ORDER
A. Satyanarayana, Accountant Member
1. These appeals filed by the two different assessees, who happened to be the partners in the same firm, are against the orders dated 14-9-1983 of the AAC for the assessment year 1971-72, for which the previous year ended on 31-12-1970.
2. The assessees are partners of the firm M. George Brothers Chitty Fund, Kozhencherry, each entitled to one-eighth share in the profits and assets of the firm. There were six other partners also. On 1-1-1970 there was a change in the constitution of the firm under which a minor by name George Jacob, son of Shri M. George, was admitted to the benefits of the partnership. The minor was given one-ninth share in the profits only. He did not contribute any capital for his being admitted into the firm for the benefits of the partnership. The GTO held that the admission of the minor resulted in reduction of the share of each partner and that the forfeiture of a part of each partner’s share of profits in the firm was without consideration and had been effected with a view to benefit the incoming partner and that this act on the part of these assessees tantamounted to gifts. He further held that the assessees had foregone 1/72 portion of their rights to enjoy profits of the firm in favour of the incoming partner. He computed the gifts by employing the super profits method.
3. Appeals were preferred before the AAC by these assessees. Before the AAC, the representative of the assessees submitted that there was no gift involved in the admission of the minor. He also challenged the method of computation of the gift. But the AAC, relying on the decision of the Madras High Court in the case of CGT v. V.A.M. Ayya Nadar [1969] 73 ITR 761 rejected the assessees’ counsel’s contention that there was no gift. But he gave some relief in the computation of the gift.
4. Against the orders of the AAC, these two assessees preferred the present appeals before us. The assessee’s counsel filed a copy of the partnership deed dated 1-1-1970 of the firm. His arguments were to the following effect : The minor did not contribute any capital for his being admitted into the firm for the benefits of the partnership. By mistake it was mentioned in the statement of facts before the AAC and in the course of arguments before him that capital was contributed by the minor. Not only the shares of profit of these two assessees were reduced but also the shares of the other six partners from one-eighth to one-ninth. Each of the partners surroundered a part of their shares to the firm. The firm gave the share to the minor. There are no gifts by these two assessees to the minor. Even if there was any gift, it was by the firm. The assessment, if any, should have been made on the firm and not on the partners individually. Reference may be made to the submissions made by the assessee and the observations of the High Court in the case of M.K. Kuppuraj v. CGT [1985] 153 ITR 481 at pp. 483 and 484 (Mad.). The case of V.A.M. Ayya Nadar (supra) is distinguishable because in that case only one partner’s share was reduced and he was assessed to gift-tax. Reference may also be made to the case of CGT v. Harinder Katyal [1985] 23 Taxman 9 (Delhi).
5. The arguments of the departmental representative were to the following effect : As rightly pointed out by the GTO each of the assessees had foregone 1/72 portion of their rights to enjoy profits of the firm in favour of the incoming minor. The case of M.K. Kuppuraj (supra) clearly applies to the facts of the case. The case of Harinder Katyal (supra) is distinguishable because in that case the gift was taken as transfer of goodwill.
6.1 We have considered the rival submissions. If an individual partner wants to transfer a portion of his share in the firm, it should be by way of a gift deed or a memorandum of gift or an assignment deed and the effects of such a transfer and the rights of such a transferee are contained in Section 29 of the Indian Partnership Act, 1932. If the transferee wants to become a partner in the firm, the firm has to execute a fresh partnership deed mentioning the fact of transfer by the existing partner to the transferee and the willingness of all the partners to admit the transferee as a partner. In the present case, the situation is not like that. The partnership deed dated 1-1-1970 clearly mentions as under :
and whereas the parties are now desirous of admitting George Jacob, son of M. George, to the benefits of the partnership.
But there is no mention in the said partnership deed about the gifting of a portion of their shares by those two assessees in favour of the minor.
6.2 As per section 30 of the Indian Partnership Act, a minor can be admitted to the benefits of a partnership with the consent of all the partners for the time being. The parties to the partnership deed dated 1-1-1970 in this case were all the eight partners of the firm, including the two assessees herein. From this it is clear that it was the firm that admitted the minor into the firm for the benefits of the partnership and not the partners individually. It was an ‘act of firm’ within the meaning of Section 2(a) of the Indian Partnership Act. Thus, in the present case, it has to be held that it was the firm that had effected the transfer in favour of the minor because not only the shares of the two assessees herein but the shares of all the partners were reduced and all partners had suffered detriment. So, if any assessment has to be made under the Gift-tax Act, 1958 (‘the Act’) in respect of the said transfer it should have been made on the firm and not on these two assessees. This view has been approved by the Madras High Court in the case of M.K. Kuppuraj (supra). In the said case, Kuppuraj was originally assessed to gift-tax on 22-6-1971. Later while completing the assessment in the case of one M.K. Krishna Chetty for the assessment year 1971-72, it was noticed that the assessee had relinquished his right over future profits by reducing his share of profit from 50 per cent to 42 per cent and conferred a benefit in favour of four minors who were admitted to the benefits of the partnership. The GTO held that by relinquishing his right to the extent of 8 per cent, Kuppuraj should be taken to have gifted that right to future profits in favour of the four minors who were admitted to the benefits of the partnership. Before the High Court the counsel for the assessee raised the contention that on the facts of the case, it should be held that there was no gift by the assessee and if at all there was any gift, it was a gift by the firm in favour of the minors who had been admitted to the benefits of partnership. The counsel also contended that since the minors got the benefits of the partnership as a result of the reconstitution of the partnership under the partnership deed dated 14-4-1970, the assessee should not be taken to be the donor. The High Court observed as under:
We have no hesitation in rejecting this contention for the reason 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 suffered any detriment. Only if they had suffered some detriment and as a result of such detriment, if the minors had obtained a corresponding benefit, then one could say that there has been a transaction of a gift by the partnership or by the partners to the minors, who have been admitted to the benefits of the partnership. It is true no doubt that it is only with the consent of the other partners the assessee can bring in the minors for getting the benefits of the partnership. But the consent of the other partners had been obtained by the assessee on his parting with 8 per cent of his profit-sharing ratio in favour of the minors, who have been admitted to the benefits of the partnership. Thus, the assessee alone suffered a detriment for the purpose of bringing in the minors into the partnership, though the. consent of the partners only enabled the assessee to bring in the minors into the partnership. The consent given by the partners has no bearing on the question as to whether the transaction of the assessee was detriment to the firm or partners of the firm, because the assessee is admittedly the person who actually relinquished a portion of his interest and not the firm or the partners of the firm. Therefore, we are not able to see how the partners or the firm as such which had not suffered any detriment can be taken to be the donors as contended by the learned counsel for the assessee. (p. 484)
In the facts and circumstances of the case, we hold that the GTO was not justified in bringing these two assessees as liable to gift-tax. Hence the assessments are cancelled.
7. In the result, the appeals are allowed.