KUPPURAJ M K Vs. COMMISSIONER OF GIFT TAX

JUDGEMENT

(1.) THE assessee in this case is an individual and he was originally assessed to gift-tax on June 22, 1971. Later, while completing the assessment in the case of one M/s. M. K. Krishna Chetty for the assessment year 1971-72, it was noticed that the assessee had relinquished his right over future profits by 8% by reducing his share of profit from 50% to 42% and conferring 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%, he 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. He thereafter valued the gift taking five years' profit of the firm from 1966-67 to 1970-71 as the basis and arrived at an average profit of Rs. 6,46,000. After deducting a sum of Rs. 1,08,000 representing management remuneration and another sum of Rs. 12,000 being interest on capital employed, he arrived at a net figure of Rs. 5,26,000. He then ascertained 8% thereon and determined the two years' purchase at Rs. 84,160. Thus the value of relinquishment of the right by the assessee was deemed to be a gift of the value of Rs. 84,160.

(2.) AGGRIEVED by the order of the GTO, the assessee appealed to the AAC. Before the AAC, the assessee contended that the admission of the minors to the benefits of the partnership could not have constituted a gift or a deemed gift, since there was nothing in the partnership deed dated April 14, 1970, which had the effect of conferring on the minors any interest in the assets of the firm; that all that the minors secured were the rights to share the future profits; that the relinquishment of a portion of the assessee's right to future profits cannot be taken as a gift at all and that the GTO has erred in holding that the gift was the transfer of the right to share future profits and as such the transaction will fall within the definition of "gift". The AAC, however, agree with the assessee's contention and held that the transfer of right to share future profits would not come within the definition of "gift" as contemplated under the Act. In that view, he allowed the appeal of the assessee.

(3.) THE learned counsel for the assessee then contends that the transfer of a right to future profits cannot be taken to be a gift at all because no property in praesenti is transferred and that it is not possible to estimate the future profits for the purpose of valuation of the gift, if any. THE learned counsel refers to the decision of this court in Addl. CGT v. Krishnamoorthy [1977] 110 ITR 212, in support of his submission that the right to a future profit cannot be a property at all which could be the subject-matter of a gift. THE question that arose in the said case was whether there is any relinquishment of a right to share in the profits of the partnership on a partner's retirement in favour of the continuing and newly admitted partners. THE facts in that case were that some of the partners retired from the partnership after collecting from the firm whatever they were entitled to get and the firm continued with the remaining partners. THEreafter, the firm admitted new partners. THE GTO took the view that since the retiring partner, even after retirement, had a share in the profits of the partnership, that right should be taken to have been relinquished in favour of the newly admitted partners and that would amount to a gift. When the matter went before the Tribunal, the Tribunal held that once the partners retired, their rights to share profits had ceased and, therefore, they cannot be taken to have relinquished any rights in favour of the newly added partners and, therefore, there is no gift element involved in the transaction. When the matter came before this court, this court took the view that the moment a partner retires from a firm, he will have no right to receive any future profits in the said firm and hence there is no question of his giving up any such right. THE learned judges also pointed out in that case, that case, that unless there is an existing right, it cannot be taken to be property and there is no question of a retiring partner having a right to share the future profits and if so, such a non-existent right cannot be "property" as contemplated by the statute. We do not see how this decision will help the assessee in this case. THEre, it was actually found that the right to received any future profits did not exist and such a non-existent right cannot be taken to be the subject-matter of a gift. In that decision, the decision in CGT v. Ayya Nadar [1969] 73 ITR 761 (Mad), has been referred to and distinguished by holding that the said decision does not apply to the facts of that case.