COMMISSIONER OF GIFT-TAX Vs. SANJAY KAPOOR

JUDGEMENT

(1.) BY this reference under Section 256(1) of the Income -tax Act, 1961, the following question has been referred to this court: Whether, on the facts and circumstances of the case, the Tribunal was justified in law to hold that the abandonment of Rs. 1,99,211 which is the share of the investment allowance reserve by the assessee in favour of the firm, i.e., M/s. Kapoor Brothers is not a deemed gift under Section 4(1)(c) of the Gift -tax Act?

(2.) THE facts of the case lie in a narrow compass: The assessee was a partner in the registered firm M/s. Kapoor Brothers having a one -fifth share in the profit or loss of the said firm. The assessee retired from the partnership firm with effect from April 1, 1986, and on the date of retirement, the credit balance in the capital account of the firm was Rs. 2,11,637 which was transferred to the unsecured loan account. The assessee received his share from the capital assets of the firm. However, he did not claim his share in the investment allowance reserve which amounts to Rs. 1,99,211. The case of the assessing authority was that the assessee relinquished his claim to the extent of Rs. 1,99,211 which was his share in the investment allowance reserve. The assessing authority, therefore, treated this amount as deemed gift under Section 4(1)(c) of the Gift -tax Act and held that the assessee was liable to pay tax on the said amount. Aggrieved by the said order, the assessee preferred an appeal before the Commissioner of Income -tax (Appeals), Ranchi, in short 'the CIT (Appeals)'. After hearing the parties, the appellate authority took the view that the aforesaid sum of Rs. 1,99,211 shall not be treated as deemed gift. Consequently, the appeal was allowed and the order of the assessing authority was set aside. The Revenue authority preferred second appeal before the Income -tax Appellate Tribunal. The Tribunal in its orders, has observed that the Department has failed to convince as to how the investment allowance reserve was an asset or a property and how upon retirement by the appellant from the partnership firm, there has been relinquishment in such an asset. The Tribunal further held that the Revenue authority has failed to prove the presence of essential ingredients laid down under Section 4(1)(c) of the Gift -tax Act so as to make the assessee liable for payment of tax on the said amount.

(3.) THERE is no dispute that after retirement from the partnership firm, the assessee received his share from the credit balance in the capital account. Mr. Jhunjhunwala, learned Counsel appearing for the appellant, is unable to satisfy us that the investment allowance reserve is also an asset of the firm and in the event of retirement, the partner is entitled to receive his share from the investment allowance reserve also.