COMMISSIONER OF GIFT TAX Vs. KARNAJI LUMBAJI

JUDGEMENT

(1.) THE question which arises in this reference lies in a very narrow compass but, in order to appreciate the question, it is necessary to state a few facts giving rise to the reference. The reference arises out of assessment of gift tax made on the assessee as an individual for the asst. yr. 1961 62, the relevant account year being Samvat Year 2016, i.e. 1st Nov., 1959, to 20th Oct., 1960. Prior to the relevant account year, the assessee and his four sons carried on business in partnership in the firm name of M/s K. L. Sons on the terms and conditions recorded in a partnership deed, dt. 23rd Nov., 1953. The share of the assessee in the partnership was four annas in a rupee while the share of each of the four sons was three annas in a rupee. The business of the partnership consisted of buying and selling second hand drums, cast iron, iron scrap, etc., after carrying out necessary repairs. Besides the four sons who were partners with him in the partnership, the assessee had two other sons by the name of Mohanlal Karnaji and Govindlal Karnaji who were working as employees of the partnership. The assessee and his four sons decided to introduce Mohanlal Karnaji and Govindlal Karnaji as partners in the partnership w.e.f. Kartak Sud 1, Samvat Year 2016, i.e. 1st Nov., 1959, and there was accordingly a change in the constitution of the partnership as recorded in a new partnership deed, dt. 2nd Nov., 1959. The shares of the assessee and his four sons who were original partners in the firm were required to be adjusted as a result of the introduction of Mohanlal Karnaji and Govindlal Karnaji and the shares of the partners in the re constituted firm were as under:

(2.) THE shares of Kasturji Karnaji, Adaji Karnaji and Varjangji Karnaji remained practically unchanged but the shares of the assessee and Nanji Karnaji were reduced in order to provide the share of twelve naye paise each to Mohanlal Karnaji and Govindlal Karnaji. The share of the assessee was reduced from 25nP. to 6 nP. and the share of Nanji Karnaji was reduced from 19 nP. to 13 nP. and out of the reduction thus made, a share of 12 nP. each was given to Mohanlal Karnaji and Govindlal Karnaji, the balance of one naye paise going to Kasturji Karnaji, Adaji Karnaji and Varjangji Karnaji in order to make up their share of l9nP. of his interest in the firm so as to attract the applicability of the GT Act. The GTO took the view that there was a gift of 19 nP. share of the assessee in the goodwill of the firm to Mohanlal Karnaji and Govindlal Karnaji and the assessee was, therefore, liable to gift tax in respect of that gift and the value of the gift was liable to be measured in terms of 19 nP. share in the value of the goodwill. This view taken by the GTO was affirmed in appeal by the AAC and the assessee was, therefore, constrained to prefer an appeal to the Tribunal. The argument which was presented to the Tribunal on behalf of the Revenue was that the assessee, by admitting Mohanlal Karnaji and Govindlal Karnaji as partners in the firm on the terms and conditions recorded in the new partnership deed, had transferred his 19 nP. share in the goodwill of the firm to Mohanlal Karnaji and Govindlal Karnaji voluntarily without consideration and there was, therefore, a gift of 19 nP. share of the assessee in the goodwill of the firm to Mohanlal Karnaji and Govindlal Karnaji. The Tribunal rejected this argument holding that neither during the continuance of a firm nor after its dissolution can a partner be said to have a specific interest in any particular asset of the firm and, therefore, the assessee did not have any specific interest in the goodwill of the firm which he could be said to have transferred to Mohanlal Karnaji and Govindlal Karnaji by admitting them as partners in the firm. The Tribunal also held that, even if the transaction could be construed as a transfer by the assessee of his 19 nP. share in the goodwill of the firm to Mohanlal Karnaji and Govindlal Karnaji, there was nothing to show that it was made without consideration and it was, therefore, not possible to say that it was a gift liable to gift tax under the Act. The Tribunal then proceeded to consider whether the case could be brought by the Revenue within cls. (b) and (d) of S. 2(xxiv) and held that neither of the two clauses had any application to the facts of the present case. The Tribunal observed that, in any event, even if cl. (b) or (d) applied and there was, therefore, a transfer of property, the element of consideration was not absent and it could not, therefore, be regarded as a gift. The Tribunal in the end considered the applicability of S. 4(c) and came to the conclusion that that provision too had no application, for even if it were assumed that the assessee discharged or surrendered or released his 19 nP. share in the goodwill of the firm, such release, discharge or surrender was not shown to be wanting in bona fides and could not, therefore, be deemed to be a gift within the meaning of S. 4(c). This view taken by the Tribunal is challenged before us in the present reference made at the instance of the CGT.

(3.) NOW , as pointed out above, there were two main grounds on which the Tribunal decided against the Revenue. One was that the assessee did not have any specific interest in the goodwill of the firm and there was, therefore, no existing movable or immovable property which could be transferred by the assessee to Mohanlal Karnaji and Govindlal Karnaji, and the other was that, even if there was a transfer of 19 nP. share in the goodwill of the firm, it was not without consideration in money or money's worth. The Revenue challenged the decision of the Tribunal on both the grounds on which it was based. The Revenue contended that the interest of the assessee as a partner in the firm was an existing though intangible movable property and it could legitimately form the subject matter of transfer and it was in fact transferred by the assessee to Mohanlal Karnaji and Govindlal Karnaji to the extent of 19 nP. share when Mohanlal Karnaji and Govindlal Karnaji were admitted as partners in the firm. The Revenue also argued that the transfer of this 19 nP. share of the assessee in the firm to Mohanlal Karnaji and Govindlal Karnaji was without consideration since there was no mention in the partnership deed of any consideration having passed from the latter to the former. Let us examine whether these contentions of the Revenue are well founded.