COMMISSIONER OF GIFT TAX Vs. RAMNIKLAL M BAMBHANIA

JUDGEMENT

(1.) IN these five references, the following common questions of law have been referred for our opinion in respect of asst. yr. 1981-82 :

(2.) THE facts giving rise to these references are as under : (1) All the five assessees were partners in the firm M/s Accurate Engineering Co., having 20 per cent share each. During the previous year relevant to asst. yr. 1981-82, there was a change in the constitution of the firm inasmuch Mr. G.V. Modha, trustee of the Accurate Trust was admitted as a partner with 50 per cent share and, therefore, reducing the share of all the five assessees by 10% each. Subsequently, there was another change in the constitution of the said firm whereby the assessee-partners of the firm retired and the business of the firm was taken over by Mr. G.V. Modha, trustee of the Accurate Trust as its sole proprietor. THE GTO held that all the five assessees are liable to gift-tax on deemed gift arising out of relinquishment of their respective share of 20 per cent in the said partnership firm in favour of Mr. G.V. Modha, trustee of Accurate Trust without adequate consideration of money or money's worth. He accordingly computed the value of deemed gift by taking average of income for five years from asst. yrs. 1977-78 to 1981-82 after allowing deduction in respect of interest on partners' capital at the rate of 12 per cent by computing the average amount of capital for one year on the basis of interest rates of partners' capital for the aforesaid five years and by allowing a further deduction at 20 per cent of profit by way of salary. (2) THE Dy. CGT(A) held that the Accurate Trust has brought in capital of Rs. 8,12,602 while the existing five partners (i.e., the assessees) have withdrawn their capital to the extent of Rs. 8,73,954. THE capital of the new partner M/s Accurate Trust was Rs. 8,52,854. Hence, the question of deemed gift for relinquishment of their respective shares did not arise. He came to the conclusion that the capital contributed by the new partner constituted adequate consideration and there was no deemed gift involved. He, therefore, cancelled the gift-tax assessment orders passed by the GTO in all these cases and allowed the appeals of all these assessees. (3) Hence, the GTO carried the matter in appeal before the Tribunal. Before the Tribunal, the Revenue contended that the goodwill of the business has been held to be an asset by the Hon'ble Supreme Court in CGT vs. Chhotalal Mohanlal (1987) 61 CTR (SC) 263 : (1987) 166 ITR 124 (SC) and that, therefore, the capital contributed by M/s Accurate Trust in the capital account cannot be treated as consideration for transfer of goodwill by these five partners in favour of M/s Accurate Trust. THE Revenue accordingly contended that transfer of goodwill by the five outgoing partners in favour of M/s Accurate Trust was without any consideration and, therefore, liable to gift-tax. THE gift was accordingly valued on the principles relating to valuation of goodwill. THE Tribunal upheld the finding given by the Dy. CGT(A) for the following reasons :

(3.) IN the facts of the present case also, both the Dy. CGT as well as the Tribunal have held that M/s Accurate Trust had brought in capital to the tune of Rs. 8,52,854 and the outgoing five partners had withdrawn their capital to the extent of Rs. 8,73,954. It is thus clear that the new partner had given adequate consideration for being inducted as a partner and the outgoing partners had also received considerations for retiring from the partnership firm. IN view of these facts, the Tribunal was right in holding that there was no deemed gift when the five assessees relinquished their shares in the partnership firm in favour of the new partner. Since the five assessees received their capital to the aforesaid extent, it cannot be said that the assessees had relinquished their shares in the partnership firm in favour of the new partner without any consideration.