudershan Kumari Munjal, partner in the firm of M/s. Munjal Sales Corporation, had 16% share of profit in the said firm before reconstitution and even after reconstitution, the share of profit remained the same. She had opening debit balance in her capital account at Rs. 1.81 lakhs and closing debit balance of Rs. 5.56 lakhs. As against the same, the other existing partners, namely, M/sThakurdevi Investments Pvt. Ltd., had opening credit balance of Rs. 39.92 lakhs and closing balance of Rs. 47.26 lakhs. While the share of profit of M/s, Thakurdevi Investments Pvt. Ltd. was reduced from 14% to 7%, no such reduction took place in the case of Smt. Sud(rshan Knmari Munjal. The GTO and Commissioner Gift Tax (Appeals) have also highlighted the remaining cases in their respective orders.
Thus, the issue whether there was a gift on account of reduction in profit sharing ratio of some of the partners in favour of the incoming partners or not is required to be decided in the light of these significant facts.
15. Their Lordships of Punjab & Haryana High Court in the case of Vipin Kumar (supra) have held that property owned by the firm actually belongs to the partners and use of the expression “firm” is only a compendious mode to designate persons who have agreed to a joint venture and what is called the property of the firm is really the property of the partners. The High Court has held as a partner can claim to have a specific interest in its assets exclusively apart from his interest as a partner in the firm and such interest is restricted to the profit sharing ratio. When the assets of the firm belong to all the partners in their profit sharing ratio, each partner can be said to have interest in those assets to the extent of his share of profit. Any reduction in the profit sharing ratio results in reduction or alienation of his rights in the assets of the firm to the extent of his reduced profit sharing ratio. Therefore, the same would constitute a gift in favour of the incoming partners within the meaning of sub-sections (xxii) and (xxiv) of section 2 read with sections 4(1)(a) and 4(1)(c) of the Gift Tax Act, provided such transfer is without adequate consideration. The facts detailed above clearly show that the incoming partners have either not brought any capital or brought very nominal capital vis-a-vis the old partners. Thus, it could not be said that reduction in share of capital in favour of the incoming partners was for adequate consideration. In fact, in some of the cases where partners have not brought any capital i.e. in cases of minors and the reduced share of profit has gone in their favour, it is a clear case of gift within the meaning of section (xii) of section 2 of the Gift Tax Act. As noted earlier, the fair market value of the assets owned by the firm far exceeded the book value. Therefore, to the extent existing partners have relinquished/alienated their share in the assets to the extent of reduced profit sharing ratio, such reduction in the value of assets also amounts to gift within the meaning of sections 2(xii) and (xxiv) read with sections 4(1)(a) and 4(1)(c) of the Gift Tax Act.
16. As regards the goodwill the same is a property of the firm. This matter was considered by the Hon’ble Supreme Court in the case of Chhotalal Mohanlal (supra). In that case, the old firm consisted of three partners. On a reconstitution, two partners continued as before. The share of third partner was reduced. His two minor sons were admitted to the benefits of partnership. The issue was whether there was a gift by “C” in favour of his two minor sons in respect of his reduced share of profit. On these facts, the Hon’ble Supreme Court held that goodwill is a property and when minors are admitted to the benefits of partnership in a firm and the share of an existing partner is reduced thereby, the right to the money value of the goodwill stands transferred and transaction constitutes a “gift” under the Gift Tax Act. While taking such view, the Hon’ble Supreme Court also approved the following judgments:
(i) CGT v. Nani Gopal Mondal (1984) 150 ITR 4691(Cal);
(ii) M. K. Kuppuraj case (supra);
(iii) Surehmal Nawalkha v. CIT (I985) 156 ITR 7142 (Raj);
(iv) Premji Trikamji Jobanputra case (supra).
It is not in dispute that goodwill computed by the assessee based on average profits of the earlier assessment years was not the goodwill of these firms. Therefore, the ratio of the judgment of Supreme Court in the above referred case is directly applicable to the facts of the present cases.
17. Besides, this issue was further considered by the Hon’ble Madras High Court in the case of M.K. Kuppurai (supra) 258 ITR 412 (Mad). The facts of-that case were that old firm consisting of three partners was reconstituted by admitting a company as a fourth partner. The firm owned a running business as well as valuable fixed assets in the form of buildings. As a result of reconstitution, the shares of each one of the existing partners were reduced by 6% and the newly admitted partner i.e., the company, was given 18% share in the profit and loss of the firm. The new partner contributed a capital of Rs. 1 lakh. On these facts, the authorities below including the Tribunal held that the relinquishment of a portion of rights held by the three partners in favour of the newly inducted partner to the extent of 1896 share given to the newly inducted partner did not truly reflect the value of the firm’s assets vis-a-vis the new partner’s capital contribution and that there was a gift to the company. On a reference, the High Court held that even though there was a capital contribution by the newly inducted partner, the extent of contribution had been found to be not commensurate with the value of the benefit conferred on that newly inducted partner by reason of reduction in the shares of the continuing partners in their share of profits. Such reduction resulted in a gift. The facts of the present cases are similar to the facts of the case before the Madras High Court. In the present cases also, the incoming partners have either brought no capital or a very nominal capital which did not commensurate with the value of the benefits conferred on them. Besides, the investments of the existing partners in the share capital far exceeded the investments made by the new partners. Admittedly, the fair market value of the assets and the goodwill far exceeded the extent of capital brought in by the new partners. Thus, such relinquishment of profit sharing ratio in favour of the new partners without adequate consideration amounts to gifts.
18. This issue was also considered by the Madras High Court in the case of M. K. Kuppuraj (supra) 153 ITR 481 (Mad). The facts before the Madras High Court were that the existing partner had relinquished his right over future profits in the firm by 8% by reducing his share of profit from 50% to 42% and the reduced share was given to the minor children who were admitted to the benefits of partnership. On these facts, the Hon’ble High Court held as under:
“Held, that by agreeing to admit the minors to the benefits of the partnership, neither the partnership nor the other partners apart from the assessee, had admission of the minor to the benefits of the partnership, the consent had no bearing on the question as to whether the transaction of the assessee was detrimental to the firm or the other partners of the firm, because the assessee was admittedly the person who relinquished a portion of his interest. Consequently, the firm or the other partners could not be held to be donors of any part of the gift. The relinquishment of the 896 profit sharing ratio in favour of the minors was admittedly without any consideration and hence would constitute a gift by the assessee in favour of the minors. The Tribunal was, therefore, right in its view that the transaction by which a partner relinquished a portion of his profit sharing ratio in the partnership in favour of another will amount to a gift falling within the definition in section 2(xii) read with section 2(xxiv) of the Gift Tax Act, 1958.”
In the present cases also, it may be noted that the new partners inducted to the various firms belong to the same families of Hero group. By inducting the new partners, the existing partners have relinquished their rights in the assets belonging to the firm and goodwill to the extent of their reduced share of profit and such relinquishment is without any adequate consideration. Therefore, the same constitutes gift within the meaning of sections 2(xii) and 2(xxiv) read with sections 4(1)(a) and 4(1)(c) of the Gift tax Act, 1958.
19. Our discussion on the issue would be incomplete without referring to the various judgments, which were specifically cited by the learned counsel for the assessee. These are discussed hereunder:
(i) Sree Narayana Chandrika Trust’s case (supra)
The facts of the case before the Apex court were that the assessee was a charitable institution having 45% share in the profits of the firm constituted on 1-4-1980. At the time of becoming a partner in the said firm in 1980, the assessee had contributed a sum of Rs. 1,000 as share capital. There was a change in the constitution of the firm on 1- 10- 1982 whereby a new partner, who contributed Rs. 25,000 towards her share of the capital of the firm, was inducted with a share of profit of 12%. As a result of induction of new partner, share of profit of the assessee was reduced from 45% to 30%. On the facts, the Tribunal had 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 was the right of the partner to get the value of his share could not be valued during the subsistence of the partnership, it was not possible to consider and quantify the question of adequacy or inadequacy of the consideration, and no gift tax was leviable. On a reference, the High Court held that the reduction in the share of profits of the assessee constituted a gift exigible to tax. On appeal, the Hon’ble Apex court held that assuming that there was a transfer of a part of which share of profit/loss in favour of the incoming partner by the assessee, since the incoming partner had contributed towards her share of the capital and the value of the services and usefulness of the incoming partner to the firm as partner was not disputed, it was not a situation of transfer for inadequate consideration so as to amount to a taxable gift within the meaning of section 4(1)(a) of the Gifttax Act, 1958. Though by referring to the judgment of Supreme Court in the case of B.T Patil & Sons v. CGT (2001) 247 ITR 588 (SC), the Supreme Court held that although the relinquishment of the share of profit/loss by a partner in favour of the inducted partner may amount to a transfer but the same was not for inadequate consideration.
The facts of the present cases are clearly distinguishable inasmuch as in the aforesaid case, the assessee had become a partner by contributing capital of Rs. 1,000 only and the incoming partner had contributed capital of Rs. 25,000. The firm had just come into being about two years before. Therefore, the capital contributed by the new partner was much higher vis-a-vis the capital introduced by the assessee. Thus, it could not be said that such transfer was for inadequate consideration. In the present cases, the incoming partners either contributed no capital or contributed very nominal capital which was far less than the market value of assets and goodwill of the firms. Besides, the capital of the existing partners far exceeded the amount of capital introduced by the incoming partners. Therefore, it could not be held that such transfer was for adequate consideration. Therefore, this judgment is not applicable to the facts of the present cases.
(ii) D. C. Shah’s case (supra):
In fact, this judgment was also referred to by the Supreme Court in the case of Sree Narayana Chandrika Trust (supra). In that case also, the share of profit of the existing partner was reduced by 5% in favour of his son and the revenue had brought to tax reduced 5% share as a gift. However, it was noted that the new partner, was inducted into the firm on his contribution of capital in the firm of Rs. 2.33 lakhs. Besides, he had been in the business for nearly four years and it was, therefore, reasonable to assume that the increase in the share of profit was on account of his experience and capacity to shoulder more responsibilities. Thus, this case is distinguishable on facts for the reason that incoming partner had brought sufficient capital of Rs. 2.33 lakhs and besides he was in the same business for the last four years. The other facts about the worth of the firm and goodwill, if any, are not known. Therefore, the decision of Supreme Court in that case is applicable to its own facts and not to the facts of the present cases.
(iii) T. M. Louizs case (supra):
This is a case of a partnership firm where the assessee had retired by taking his share of capital standing to his credit in the firm. The revenue authorities brought to tax relinquished share of profit on the ground that the market value and the goodwill of the firm had not been taken into account at the time of his retirement. On these facts, the Hon’ble Supreme Court held that when a partner retires from a partnership, the partnership continues. The assets and the goodwill of the firm continue to remain the assets and the goodwill of the firm. All that the retiring partner gets is the value of his share in the partnership assets less its liabilities. it cannot, in such circumstances be held assuming that the retiring partner received less than what was his due, that the difference was something that he had transferred to the continuing partners within the meaning of “transfer of property” for the purpose of Gift Tax Act or that there was a gift liable to tax. This case is again distinguishable.
In the present cases, none of the partners has retired from the firm. On the contrary, the share of profit of the existing partners who continue to be the partners in the firm was reduced and given to new partners inducted in the partnership firms. The relinquishment of their rights in assets and goodwill of the firms in favour of incoming partners without adequate consideration constituted gifts liable to tax to the extent of their reduced share of profit. Therefore, this judgment is also not applicable to the facts of the present cases.
(iv) T Abdul Wahid’s case (supra)
The facts of this case were that on reconstitution of the firm, the share of the assessee was reduced and the share allotted to another partner who was newly inducted and to a minor to whom the benefits of partnership were extended. The assessing officer treated the reduced share as gift in favour of the newly admitted partner and the minor. Minor had also contributed capital. There is no discussion as to whether the firm owned assets whose market value exceeded the book value and goodwill. On these facts, it was held that induction of new partner was for a consideration because of their capital contribution. These are not the facts of the present case. Here, the market value of the assets and goodwill far exceeded the capital brought in by the new partners vis-avis the capital contributed by the existing partners. Therefore, reduction in share of profit was without any adequate consideration.
(v) P.K. Somrajan Pillai case (supra):
In this case also, one partner retired from the firm and in his place a new partner was inducted. By relying on the judgment of Supreme Court in the case of T. M. Louiz (supra) the High Court held that when a partner retired and in his place a new partner was inducted, the partnership continued and the assets and goodwill of the firm continued to remain the assets of the firm.
As discussed above, this case is distinguishable inasmuch as in the present cases, it is not the case of the retirement of old partners. These are the cases of reduction of shares in favour of the incoming partners without adequate consideration. Therefore, this case is also not applicable to the facts of the present cases.
(vi) Maneklal Hargovandas Patel case (supra) :
In this case, the assessee was 80 years old and totally blind and, therefore, physically unfit for continuing as a partner in the firm. Due to these reasons, his share of profit was reduced from 25% to 4%. Further, the assessee had already declared a gift of Rs. 25,000 in the return. The issue before the Gujarat High Court was whether reduction of 2196 share of profit of the assessee amounted to a gift. The High Court held that it did not amount to a gift because such reduction was for a valid reason.
These are not the facts of the present cases. In none of the cases, the assessee has been able to lead evidence that reduction in share of profit was made because the partner was physically unfit to carry on the business of the firm.
20. The learned Counsel for the assessee has also relied on the decision of ITAT, Chandigarh Bench in the case of Smt. Brii Mohan Lal (supra) 5 ITD 558 (Chd), where the partner had retired from the firm by taking his balance in the capital account. Here also, it was a case of retirement from the firm and not induction of new partners resulting in reduction in share of profits. Therefore, this decision is also not applicable. Moreover, this does not take into account the judgment of Supreme Court in the case of Chhotalal Mohan lal (supra) and the judgment of Punjab & Haryana High Court in the case of Vipin Kumar (Individual)(supra). The same is the position with regard to the case of Brij Mohan Lals case (supra), for the assessment year 1970-71, a copy placed on our file.
2 1. In the list of cases relied upon by the Id. Counsel, one such case referred to is that of ITAT Madras Bench in the case of Vinsent P. Farms v. GTO (1990) 33 ITD 58 (Mad). In this case, the assessee became a partner in the firm in the year 1973 by contributing share capital of Rs. 3 6,000. His share of profit in the said firm was 60%. He retired from the firm on 31-3-1976. One ladypartnerwas inducted as anewpartnerwith 40% share and capital contribution of Rs. 1,20,000. On these facts, it was held that when there was adequate capital contribution by the new partner there was no element of gift in the transaction by which the assessee retired from the firm. Here also it is a case of retirement of a partner from the firm and induction of new partner with sufficient capital (as against capital contribution o Rs. 36,000 with 60% share, new partner brought capital of Rs. 1,20,000 with 40% share). This decision is also not applicable to the facts of the present cases.
22. The assessee has further relied on the decision of Cochin Bench of the ITAT in the case of GTO v. Smt. Saralaben S. Mehta ( 1987) 20 ITD 69 (TM). There is no such case in Smt. Saralaben S. Mehta case (supra) on the issue of deemed gift. As regards other decisions mentioned in the list and reported in TTJ, the assessee has not furnished copies thereof. However, there also the finding is that if the incoming partner has brought sufficient capital, the reduction in share of profit would not be without a consideration and hence not liable to gift tax. These decisions are also not applicable to the facts of the present cases. Moreover, the judgment of the court takes its colour from the facts and the questions raised. It is not correct to read the judgment of the court in isolation of the facts and questions raised before the court. Reliance in this regard is placed on the judgment of Hon’ble Supreme Court in the case of CIT v. Sun Engg. Works P. Ltd. (1999) 198 ITR 297 (SC). Thus the judgments/ decisions relied upon by the learned counsel are of no help to the assessees.
23. Thus, in the light of detailed discussion on the facts and circumstances of the case and the legal position discussed above, we are of the considered opinion that Iearned Commissioner (Appeals) was justified in holding that reduction in the share of profit of the assessees in the assets and goodwill of the firm in favour of the incoming partners including the minors admitted constituted gifts liable to gift tax. Such finding would equally apply to cases where as a result of reconstitution of the firm, shares of profit of the partners were reduced in favour of the other partners i.e. in the case of Munjal Gases. We do not find any infirmity in the orders of the Commissioner (Appeals). The same are upheld and the respective grounds of the assessees are dismissed.
24. Assessees have raised some grounds relating to computation of gift. However, no specific arguments were advanced during the course of hearing of the appeals before us. The learned counsel for the assessee simply advanced legal arguments, whether amounts in question constituted gift or not. Moreover, we find that the basis of computation of gifts in the various assessments was confronted to the assessees during the course of assessment proceedings. In fact, the learned counsel for the assessees and the representatives of the assessees had initially agreed before the assessing officer to the computation of gifts in their respective cases. Subsequently, the assessees retracted from such agreement. However, we find that such computation has been made on the basis of average profits of the last five years. In fact, in the case of M/s. Bhagyoday investments P. Ltd., the assessee had itself computed the goodwill at Rs. 1,24,15,048. The basis of computation of the goodwill is also the same in the remaining cases. The basis of working the fair market value of the assets and the book value is the respective balance sheets and the value shown in the wealth tax returns. No specific arguments have been addressed before the Bench to challenge such value. Thus, for the detailed reasons given by the authorities below, with which we agree, and in the absence of any specific grievance in this regard projected before us, we are of the opinion that the computation of taxable gifts as sustained by the learned Commissioner (Appeals) does not merit any interference. Accordingly, we confirm the orders of Commissioner (Appeals) in all the cases and dismiss the respective grounds of appeals.
25. In the result, all the eight appeals filed by the assessees are dismissed.