COMMISSIONER OF GIFT TAX Vs. E K VENKATESHWAR

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 Section 26(3) of the Gift-tax Act, 1958, 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 Cud-dapah 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 E. V. Rajendra Sarma was working as sales manager for about ten years prior to April 1, 1972, when he was admitted as a partner with a 3/32 share while the assessee had a 5/32 share besides goodwill. THE share is in both profits and losses. THE said firm was reconstituted by a deed with effect from April 1, 1976. As per the said deed, the share of the assessee is reduced from 5/32 to 1/16 and the share of his son was increased to a 3/16th share. Apart from this the goodwill of the firm, which was allotted to the assessee under the deed dated April 1, 1972, was re-assigned to the assessee's son. When further change in the constitution occurred with effect from April 1, 1976, the assessee was 64 years old, but weak in health due to continuous infection of lungs, diminished eyesight 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 ten years as an employee and for four years as a partner. Only the assessee and his son were active partners. THE 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. V. 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 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 April 1, 1972, placed on the assessee's son greater responsibilities than on the other partners, while the partnership deed dated April 1, 1976 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 assessce'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 the 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 the 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.) THE Tribunal thereafter referred to a number of decisions cited before it and finally held--"It is therefore clear that in the facts of the assessee's case even if we were to go only with reference to Section 5(1)(xiv) the arrangement would qualify for exemption on the ground that the reservation of goodwill in favour of the assessee's son and increased share including salary and the expense of the assessee were for the purposes of the business and in the course of business."