COMMISSIONER OF GIFT TAXES Vs. E K VENKATESHAM

JUDGEMENT

(1.) At the instance of the Revenue, the Income- Tax Appellate Tribunal referred the following two questions, said to arise out of its order in GTA No. 53 of 1983 for the assessment year 1977-78, for the opinion of this Court under Sec.26 of the Gift Tax Act, in pursuance of the directions of this Court :-

(2.) The brief facts leading to the above reference are as under:- The assessee has been and continues to be the managing partner of M/s. South Indian Mining and Slab Co., at Bethamcherla. The firm extracts Cuddapah stones (rough slabs) in its stone quarry. It incidentally gets lime stone lumps. Both these activities are in the nature of mining activity, though it sells yellow ochre powder by way of trade. The assessee's son Sri Sri E.V.Rajendra Sarma was working as sales manager for about 10 years prior to 1-4-1972, when he was admitted as a partner with 3/32 share while the assessee had 5/32 share besides goodwill. The share is in both profits and losses. The said firm was reconstituted by a Deed with effect from 1.4.1976. As per said Deed, the share of the assessee is reduced from 5/32 to 1/16 and the share of his son was increased to 3/16th share. Apart from this the goodwill of the firm, which was allotted to the assessee under the deed dated 1.4.1972, was re-assigned to the assessee's son. When further change in the constitution occurred with effect from 1-4-1976, the assessee was 64 years old, but weak in health due to continuous infection of lungs, diminished eye sight and poor hearing. He uses a hearing aid. He did not have any balance in his accounts other than his fixed capital as he had drawn his profits. As per the son, Sri E.V.Rajendra Sarma, he had worked in the firm for about 10 years as an employee and for four years as a partner. Only the assessee and his son were active partners. Assessee's son is said to be familiar with the Government procedures and bears the main burden of the day-to-day management. It is the assessee's case that the assessee's responsibilities were getting reduced from the arrangement which was with the concurrence of the other partners, it is evident from the deed that the reward was to match the responsibilities of management of the firm. Other partners also stood to gain by the goodwill remaining intact as all the partners had the benefit of goodwill by way of profits during the subsistence of the firm. Sri E.Rajendra Sarma had a capital of about Rs.30,000/- at the relevant time. The partnership share was with reference to the capital contribution. The partnership deed envisaged greater finance and it is was for this reason that the capital was also doubled from Rs.80,000/- to Rs.1,60,000/-. The capital contribution from the other partners was increased for this purpose. Even the partnership deed dated 1-4-1972 placed on the assessee's son greater responsibilities than on the other partners, while the partnership deed dated 1-4-76 placed even additional responsibilities on him. The assessee's son happened to be the youngest of all the partners (his age is 34 years while the other partners were much older than him). The assessee's son is also said to have attended college (B.Sc.,) in a subject connected with mining, though he did not complete the course, but had been actively associated with the firm on full time basis ever since he left college. Though the assessee had a larger share (including higher sales) out of profits, he took equal responsibility than hitherto to share a larger loss in the event of loss and to a larger liability in case liabilities exceeded the assets in the event of dissolution. In short, it is the case of the assessee that the reduction of his interest in the firm on one hand and the increase of his son's interest was due to his own poor health, reduced responsibilities and reduced investment on his part on one hand and the greater financial participation, greater responsibilities and the greater interest shown by his son to the satisfaction of all the partners on the other hand.

(3.) On the above facts, the Assessing Officer felt that there was a transfer giving rise to a deemed gift liable to gift tax and therefore issued notice under Sec. 13(2) of the Gift Tax Act (hereinafter referred to as 'the Act') for the assessment year in question, in response to which the assessee filed a 'nil' return. Thereafter the Assessing Officer after hearing the assessee concluded that the reduction of the share of the assessee in the partnership firm as a result of reconstitution under the fresh partnership deed, dated 1-4-1976 and also the goodwill, which was exclusively reserved for the assessee was transferred to his son and the same would amounts transfer of an asset giving rise to a gift liable to gift-tax. Accordingly, the Assessing Officer computed the gift liable to gift tax and levied a gift tax of Rs.59,992/-. This was contested by the assessee before the Commissioner of Appeals. The Commissioner of Appeals dealt with the transfer of goodwill as well as the reduction of the share in the partnership firm of the assessee and the increase in the share of the assessee's son were dealt with separately. With reference to the transfer of goodwill, it was held that under the terms of the partnership deed, the partners have retained the power to amend, restrict or delete the conditions of partnership deed, with the consent of all the partners in writing in terms of Clause 25 of the Partnership Deed dated 1.4.1972. Therefore, in terms of the said powers while reconstituting the firm by a new partnership deed dated 1.4.1976, the firm had reassigned the goodwill to the assessee's son, who is also one of the partners. The Commissioner of appeals was of the opinion that the said goodwill was being assigned and re-assigned from time to time as and when there were fresh partnership deeds reconstituting the firm, which was in existence since 1920. The learned Commissioner also felt that no partner would have any specific interest in any of the partnership assets including the goodwill. Therefore, it was only the firm, which was the owner of the goodwill, which had reassigned the same to the assessee's son and there was no transfer by the assessee in favour of his son, who is also a partner of the firm. The learned Commissioner also held that in order effect transfer of such an asset, a registered document is necessary and even in the absence of such a registered document, the same would not amounts to transfer. Coming to the alteration of the shares i.e., the decrease of the assessee's share in the partnership firm and proportionate increase in the share of the assessee's son, who is also another partner, it was held that the said change in the profit sharing ratio was as a result of bona fide reconstitution of the firm and there was no gift or transfer of property. According to the Commissioner of Appeals, it was proved with reference to the facts and circumstances of the case that there was introduction of additional capital as well as devoting of more time to the business by the assessee's son, who is a partner and the same would constitute adequate consideration. Therefore, it was held that there is no transfer in respect of both the aspects and accordingly allowed the appeal.