CGT ADDL Vs. KRISHNAMOORTHY P

JUDGEMENT

(1.) THERE was a partnership firm under the name and style of Messrs. S. R. P. Ponnuswamy Chettiar, carrying on business in retail in textiles. The partners and their respective shares in the profits and losses were as under : <FRM>JUDGEMENT_212_ITR110_1977Html1.htm</FRM>

(2.) FOUR partners, who are the assessees in these references, retried from the partnership with effect from April 17, 1964. At the time of retirement, as stated by the Appellate Assistant Commissioner in his order, they took whatever they were entitled to from the partnership firm, namely, the amounts of capital invested along with profits and shares to their credit. The firm was reconstituted with the continuing two partners and certain others by a deed dated July I, 1964, and that partnership became effective from April 17, 1964, namely, the date on which the four assessees herein retired. The Gift-tax Officer came to the conclusion that as a result of the retirement from the partnership firm, the assessees herein had relinquished their respective interests as shown above in the partnership firm and since the right of a partner to share in the profits of the firm is property capable of transfer and since the retirement of the assessees from the partnership firm had resulted in relinquishment of the interest in the partnership firm, there was diminution of the assessee's interest and corresponding increase in the value of shares in the hands of the continuing partners and, in the circumstances, the assessees relinquishing their rights in the partnership firm constituted gifts. The Gift-tax Officer valued the rights of all the partners to share the profits of the firm at 2 to 21/2 times of the average profits during the preceding three years and the value of the rights of all the partners to share the profits of the partnership firm was taken by him at Rs. 2 lakhs and the respective assessee's shares were worked out on the percentage shown already and the amounts so arrived at were subjected to gift-tax.

(3.) WE are clearly of the opinion that that case has no bearing whatever on the present case. In that case, a partner, Who Was entitled to 1/3rd share, by realignment was allotted only 1/9th share and the balance of 2/9th share went to other partners. At the same time, that partner's share of the capital was not reduced and he continued to be a partner. Consequently, in view of his continuing as a partner, he had a right to share the profits, so long as he continued. But he got that right reduced from 1/3rd to 1/9th without at the same time reducing his share of the capital proportionately with the result 2/9th share in the profits was treated as gift. In the present case, the assessees have retired from the partnership. The moment they have retired, their right to a share in the future profits of the firm came to an end and, therefore, there is no question of their giving up any right to share the future profits. In view of this, the decision of this court in V.A.M. Ayya Nadar's case [1969] 73 ITR 761 (Mad) referred to above cannot be of any assistance whatever to the case of the revenue in the present references. Under these circumstances, we answer the question referred to this court in the affirmative and in favour of the assessee in each of these references. The assessees being different individuals, they will be entitled to their costs and the counsel's fee is fixed at Rs. 500 each.