IN THE HIGH COURT OF KERALA AT ERNAKULAM
OP No. 11664 of 1997(S)
1. THE COMMR. OF GIFT-TAX,TVM.
... Petitioner
Vs
1. K.KARUNAKARAN,QUILON
... Respondent
For Petitioner :SRI.P.K.RAVINDRANATHA MENON (SR.)
For Respondent : No Appearance
The Hon'ble the Chief Justice MR.H.L.DATTU
The Hon'ble MR. Justice K.T.SANKARAN
Dated :19/07/2007
O R D E R
H.L.DATTU, C.J. & K.T.SANKARAN, J.
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O.P.No.11664 of 1997
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Dated, this the 19th day of July, 2007
JUDGMENT
H.L.Dattu, C.J.
This is a petition filed by the Revenue under Section 26(3) of the Gift-tax
Act, 1958 ( Act for short) for the assessment year 1984-85.
2. The respondent was a partner of the firm M/s.Karuna Cashew Co.,
Quilon. He retired from the partnership firm during the previous year relevant
to the assessment year 1984-85 . The assessing officer has completed the
assessment determining the taxable gift at Rs.15,69,680/- being of the opinion
that the right to share in future profit of the firm as goodwill is forfeited by the
assessee by retiring from the partnership firm. Aggrieved by the findings and
conclusions reached by the assessing officer, the assessee had filed appeal
before the Commissioner of Income Tax. The said appellate authority has
allowed the appeal and set aside the orders passed by the assessing authority
under the provisions of the Gift Tax Act.
3. The Revenue aggrieved the aforesaid order had carried the matter
in appeal before the Income Tax Appellate Tribunal. The Tribunal following the
decision of this Court in the case of Commissioner of Gift Tax v. T.M.Luiz
Kannamally (180 ITR 257) has rejected the appeal filed by the Revenue.
4. The Revenue had filed an application before the Tribunal under
Section 26(1) of the Act requesting the Tribunal to refer the following question
of law for consideration and decision by this Court. The said question of
law reads as under:
O.P.No.11664/1997 2
“Whether, on the facts and in the circumstances of the case, the
Tribunal is right in law in holding that the retirement of the
assessee from the partnership firm does not amount to gift and
no gift-tax is leviable?”
5. The Tribunal rejected the application filed by the Revenue under
Section 26(1) of the Act.
6. The Revenue is before us in this petition filed under Section 26(3) of
the Act to state the case and refer the aforesaid question of law for our
consideration and decision.
7. The question of law to which the Revenue wants us to consider and
decide is already decided by the apex Court in the case of Commissioner of
Gift Tax v. T.M.Louiz [2000) 245 ITR 831]. In the said decision the apex Court
has stated as under:
“The definition of ‘gift’ makes it clear that there has to be
a transfer by one person to another of movable or immovable
property; such transfer has to be voluntary and without
consideration in money or money’s worth. What is, therefore,
absolutely essential for the purpose of a gift is a transfer of
property. “Transfer of property” is defined for the purpose of the
Gift-tax Act as any disposition or conveyance, or assignment or
settlement or delivery or payment or other alienation of property.
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 purposes of
the Gift-tax Act, 1958, or that there was a gift liable to gift-tax.
The word “settlement” in the definition of “transfer of property” in
the Gift-tax Act takes colour from the context of the definition
and its neighbouring words and means a settlement upon trust
and not a settlement of accounts.
During the accounting year relevant to the assessment
O.P.No.11664/1997 3
year 1973-74, the assessee retired with effect from April 1, 1972,
from two firms in which he was a partner. The Gift-tax Officer
assessed him to gift-tax on the basis that, upon such retirement,
there was a gift because the assessee had surrendered his
rights in the firms. However, the Tribunal and the High Court
held that gift-tax could not be levied. On appeal to the Supreme
Court:
Held, dismissing the appeal, that when the assessee
retired from the two firms, he received the value of his shares
therein. There was merely an adjustment of rights between the
retiring partner and the continuing partners in the assets of the
partnership and there was no element of transfer of interest by
the retiring partner to the continuing partners. Gift-tax could not
be levied.”
8. In view of the pronouncement of the apex Court, at this stage, it may
not be necessary for this Court to direct the Tribunal to state the case and refer
the question of law framed by the Revenue for our consideration and decision.
In view of the above, the original petition filed by the Revenue requires to be
rejected and it is rejected.
Ordered accordingly.
(H.L.DATTU)
CHIEF JUSTICE
(K.T.SANKARAN)
JUDGE
vns