ORDER
M.A.A. Khan, Judicial Member
1. This is an appeal by Revenue from the order of the Appellate Assistant Commissioner of Gift-tax, A.R.II, Ahmedabad (A.A.C.) dated October 16,1985.
2. The assessee (since deceased) is an individual and the assessment year involved is 1977-78 with the previous year ending with S.Y. 2032. The assessee, along with his two sons, was a partner in the firm M/s Mahasukhlal Bhailal. This firm was carrying on the business of manufacturing and selling silver ornaments at Manek Chowk, Ahmedabad since long under the Partnership Deed dated January 28,1972. Up to March 31,1976, the constitution of this firm was as follows:
1. Shri Mahasukhlal Bhailal 40%
2. Shri Narendrakumar Mahasukhlal 30%
3. Shri Jitendrakumar Mahasukhlal 30%.
3. There was a change in the constitution of the firm with effect from March 31,1976 under a Partnership Deed executed on April 1, J976. By the change effected in the constitution, one more son of the deceased-assessee was admitted as a partner in the firm. Therefore, with effect from March 31,1976 the constitution of the firm was as follows:-
1. Mahasukhlal Bhailal 15%
2. Narendrakumar Mahasukhlal 25%
3. Jitendrakumar Mahasukhlal 25%
4. Ashwinkumar Mahasukhlal 35%.
4. The deceased-assessee filed a return of gift on 19.2.1979 declaring a gift of Rs. 10,000, other than the gift in question. However, the Gift-tax Officer (GTO) noted that in effecting the change in the constitution of the firm in the course of the year under consideration the share of the deceased-assessee was reduced from 40% to 15% and, therefore, there had been a gift of 25% of his share in the firm by the deceased-assessee in favour of his son, partner Ashwinkumar Mahasukhlal. The GTO was of the opinion that the reduction in the share of the deceased-assessee was without consideration and, therefore, it had amounted to a gift which he determined at Rs. 13,190. He, therefore, charged gift-tax accordingly after giving the statutory exemption of Rs. 5,000.
5. The assessee carried the matter in appeal to the AAC. Before the AAC it was urged on behalf of the assessee that there was no gift within the meaning of Section 2(xii) read with Section 2 (xxiv)(d) of the Gift-tax Act, 1958 (the Act) which could be charged to gift-tax under the provisions of Section 4(l)(c) of the Act. It was explained that the new partner had been admitted in a running partnership business on account of commercial expediency and that the new partner had also contributed capital investment in the partnership firm and had further agreed to participate in the business activities of the firm and to share the profits and the losses of the firm in accordance with the share specified in the partnership deed. The learned AAC, relying upon certain decisions of the High Courts found favour with the contentions advanced on behalf of the assessee and cancelled the levy of gift-tax on the amount of Rs. 13,190.
6. The revenue is aggrieved against this order of the learned AAC and has come up before us in this appeal. Mr. B.R. Kaushik, the learned Senior Departmental Representative has vehemently urged that the goodwill of a firm was a property which can be the subject matter of gift from one partner to another partner/ person. Mr. Kaushik further submitted that the question whether there has been a gift of such type of property in a given case should be considered at the point of time the gift is made. If at that point of time there is no evidence to show that the release, discharge, surrender of his share or part of his share by a partner in favour of another person had been made without any consideration then certainly such release, discharge or surrender would result in a deemed gift liable to be taxed as such under the provisions of Section 4(l)(c) of the Act. Mr. Kaushik emphasised that the question of rendering services to the partnership, sharing its losses and profits would arise subsequent to and consequent upon the person receiving the gift and becoming a partner in the firm and such obligations on the part of the incoming partner cannot be treated as consideration of the gift resulting in his favour by the reduction in the share of an existing partner. Mr. Kaushik further submitted that the duty of sharing the possible future losses of the firm is set off against the right of receiving the future profits of the firm and, therefore, the mere obligation of sharing the possible future losses of the firm cannot be regarded as a good consideration of a gift flowing from reduction of the share of an existing partner. Mr. Kaushik summed up by stressing that in the instant case it was an internal arrangement between the various members of a family headed by the deceased-assessee as karta thereof and it was simply a case of tax evasion through tax planning and so hit by the Supreme Court decision in the case of McDowell & Co. Ltd. v. CTO [1985] 154 ITR 148.
7. As against the above arguments advanced on behalf of the revenue, Mr T.P. Amin, the learned representative for the assessee-respondent advanced almost the same arguments which were advanced before the learned AAC. Mr. Amin particularly emphasised that in the instant case a major son had been admitted to the partnership and the said major son had contributed a capital of Rs. 70,000. Mr. Amin further pointed out that the assessee was in bad health and was not able to work and, therefore, the necessity of admitting a new partner, who had already been helping the business of the firm, arose. It was submitted that the new partner would devote his time in the business of the firm and was also liable to share the possible losses of the firm in future. Therefore, the services to be rendered by him, the obligation to share losses and the contribution of capital amounting to Rs. 70,000 or so should be regarded, as has been rightly regarded by the learned AAC, as forming good consideration for the transaction in question. Mr. Amin placed reliance on the cases cited by the learned A.A.C. in his order under appeal. In the end Mr. Amin submitted that the learned AAC recorded a finding that the provisions of Section 4(l)(c) of the Act were not at all applicable to the case on hand.
8. The arguments advanced on behalf of the parties require us to approach the present case from two angles. In the first place it is to be considered whether there has been a gift at all from the deceased-assessee in favour of his third son. In the second place it will have to be seen as to whether the provisions of Section 4(l)(c) are applicable to the facts and circumstances obtaining in the instant case. We may observe that even if the reduction of the share of the deceased-assessee is found to have given rise to a deemed gift in favour of his third son, who became a new partner in the firm, the pertinent question for the application of Section 4(l)(c) of the Act would be whether such a gift had been made bona fide or not
9. Insofar as the first question which we have addressed to ourselves is concerned we feel inclined to take the view that the reduction in the share of the deceased assessee from 40% to 15% in the firm had certainly resulted in a deemed gift of his 25% share in the firm in favour of the new partner. No doubt it has been urged on behalf of the assessee respondent that the transaction in the instant case being not without consideration no deemed gift had flowed from such transaction in favour of the new partner by the deceased-assessee and reliance in this behalf has also been placed on certain decisions of the High Courts and the Tribunal which we would discuss later on. But on the facts and circumstances obtaining in the instant case we are of the opinion that the transaction, being without consideration in money or money’s worth, had certainly given rise to a deemed gift resulting from the release, discharge or surrender of his 25% share in the goodwill of the firm by the deceased-assessee.
10. It is by now well settled from the declaration made by the Supreme Court in the case of CGT v. Chhotalal Mohanlal [1987] 166 ITR 124/31 Taxman 512 that goodwill of a firm is a property and such property can be the subject matter of a valid gift. The reduction in the share of the deceased-assessee from 40% to 15% in favour of the new partner had certainly resulted in the transfer of deceased-assessee’s rights and interest in the goodwill of the firm to the extent of 25%. Obviously the deceased-assessee or any other person on his behalf had received nothing, either directly or indirectly, by way of consideration of his releasing, discharging or surrendering a substantial part of his share in the goodwill of the firm. The question, however, is whether the obligation of the incoming partner to share the possible future losses of the firm, to render services to it and also to contribute capital in the firm could be said to be forming good consideration for the transaction in question in the instant case. The answer to this question, may we think, be best given on a study of the various terms and conditions as incorporated in the partnership deed executed between the partners of the firm at the time of admission of the new partner Shri Ashwinkumar Mafeasukhlal to the firm.
11. As stated above the partnership deed was executed on the first day of April, 1976 but the partnership was given effect to by that deed with effect from 31.3.1976. Some of the clauses of this partnership deed, which are relevant for our purpose, provide as follows:-
5. That the capital of the firm shall be contributed by the partners as per requirement
6. That the capital of the partner shall carry interest as may be decided by partners from time to time.
11. That the salary will be paid to working partner as per mutual consent by the partners.
A study of the above clauses makes it crystal clear that the capital of the firm was required to be contributed by all the partners as per requirements of the firm. By clause 6 it was specifically provided that the capital of the partner would carry interest as may be decided by partners from time to time. By clause 11 it was further provided that salaries would be paid to the working partners as per mutual consent of the partners. Partnership is a result of a contract between two or more than two persons, who come together for the purpose of carrying on a business and it is for that purpose that each of the partners undertakes certain obligations which may be either of contractual nature or, subject to a contract to the contrary, as laid down under the Partnership Act. These obligations would form the consideration for the rights which each of the partner has under the contract of partnership. Once a person has become a partner in a partnership he would be subjected to all the obligations, contractual as well as statutory, which attach to a partner of a firm, inter alia, the obligation to attend diligently to his duties in the conduct of business of the firm. He would also be liable to share the losses which arise to the firm subsequent to his induction as a partner. It is a matter of common knowledge that a new partner is admitted to an existing firm obviously for two reasons -either because the new partner would bring finances to the firm or because he would be going to attend to the business of the firm. But once a person becomes a partner in a firm, his rights to share the assets and profits of the firm and his obligation to share in the liabilities and probable losses of the firm would be governed by the contract of partnership and the relevant provisions in the Partnership Act.
12. In the instant case, the position obtaining is like this that the new partner Shri Ashwinkumar Mahasukhlal is stated to have been made a partner for the purpose of rendering services to the firm. Rendering of special or specialised services to a firm may no doubt constitute good consideration for the agreement for admission of the new partner to the firm as in that case the firm would be saved of the remuneration otherwise being paid by it to the incoming partner who might have been serving the firm before or to any other person in his place. But in the instant case clause 11 of the partnership deed specifically lays down that salary to working partner would be paid. In the presence of clause 11 it cannot be claimed that the services intended to be rendered to the firm by the new partner Shri Ashwinkumar Mahasukhlal could be regarded as sufficient consideration for the transaction culminating in his admission as a partner in the firm. Again, no doubt the copy of the capital account placed before us indicates that in S.Y. 2032 the opening balance in the capital account of the new partner was Rs. 70,196 and the closing balance was Rs. 64,009. But that position itself would not suggest that Ashwinkumar had been admitted in the partnership as a partner in view of his contributing Rs. 70,000 and odd to the capital of the firm. In this behalf clause 6 of the partnership deed, which clearly lays down that the capital of the partner shall carry interest, cannot be ignored altogether. Whatever capital Shri Ashwinkumar had brought he was entitled to earn interest thereupon as per clause 6 of the partnership deed. We are, therefore, of the opinion that bringing in capital with a right to receive interest thereupon would not constitute a consideration for the transaction in question.
13. Lastly the possibility of sharing future losses of the firm, to our mind, would not make by itself a consideration for the transaction in question inasmuch as the obligation of sharing the possible losses of the firm results from the corresponding right of a partner to share the profits of such a firm. As submitted by Mr. Kaushik, the position is to be judged at the time of reduction of the share of the deceased-assessee. For, the rights and liabilities of the incoming partner would follow consequent upon his becoming a partner in the firm and not before. It is no doubt true that consideration of a transaction is not necessarily to come from the donee but may also come from a third person. But in the present case we find that no consideration of the transaction of reduction of the share of the deceased-assessee, either directly or indirectly, came from any quarter. The new partner contributed the capital in the firm to earn interest thereupon. He agreed to work for the partnership in consideration of a salary agreed to be paid to him. And, his obligation to share the losses of the firm arose from his corresponding right to share the future profits of the firm. In that sense of the matter we are clearly of the opinion that the transaction in question in the instant case was certainly without any consideration.
14. The learned A.A.C. seems to have heavily relied upon the Gujarat High Court decision in the case of CGT v. Karnaji Lumbaji [1969] 74 ITR 343. In that case the father assessee and four of his sons were doing business as a partnership, the father having 4 annas share and each of the four sons having 3 annas share. Two other sons of the assessee, who were already working as employees in the partnership were admitted as partners in the firm and their admission resulted in reduction of the assessee’s share in the firm. It was on these facts that the Gujarat High Court observed that since the two sons were already the paid employees of the firm and as such were sufficiently experienced in the business of the firm and from their admission the firm was to be saved of the remuneration which was otherwise being paid to them as employees and the firm would be benefited by their experience, it was not possible to say that their admission as partners in the firm was gratuitous and without any consideration. That position is not obtaining in the present case. Herein there is no evidence to the effect that the new partner was an employee of the firm before or was having any special experience in the line of business carried on by the firm. Moreover by clause 11 it had been specifically provided that the working partner would be paid salary. In our opinion, therefore, the ratio in this decision does not help the case of the assessee.
15. In the case of CGT v. P. Gheevarghese Travancore Timbers & Products [1972] 83 ITR 403 (SC) the assessee was the sole proprietor of a business which he converted into a partnership by taking two of his daughters as partners. The daughters’ contribution to capital was made by transfer from the assessee’s account. It was on these facts that the question arose for the consideration of their Lordships whether goodwill in the said firm can be treated separately for the purpose of gift-tax. Their Lordships observed that though according to the deed of partnership goodwill was a part of properties and assets of the business which the assessee had transferred to the partnership, the departmental authorities never treated all the assets and property of the assessee which were transferred to the partnership as the subject matter of gift. Nor was it claimed before the Supreme Court that the property and assets valued at Rs. 4 lakhs were the subject matter of the gift. All that the department did and persisted in was to pick out only one of the assets of the assessee’s proprietary business viz. its goodwill and regard the same as the subject matter of gift. That approach was wholly uncomprehensible and, therefore, gift-tax was not payable on the goodwill of the firm. Their Lordships further observed that the donor made a gift while he was running the business was not sufficient to bring the gift within the exemption under Clause (xiv) of Section 5(l) of the Act. It had further to be established that there was some integral connection or relation between the making of the gift and the carrying on of the business and the object in making the gift or the design or intention behind it related to the business. In that case their Lordships found that the real intention of the assessee was to take his daughters into the firm with the object of conferring benefit on them for their advancement. Since the requirements of Section 5(l)(xiv) of the Act were not satisfied so far as the gift of Rs. 50,000 was concerned, there was no question of any charge of gift-tax. It may be noted that not only the facts of this case but also the ratio laid down in this decision are clearly distinguishable from those in the instant case.
16. Another decision relied upon by the learned A.A.C. in support of his conclusions is that of the Madras High Court in the case of Addl. CGT v. A.A. Annamalai Nadar [1978] 113 ITR 574. In that case the assessee who was carrying on a proprietorship business converted the same into a partnership by taking his major son who was already working with him in the business for remuneration and admitting his two minor sons to the benefits of the partnership. The sons had contributed capitals to the firm. It was on these facts that, following the ratio in the decisions of the Gujarat High Court in Karnaji Lumbaji (supra) and of the Supreme Court in P. Gheevarghese, Travancore Timbers & Products’ case (supra) their Lordships of the Madras High Court held that in view of the capital contribution by the three sons and rendering of services and agreement to share the losses by the major son there was adequate consideration for the conversion of the proprietary business into a partnership business and hence there was no question of any gift of goodwill to the major son while as far as the minor sons were concerned there was no transfer of any assets as such to them so that there could be no gift of any goodwill in their favour. It may be noted that in rendering this decision their Lordships of the Madras High Court had followed the ratio laid down in the decisions of the Gujarat High Court and the Supreme Court which we have already discussed. We have found that both the said decisions had been decided on their own merits and not only that the facts of those cases materially differed from the facts of the case on hand but also that the ratio laid down in those decisions is not at all applicable to the facts of the present case. In the instant case it has clearly been found from the material on record that the new partner was to receive remuneration for the services to be rendered by him in the firm and he was also entitled to interest on the capital contributed by him in the firm. In our opinion, therefore, this case too does not advance the cause of the assessee in the present case.
17. Another case relied upon by the assessee is that of the GTO v. Vrajlal M. Soni (HUF) [GT Appeal No. 24(Ahd.) of 1987 dated 16-12-1988] decided by Ahmedabad Bench ‘B’. In that case two new partners were admitted in the partnership as working partners. The new partners had introduced capital and had also undertaken to share losses of the firm. From the order of the Tribunal it is not gathered as to whether the new partners were to receive interest on their capital contribution and also to receive salaries for the services rendered by them to the firm as is the position in the instant case. We are, therefore, of the view that the facts of that case are materially distinguishable and distinct from those obtaining in the case before us. This decision of the Tribunal also, therefore, does not help the assessee.
18. The above discussion, we think, leads us to the irresistible conclusion that in the instant case there was certainly a gratuitous gift, without any consideration, by the father-assessee in favour of his third son. In this behalf, therefore, we agree with Mr. Kaushik that it was in the sort of a family arrangement wherein the father-assessee had made a gift of his substantial share in the firm in favour of his third son. In our opinion, therefore, the transaction in the instant case amounted to a gift defined in Section 2(xii) read with Section 2 (xxiv) of the Act.
19. Now the pertinent question that arises for consideration is whether the provisions of Section 4(1)(c) apply to the transaction in question for the purpose of chargeability to gift-tax. We would like to avail of this opportunity for observing that the question of applicability of Section 4(l)(c) would obviously arise after a transaction of release, discharge or surrender of one’s right in a property has been declared as amounting to a gift. Once such a transaction is found to be a transaction of gift then the question for the purpose of application of Section 4(1)(c) would be whether such a gift was bona fide or not. In the instant case, the G.T.O. does not at all appear to have addressed himself to this pertinent question. In fact his order on this point is totally silent. It need not be restated that the G.T.O. had sought to tax an amount of Rs. 13,190 as a result of his reading a deemed gift in the transaction in question. The gift had resulted from reduction of the assessee’s share in the firm. Obviously, therefore, the G.T.O. was required to consider as to whether such a gift had been made without any necessity or business expediency or was wanting in bona fides in any way. The G.T.O. did not approach the case from that angle. In fact he made no mention of the fact that he intended to tax the amount of Rs. 13,190 by application of the provisions of Section 4(l)(c) of the Act. And, when we come to the order of the learned A. A.C. we find that he has accepted the contention of the assessee that the gift had been made out of business expediency inasmuch as the father-assessee had become old and the business of the firm required the services of another man, particularly one who had been working in and for the firm from before. This is a positive finding of fact and notwithstanding the fact that we have agreed with Mr. Kaushik that it was a family arrangement, the finding remains intact. In our opinion the revenue has not been successful, in the facts and circumstances pointed out by us above, to prove that the gift made by the deceased in the instant case in favour of his third son was wanting in bona fides. The deceased-assessee might have been ill due to old age and the firm might be necessitating the services of another person. We find no cogent reasons to reject a finding of fact recorded by the learned A.A.C. on these points. As stated above, the deemed gift would be taxable under Section 4(1)(c) of the Act if such a gift is found wanting in bona fides of the donor. Since the G.T.O. failed to record such a finding in his order and on the contrary the learned A.A.C. recorded a positive finding in favour of the gift having been made bona fide, the bona fides indicated from business expediency as mentioned by the learned A.A.C., and such finding of fact recorded by the learned A.A.C. has not been demolished before us, we see no alternative but to uphold the order of the learned A.A.C. Thus, though we are clearly of the opinion that in the present case the reduction of the share of the assessee in the firm from 40% to 15% had certainly resulted in a gift of his 25% share in the firm in favour of his third son Shri Ashwinkumar Mahasukhlal, yet since such a gift was not wanting in bona fides on the part of the donor the transaction in question cannot be subjected to charge of gift-tax.
20. In the result this appeal fails and is dismissed.
K.R. Dixit, Judicial Member
1. I agree with the ultimate decision of any learned brother contained in paragraph 20 above. However, I would like to add a few words.
2. In the case of Karnaji Lumbaji (supra), the Gujarat High Court has observed as follows at page 353:-
There is no material brought here to show that Mohanlal Karnaji and Govindlal Karnaji were admitted as partners in the firm without consideration. Oft the contrary the facts clearly show that they were admitted as partners for consideration, the consideration being that with their experience gained by them as employees they would attend to the business of the firm, no remuneration would be payable to them as was being done till then, they would share not only the assets but also in the liabilities of the firm and they would also participate in the future losses of the firm, if any.
(Emphasis supplied)
Therefore, the High Court has clearly stated that sharing in the liabilities and in the future losses is also consideration. The High Court has stated as above irrespective of the fact that sharing of losses would be coupled with the prospect of sharing profits. Therefore, I am of the view that the gift-tax cannot be levied in this case.