S. Sankarasubban, J.
This reference is at the instance of the revenue under section 26(1) of the Gift Tax Act, The questions referred to are :
(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?
2. The assessee in this case is M/s Sree Narayana Chandrika Trust (hereinafter referred to as ‘the Trust’). The Trust is a (sic-partner in a) partnership firm and the trust was having 45 per cent profit in the partnership as per the deed executed on 1-4-1980. The firm was reconstituted under a deed executed on 1-10-1982. As per the deed, the assessee’s share in the profit of the firm was reduced to 30 per cent from the earlier 45 per cent. On the view that the assessee surrendered 15 per cent right in the profits of the firm in favour of the other partners, the Gift Tax Officer initiated proceedings and issued notice under section 16(1) of the Gift Tax Act, requiring the assessee to file a return of gift.
3. Accordingly, the assessee filed the return showing the net taxable gift at nil. The assessing officer completed the assessment by Annexure A order. He found Rs. 7,36,650 as the average profit of the firm taking into consideration the profits for the years 1978-79 to 1982-83. After adjustment, three years purchase price was arrived at Rs. 21,16,000. The value of 15 per cent share surrendered by the assessee was put at Rs. 3,17,400. The assessing officer fixed the gift-tax at Rs. 59,600,
4. Against the assessment order, the assessee preferred an appeal before the Commissioner of Gift Tax (Appeals)-II, Cochin. Before the Commissioner of Gift Tax (Appeals), the assessee raised the contentions that it is not liable to gift-tax. The first contention that was raised is regarding the existence of goodwill. The Commissioner of Gift Tax (Appeals) found against the assessee. The next question was since capital was contributed whether there was any gift, The Commissioner of Gift Tax (Appeals) took the view that the contribution of Rs. 25,000 by the new partner cannot be considered as adequate consideration. The matter was taken before the Tribunal, Cochin Bench, by the assessee.
5. Before we deal with the order of the Tribunal, one more fact that is necessary is that in the reconstitution of the partnership in 1982, a new partner by name M.U. Indira was inducted and she contributed Rs. 25,000. The share of profit for Indira was fixed at 12 per cent. Another 3 per cent share of the assessee was given to the other existing partners. Copy of the order of the Tribunal is produced as Annexure C. In para 4 of the order of the Tribunal, it is stated as follows: “Sri. C.K. Nair very fairly submitted that since the decision of the Tribunal is against the assessee on the question of goodwill, he would not argue further on this issue. The issue is decided against the assessee”. It was then contended that the firm did not have any other business nor did it have any asset and, therefore, the reduction of share from 45 per cent to 30 per cent cannot give rise to any gift in the matter of goodwill alone. For this proposition, the decision in (1982) 132 ITR 317 (sic) was relied on. The Tribunal took the view that since there was no application regarding the amount of liability, etc. the issue cannot be decided or the issue can be decided only after getting information from the assessing officer. But it took the view that since it was disposing of the appeal on another point, it was not necessary to decide the issue.
6. The third point for consideration was since the transfer was supported by consideration, whether there was any gift. The Tribunal considered the decision of this court in CGT v. K.A. Abdul Razack & Anr. (1992) 196 ITR 578 (Ker) and also a Full Bench decision in CGT v. C.K. Nirmala 113 1995 KLJ (Tax Cases) 355. It went on to consider the question whether there was any consideration for the transfer. The Tribunal relied on the decision of the Supreme Court in Sunil Siddharthbhai v. CIT (1985) 156 ITR 509 (SC) which held as follows :
“The consideration for the transfer of the personal assets is the right which arises or accrues to the partner during the subsistence of the partnership to get his share of the profits from time to time and, after the dissolution of the partnership or with his retirement from the partnership, to get the value of his share in the net partnership assets as on the date of the dissolution or retirement after deduction of liabilities and prior charges. The credit entry made in the partner’s capital account in the books of the partnership firm does not represent the true value of the consideration. It is a notional value only, intended to be taken into account at the time of determining the value of the partner’s share in the net partnership assets on the date of dissolution or on his retirement, a share which will depend upon deduction of the liabilities and prior charges existing on the date of dissolution or retirement. It is not possible to predicate beforehand what will be the position in terms of monetary value of a partner’s share on that date. At the time when the partner transfers his personal asset to the partnership firm, there can be no reckoning of the liabilities and losses which the firm may suffer in the years to come. All that lies within the womb of the future. It is impossible to conceive of evaluating the consideration acquired by the partner when he brings his personal asset into the partnership firm when neither can the date of dissolution or retirement be envisaged nor can there by any ascertainment of liabilities and prior charges which may not have even arisen yet. Therefore, the consideration which a partner acquires on making over his personal asset to the firm as his contribution to its capital cannot fall within the terms of section 48. And as that provision is fundamental to the computation machinery incorporated in the scheme relating to the determination of the charge provided in section 45, such a case must be regarded as falling outside the scope of capital gains taxation altogether.”
Respectfully following the ratio laid down by the Apex Court in Sunil Siddharthbhai’s case (supra), 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 in the partnership assets cannot be evaluated when the partnership is subsisting, the question of any consideration or inadequacy of consideration cannot be quantified. In such an event it cannot be held that there was gift exigible to tax.
7. We heard learned senior counsel for the revenue Shri P.K. Ravindranatha Menon and learned counsel for the assessee, Shri Dale Kurian.
8. Shri Ravindranatha Menon submitted that the entire approach made by the Tribunal was wrong. The decision in Sunil Siddharthbhai’s case (supra) is not applicable to the present case. Learned counsel cited a number of decisions of the Supreme Court as well as this court holding that if there is reduction in the share of a partner in favour of an incoming partner or existing partners that amounts to a gift. It is also submitted that the goodwill forms part of the assets of a firm. Learned counsel for the assessee/respondent submitted that the share of a partner can be ascertained only at the time of dissolution of the firm and hence, the question of adequacy or inadequacy can be considered only at the time of dissolution.
9. In CGT v. Chhotalal Mohanlal (1987) 166 ITR 124 (SC), the Supreme Court had to consider the question whether minor sons of partner admitted to benefits of partnership and the share of father was reduced. Dealing with this contention, the Supreme Court held as follows :
“Once goodwill is taken to be property and with the admission of the two minors to the benefits of partnership in respect of a fixed share, the right to the money value of the goodwill stands transferred, the transaction does not constitute a gift under the Act. Since there has been no dispute about valuation of the goodwill as made by the Gift Tax Officer, with the conclusion that there has been a gift in respect of a part of the goodwill, the answer to the question referred has to be in the, affirmative, that is, it constitutes a gift under the Act.”
In CGT v. K.A. Abdul Razack & Ors. (supra), a Division Bench of this court had occasion to consider a similar question. This court held that under section 2(xii) of the Gift Tax Act, one of the essential conditions for a gift is that the transfer must be without consideration in money or money’s worth. The burden of proving that a particular transfer is a gift is upon the revenue by showing that the transfer was without consideration. If there is any capital contribution by or on behalf of the minors who are admitted to the benefits of the partnership, there can be no gift in respect of the goodwill. This court further held that “the Tribunal was right in holding that the capital contributed by the minors should be treated as consideration of the gift of interest surrendered in favour of the minors in determining the value of the taxable gift”. The decision in CGT v. C.K. Nirmala (supra), is a Full Bench decision of this court Mohammed, J, speaking for the bench held as follows : “One of the essential ingredients constituting the gift under this provision is that the transfer of property by one person to another must be “without consideration in money or money’s worth”. However, the word ‘consideration’ is not defined in the Act and, therefore, it must carry the meaning assigned to it in section 2(d) of the Indian Contract Act, 1872. The above provision is no doubt subject to such qualifications or limitations as contained in the Gift Tax Act. Under the Contract Act the adequacy or inadequacy of the consideration is immaterial, but under the Gift Tax Act an agreement to transfer of property “otherwise than for adequate consideration” gives rise to a gift to the extent of inadequacy”. In that case, it was also held as follows :
“In this case the incoming partners have generated Rs. 30,000 as capital invested in the partnership business and this is more than the value of the interest transferred by the assessee in favour of the incoming partners. Here, the amount of Rs. 30,000 is the consideration for transferring the interest of the assessee and this consideration has not been directly paid to the promisor, but it is introduced as capital to the partnership. Therefore, it cannot be said that the transfer of interest by the assessee in favour of the incoming partners has not been supported by consideration. Once the transfer of interest is supported by consideration the essential ingredients constituting the gift obliterates. The different consideration may arise if the transfer of interest does not include the goodwill of the business. As far as this case is concerned the question of such consideration did not arise inasmuch as the goodwill is treated to be the interest transferred.”
10. Thus, the Supreme Court and this court are of the view that the goodwill can form part of the assets of the firm and if the transfer is not supported by consideration, then there will be a gift. It is further stated that under the Gift Tax Act, the consideration should be adequate. In the present case, the Tribunal relied on the decision of the Supreme Court in Sunil Siddharthbhai v. CIT (supra). There, the question arose under the Income Tax Act and the question was whether the assessee was liable to pay tax on capital gains. In that case, the assessee was a partner in M/s Suvas Trading Company, a partnership firm constituted under a deed of partnership dated 27-9-1973. As his contribution to the capital of the partnership firm, the assessee made over certain shares of limited companies which were held by him as his capital assets. The book value of those shares in his account books was shown as Rs. 1,49,819, but on the date when he contributed those shares to the partnership firm, he revalued the shares at the market value of Rs. 1,60,279 and credited the resulting difference of Rs. 10,460 to his capital account. The Commissioner was of the opinion that the difference between the market value of the shares and the cost of acquisition of the shares to the assessee should have been brought to tax as capital gains in view of section 45 of the Income Tax Act, 1961, and hence, he exercised the revisional jurisdiction and reopened the assessment and remanded the case to the Income Tax Officer directing him to revise the assessment. The assessee appealed to the Tribunal and the Tribunal held that while the transaction did amount to a transfer within the meaning of clause (47) of section 2 of the Income Tax Act, it did not result in capital gains liable to tax. The matter was taken before the High Court of Gujarat in reference. The questions referred were whether there was capital gains and whether there was a transfer within the meaning of clause (47) of section 2 of the Income Tax Act. So far as the question of transfer is concerned, the argument that was urged was that shares had not been transferred to the partnership, because the property of the partnership belonged to all the partners. This contention was repelled by the Supreme Court and the Supreme Court held, thus :
“Therefore, what was the exclusive interest of a partner in his personal asset is, upon its introduction into the partnership firm as his share to the partnership capital, transformed into an interest shared with the other partners in that asset. Qua that asset, there is a shared interest. During the subsistence of the partnership, the value of the interest of each partner qua that asset cannot be isolated or carved out from the value of the partner’s interest in the totality of the partnership assets. And in regard to the latter, the value will be represented by his share in the net assets on the dissolution of the firm or upon the partner’s retirement.”
The above observations were made when the Supreme Court was considering the question whether section 48 of the Income Tax Act was applicable. Section 48 of the Income Tax Act as it stood then reads as follows :
“48. The income chargeable under the head ‘Capital gains’ shall be computed by deducting from the full value of the consideration received or accruing as a result of the transfer of the capital asset the following amounts, namely :
(i) expenditure incurred wholly and exclusively in connection with such transfer :
(ii) the cost of acquisition of the capital asset and the cost of any improvement thereto.”
It was in that context that the Supreme Court held that the share of a partner cannot be ascertained. This is clear from the following observations of the Supreme Court in the same judgment: “We are unable to hold that the consideration which a partner acquires on making over his personal asset to the partnership firm as his contribution to its capital can fall within the terms of section 48.” Further, at page 523 (of 156 ITR) of the above decision, it is observed as follows :
“Inasmuch as we are of the opinion that the consideration received by the assessee on the transfer of his shares to the partnership firm does not fall within the contemplation of section 48 of the Income Tax Act and further that no profit or gain can be said to arise for the purposes of the Income Tax Act, we hold that these cases fall outside the scope of section 45 of the Act altogether.”
11. The question in this case is whether the relinquishment of the share of the assessee will amount to a gift. No question of evaluation of the partner’s share comes up for consideration in this case. Hence, we are of the view that the Tribunal was not correct in relying the decision in Sunil Siddharthbhai v. CIT (supra) and holding that since the adequacy or inadequacy of consideration cannot be quantified, the transaction is not exigible to gift-tax. The Tribunal allowed the appeal only on the reasoning that the question of adequacy or inadequacy consideration cannot be quantified.
12. In view of the above, so far as question No. 2 is concerned, we answer in the negative and in favour of the department. So far as question No. 1 is concerned, the Tribunal held that the reduction of profit will not amount to gift only on the reasoning that the consideration for transfer cannot be evaluated.
Hence, that question is also answered in the negative and against the assessee.