1. This is a reference by the Income-tax Appellate Tribunal, Bombay Bench 'C', Bombay, under s. 26(1) of the G.T. Act, 1958. The question referred to us by the Tribunal, to be found in para. 8 of the statement of case, reads as follows :
'Whether, on the facts and in the circumstances of the case, and on a proper interpretation of section 2(xxiv) and/or section 4(a) of the Gift-tax Act, there was a 'transfer of property' and, consequently, a 'gift' under annexure 'A' so as to come within the scope of the liability to tax under that Act ?'
2. As a result of the discussion at the bar, we formed the opinion that the question referred to us be reframed and split up into two questions as follows :
'(1) Whether, on the facts and in the circumstances of the case, and on a proper interpretation of section 2(xxiv) of the Gift-tax Act, there was a 'transfer of property' in respect of 40% of the goodwill of the sole proprietary concern of the assessee to the assessee's son, Virendra as a result of the partnership deed dated 25th June, 1958, between the assessee and his son, Virendra
(2) Whether, on the facts and in the circumstances of the case, and on a proper interpretation of section 2(xii) and/or section 4(a) of the Gift-tax Act, there was a 'gift' in respect of 40% of the goodwill of the sole proprietary concern of the assessee to the assessee's son, Virendra, as a result of the said partnership deed, so as to be liable to gift-tax under that Act ?'
3. A few facts may be stated : The reference relates to the assessment year 1959-60, the relevant previous year being the Samvat year ending on 11th November, 1958. The assessee had been working as a chartered accountant for several years, carrying on his profession as chartered accountant and tax consultant at 418, Kalbadevi Road, Bombay-2, in the firm name and style of 'Bhogilal Chimanlal Shah & Co.'. He has a son by name Virendra, who had qualified himself as a chartered account. After passing his C.A. examination, Virendra had been employed by the assessee as an assistant on a salary of Rs. 500 per month. With effect from 1st April, 1958, the assessee and Virendra formed a partnership in the firm name and style of 'Messrs Bhogilal Chimanlal Shah & Co.', for the purpose of the same profession, and the terms governing the said partnership were recorded in a partnership deed dated 25th June, 1958, a copy whereof is annexure 'A' to the statement of case. The partnership was at will. The partnership business was declared to be that of practising as chartered accountants and tax consultants. It was to be carried on at the same place where the assessee was carrying on his profession as chartered accountant and tax consultant. Under clause 6 of the partnership deed, the net profits and losses were to be divided between the partners in the proportion of 60% to the assessee and 40% for Virendra. Clause 5 provided that the business of the partnership was be looked after and managed by the partners; but it further provided that Virendra was to devote his whole time and attention, whereas the assessee was not obliged to attend to the said business any further than he shall think proper and could actively engage in the same or abstain wholly or partially from any active part therein as he may from time to time deem fit. Clause 8 provided that in the event of death or retirement of the assessee, his share and interest in the goodwill of the partnership should accrue to Virendra in consideration of Virendra having undertaken to devote his whole time and attention to the business of the partnership as per clause 5 of the partnership deed.
4. The GTO issued a notice under s. 15(2) of the G.T. Act and in the course of assessment considered the question as to whether there was any taxable gift in the transaction of the formation of the partnership. The GTO came to the conclusion that 40% of the goodwill of the firm had been gifted to Virendra at the time when he was taken as a partner in the firm and this surrender constituted a gift. The value of the gift was estimated at Rs. 88,072 and after giving an exemption of Rs. 10,000 he brought to tax sum of Rs. 78,072.
5. The assessee thereafter preferred an appeal to the AAC objecting to the assessment to gift-tax as also to the valuation of the gift. The AAC rejected the assessee's appeal partly, holding that there was a gift, but the quantum of the gift estimated was reduced from Rs. 88,072 to Rs. 63, 400. The AAC held that the admission of Virendra as a partner in the firm of Messrs. Bhogilal Chimanlal Shah & Co. was without any consideration or without adequate consideration and a right and interest in the property and assets of the firm had been gifted, which gift was assessable to gift-tax.
6. The assessee carried the matter further to the Tribunal, where it was contended on behalf of the assessee that this was not a transaction which was brought within the scope of the provisions of the G.T. Act, particularly s. 2(xxiv) or s. 4(a), which were the sections relied upon by the AAC. The value of the gift as estimated by the AAC was not disputed before the Tribunal. On the other hand, it was contended by the departmental representative representing the revenue that there was consideration for the formation of the partnership but that there was no consideration in money or money's worth as regards the share in the goodwill which was transmitted or transferred to Virendra by the assessee as a result of the formation of the partnership. According to the Tribunal, there was no 'gift' in the instant case covered by s. 2(xii) read with s. 2(xxiv) of the G.T. Act. It was further of opinion that s. 4(a) was not applicable to the transaction in question as, according to the Tribunal, the carrying on of a profession could not be equated with 'property.'
7. These conclusions of the Tribunal have been impugned in this reference before us, which is a reference at the instance of the CGT.
8. Under the G.T. Act, the charge of gift-tax is provided under s. 3 'Gift' has been defined in s. 2(xii) and the said definition may be usefully set out :
'2. (xii) 'Gift' means the transfer by one person to another of any existing movable or immovable property, made voluntarily and without consideration in money or money's worth, and includes the transfer or conversion of any property referred to in section 4, deemed to be a gift under that section.'
9. The expression 'transfer of property' is defined by s. 2(xxiv) and this definition is also required to be fully set out :
'2. (xxiv) 'Transfer of property' means any disposition, conveyance, assignment, settlement, delivery, payment or other alienation of property and, without limiting the generality of the foregoing, includes -
(a) the creation of a trust in property;
(b) the grant or creation of any lease, mortgage, charge, easement, licence, power, partnership or interest in property;
(c) the exercise of a power of appointment of property vested in any person, not the owner of the property, to determine its disposition in favour of any person other than the donee of the power; and
(d) any transaction entered into by any person with intent thereby to diminish directly or indirectly the value of his own property and to increase the value of the property of any other person.'
10. Section 4 of the said Act bears the section-heading 'Gifts to include certain transfers'. Clause (a) of s. 4 provides as follows :
'4. For the purposes of this Act, -
(a) where property is transferred otherwise than for adequate consideration, the amount by which the market value of the property at the date of the transfer exceeds the value of the consideration shall be deemed to be a gift made by the transferor.'
11. We may finally refer to the exemption contained in s. 5(1)(xiv), to which reference was made by Mr. Munim on behalf of the assessee; it provides as follows :
'5. Exemption in respect of certain gifts. - (1) Gift-tax shall not be charged under this Act in respect of gifts made by any person -...
(xiv) in the course of carrying on a business, profession or vocation, to the extent to which the gift is proved to the satisfaction of the Gift-tax Officer to have been made bona fide for the purpose of such business, profession or vocation.'
12. It was submitted by Mr. Joshi that the view taken by the Tribunal and the observations to be found in paras. 3 to 7 of its order were erroneous and arose from a misreading and misconstruction of the statutory provisions. It was submitted that some goodwill must be deemed to attach to the business or profession of chartered accountants and tax consultants which the assessee was carrying on as an individual in the name and style of Bhogilal Chimanlal Shah & Co. prior to 1st April, 1958. According to Mr. Joshi, with effect from this date the partnership firm of the assessee and Virendra carried on the very same business at the very same premises under substantially the same name, and in the assets of this firm the assessee would have a 60% share, whereas Virendra would have 40% by reason of their respective shares in the profits and losses as provided under clause 6 of the partnership deed. It was submitted that the goodwill which the assessee had in respect of this business when he entered into the partnership could not have been retained by the assessee after he formed the partnership with his son; and there was accordingly transmission of 40% interest in that goodwill to the son, Virendra, after the formation of the partnership.
13. The goodwill of a business is admittedly an intangible asset. It is the whole advantage of the reputation and connections formed with the customers together with the circumstances making the connections durable. It is that component of the total value of the undertaking which is attributable to the ability of the concern to earn profits over a course of years because of its reputation, location and other features. The goodwill of an undertaking has been described as the value of the attraction to customers arising from the name of the undertaking, reputation, for skill, integrity, efficient business management or efficient service.
14. There is little doubt as to whether the expression would be properly applicable to a purely personal business like that of a solicitor and perhaps the same considerations may apply to the business or profession of a chartered accountant or a tax consultant. In Corduroy on Solicitors (sixth edn.), at page 483, it is observed that such goodwill is frequently dealt with as having an ascertainable value and it has been described as 'the advantage, whatever it may be, which a person gets by continuing to carry on and being entitled to represent to the outside world that he is carrying on a business which has been carried on for some time previously'. By reason of the definition to be found in s. 4 of the General Clauses Act, 1897, goodwill must be deemed to be included within the classification of movable property, though it is clearly a species of intangible property.
15. It, however, must be regarded as a property having a value of its own apart from other assets of the business.
16. The first point to be considered is whether there was a transfer of this property, viz., 40% of the assessee's interest in the goodwill, which prior to the formation of partnership solely belonged to the assessee within the meaning of s. 2 of the G.T. Act. Under s. 2 of the Act 'property' is defined as including any interest in property, movable or immovable, and would certainly include goodwill. Again, the expression 'transfer of property' has been defined in words of the widest amplitude as meaning any disposition, conveyance, assignment, settlement, delivery, payment or other alienation of property and further, without limiting the generality of the foregoing, as including the grant or creation of any lease, mortgage, charge, easement, licence, power, partnership or interest in property. By reason of the formation of the partnership it would be possible to say that Virendra was enabled to acquire 40% interest in the goodwill of the erstwhile sole proprietary concern of the assessee in which name the assessee was carrying on his business or profession of chartered accountant and tax consultant. In this opinion I am fortified by the view taken by the Kerala High Court in CGT v. Ganapathy Moothan : 84ITR758(Ker) . The assessee, who was concerned in the reference before the Kerala High Court, was carrying on business in rice-milling and paddy in the name and style of K. Ganapathy Moothan; he was also doing business in grocery. In 1962, he converted this proprietary concern into a partnership, there being 4 partners, viz., the assessee and his three major sons. Three points arose for consideration before the Kerala High Court which are of interest to us. The first was, whether the assessee had a goodwill in respect of his business before he entered into partnership with his sons; the second was, whether the goodwill was transferred by converting the proprietary concern into a partnership; and the third and the final question was, whether the transfer would amount to a gift within the meaning of s. 2(xii) read with s. 2(xxiv)(b) or 2(xxiv)(d). It was observed by Mathew J. that since after forming the partnership the assessee could not have retained the goodwill of the erstwhile proprietary concern with himself, the goodwill must be deemed to be one transferred to the partnership as it was incidental to the business. It was observed that when the same business was carried on, it had the advantage of the goodwill which had accrued to the assessee before he entered into the partnership. It was held further that entering into partnership would constitute a transfer by virtue of the provisions of s. 2(xxiv)(b). In other words, according to the Kerala High Court, when the assessee formed the partnership with his three major sons to carry on substantially the same business, there was a transfer of goodwill. Finally, on the third question, the Kerala High Court concluded that there was no reason why the transfer did not amount to a gift. According to the Kerala High Court, there was no consideration for the assessee in transferring the goodwill of the firm by entering into the partnership in respect of the property, viz., the goodwill, which was an incident of the business formerly carried on by him. In this view of the matter, according to Kerala High Court, the transfer amounted to a gift within the meaning of s. 2(xii) of the Act.
17. Very naturally Mr. Joshi has placed strong reliance on this decision, as, according to him, it answered both the questions which must be decided in his favour. With respect to the learned judges of the Kerala High Court, it must be observed that whilst the view taken on the provisions contained in ss. 2(xxiv)(b) and 2(xxiv)(d) has been arrived at after a proper discussion of the statutory provisions and the two points for consideration as indicated earlier correctly and properly dealt with, the view on the third point, viz., as to whether the transfer amounted to a gift which would depend upon the consideration of the provisions found contained in s. 2(xii) of the G.T. Act, 1958, which would have a bearing on the second question as reframed, appears to have been given to some extent in a cursory manner. In my opinion, although the decision on the first two points as indicated earlier is correct, it is not possible to agree with the conclusion of the Kerala High Court on the third aspect of the question as to whether the transfer amounted to a gift. In arriving at this conclusion, the Kerala High Court has emphasised that there was no consideration on the part of the assessee in transferring the goodwill to the new partnership which would refer to the share of the same to the extent to the interest of the new partners in the partnership assets. This approach would not appear to be correct inasmuch as there need not be specific or separate consideration for each of the items under an agreement and the question whether any transaction is supported by a consideration or not will have to be dealt with as a whole and not by considering each item separately by itself.
18. Analysing the facts of the instant case, it is important, in the first place, to note that there was no provision in the deed of partnership for transferring to the partnership the goodwill enjoyed by the erstwhile business or profession of the assessee. Nor was there a separate agreement entered into for this purpose. Transmission could be deemed to have been effected by operation of legal provisions. The transfer then of the goodwill, viz., 40% share in the goodwill, arises as a result of and is incidental to the formation of the new partnership. Now, under s. 2(xii) of the G.T. Act, 'gift' means, (1) a transfer, (2) by one person to another, (3) of any existing movable or immovable property, (4) made voluntarily, and (5) without consideration in money or money's worth. The expression 'gift' according to the definition also includes transfers or conversions referred to in s. 4 which may be described as deemed gifts although such transfers or conversions may not satisfy the first part of the definition of 'gift' under s. 2(xii). Now, where a portion of the goodwill of a business is deemed to be a transfer by reason of the formation of the partnership, the question which will arise for determination first is whether there was consideration for the entire transaction, viz., the formation of the partnership and not whether there was consideration for the transfer or transmission of interest in the goodwill.
19. It is clear that in the ultimate analysis a partnership is contract, i.e., an agreement enforceable at law which must be supported by consideration (sees. 2(g) and (h) and s. 25 of the Indian Contract Act, 1872). The aspect of consideration for a contract of partnership has been dealt with by Lindley on Partnership, 13th edn., in the following words, at page 113 :
'Agreements to enter into partnership, like all other agreements, require to be founded on some consideration in order to be binding. Any contribution in the shape of capital or labour, or any act which may result in liability to third parties, is a sufficient consideration to support such an agreement.
A bona fide contract of partnerships is not invalidated by the unequal value of the contributions of its members, for they must be their own judges of the adequacy of the consideration for the agreement into which they enter.'
20. By an agreement of partnership there is conferment of mutual rights and the undertaking of reciprocal obligations which would constitute for each of the parties the respective consideration for its share in the profits and assets. It would be impermissible in this view of the matter to consider the transmission or transfer of the goodwill de hors the formation of the partnership. It is to be considered as part and parcel of the same transaction and, considered as such, it would be impossible to come to the conclusion that the formation of partnership, particularly a professional partnership, as arises in the instant case, was one without any consideration. It is undoubtedly true that one of the benefits received by Virendra as a result of the formation of partnership between him and the assessee under a deed of partnership dated 25th June, 1968, may be understood to be a 40% interest in the goodwill. But the same consideration as would sustain the agreement of partnership between the assessee and Virendra would constitute a consideration for the transmission of this interest in the goodwill. As stated earlier, one of the requirements for the application of s. 2(xii) was that the transfer must be without consideration in money or money's worth. The transfer of 40% interest in the goodwill cannot be accepted or held to be one without consideration in the instant case. Before considering the question whether the consideration is one otherwise than such as is contemplated by the first part of s. 2(xii) i.e., one not in money or money's worth, reference may be made to a few authorities cited at the bar.
21. Mr. Joshi on behalf of the revenue first referred us to CGT v. V. A.M. Ayya Nadar : 73ITR761(Mad) , where it was held that the redistribution of the share of profits as between one partner and certain others who are all partners in a firm involves the transfer of the right which has the effect of diminishing a partner's interest and, correspondingly, increasing the value or quantum of the shares held by the other partners. According to the Madras High Court, such realignment involved transfer of property and amounted to a gift chargeable to gift-tax. It does not involve the question of alignment of shares of a partnership and the observations above reproduced will be of very little assistance to us. That is a totally different type of situation. Similarly, the observations made in this judgment may not apply to a consideration of what would be the position on dissolution of the firm in question, whether by reason of retirement or otherwise. Again, the observations must not be taken necessarily to apply to a case where the transmission was not by reason of nay express provision in the deed of partnership or by necessary implication of the formation of the partnership but by reason of a separate deed of assignment.
22. A later Madras case, viz., CGT v. A.M. Abdul Rahman Rowther : 89ITR219(Mad) , was also principally concerned with the redistribution of the profit-sharing ratio on the admission of two new partners in a firm and, in the view taken by the Madres High Court, amounted to a gift by the assessee of a portion of his share in the goodwill of the firm. That decision is distinguishable from the facts which arise for consideration before us.
23. We are also referred to CGT v. M. K. Krishna Chettiar : 87ITR1(Mad) , which was concerned with the consequences and the effect of certain provisions in a partnership deed becoming applicable on dissolution of the firm. As stated earlier, we are not concerned with such a case and the authority, therefore, is not required to be considered.
24. The view taken by the Madras High Court in CGT v. Ayya Nadar : 73ITR761(Mad) and CGT v. Abdul Rahman Rowther : 89ITR219(Mad) , seems to be contrary to the view taken in favour of the assessee by the Gujarat High Court in CGT v. Karnaji Lumbaji : 74ITR343(Guj) , and the said decision has been cited with approval in a later decision of the Gujarat High Court in CGT v. Chhotalal Mohanlal : 97ITR393(Guj) . In the latter case, it was held that when a firm is reconstituted and as a result of its reconstitution the shares of some of the partners are diminished, there was no transfer of property within the meaning of s. 2(xxiv) of the G.T. Act, and, therefore, s. 2(xii) could not be attracted. As stated earlier, on the view expressed by me that there was consideration for the transfer or transmission of 40% interest in the goodwill which was merely a consideration which would support the partnership between the assessee and Virendra, it is unnecessary to consider these authorities in detail though the observations in CGT v. Karnaji Lumbaji : 74ITR343(Guj) are totally in favour of the assessee.
25. A similar view appears to have been taken by the Allahabad High Court in CGT v. Sardar Wazir Singh : 99ITR104(All) . Accordingly to the Allahabad High Court, there was consideration for converting the proprietary business of the assessee before it into a partnership business, and it further held that neither s. 4(a) nor s. 4(c) were applicable.
26. I have already indicated that it was not disputed by the departmental representative before the Tribunal that there was consideration for the formation of the partnership and, indeed, this position was not open to challenge. Once that is conceded, in my view, it could not be urged that there was no consideration for the transmission or transfer of this interest in the goodwill and this transfer cannot be regarded as a gift within the meaning of s. 2(xii) of the G.T. Act, 1958.
27. It was submitted by Mr. Joshi that assuming there was consideration for the transfer, the department's case was that there was inadequate consideration for such a transfer and our attention was drawn to the finding given by the AAC in para. 3 of his order. In the first place, it must be observed that it was not the case of the revenue that there was consideration but that the same was inadequate. The case of the revenue was that this was a transfer which was required to be separately considered and for which specific consideration, apart from the consideration which would support or sustain the partnership, was required to be shown. In my view, the approach is totally fallacious. It would not be open to the revenue to pick out or choose one item and ask the assessee to show the consideration for the transfer or transmission of that item. As a result of the formation of the partnership, Virendra acquired an interest in the assets of the partnership, the right to share the profits of the partnership and incidentally also must be deemed to have acquired 40% interest in the goodwill of the erstwhile proprietary concern of the assessee. It will not be open to the revenue to lavish attention only on the last mentioned item and submit that the consideration for the same was nil or inadequate. One of the benefits or advantages conferred on Virendra is the transfer or transmission of the interest in the goodwill to him for which he had agreed to be a partner, for which he had agreed to devote his full time and attention to the partner, for which he had agreed to devote his full time and attention to the partnership business and profession and for which he had accepted and undertaken the obligations and possible liabilities which are mutual and reciprocal. It is impossible to conceive in the circumstances of such a professional partnership that it could be contended that the consideration was not adequate. One of the reasons which may be given is that it would not be possible to precisely assess or evaluate the totality of the obligations and liabilities undertaken and the services agreed to be rendered by Virendra. It is true that it may not be possible to sustain the discussion to be found in para. 8 of the order of the Tribunal; but the conclusion that s. 4(a) was not available will have to be sustained on the footing indicated above. That the approach of the revenue is an improper one is suggested by the observations to be found in a Supreme Court decision, viz., CGT v. Gheevarghese : 83ITR403(SC) .
28. Mr. Munim on behalf of the assessee contended that even if this was regarded as a gift, it must be deemed to be a gift exempted under the provisions of s. 5(1)(xiv), which provisions have been earlier set out. Our attention was drawn in this connection to two decisions of the Kerala High Court in (1) CIT (GT) v. Devadasan : 91ITR464(Ker) and (2) V. O. Markose v. CIT : 98ITR504(Ker) . In my opinion, this aspect of the matter will not arise from the question referred to us by the Tribunal, which question has been reframed into two questions by us as set out earlier in this judgment. We are required to consider, construe and apply the statutory provisions to these two questions as reframed; we are required to consider all the facts of the case and apply the statutory provisions contained in ss. 2(xii), 2(xxiv) and 4(a) of the Act, and it would not be proper to permit the assessee to rely on other provisions which do not arise from the question referred to us on the footing that they are the aspects of the question referred to us. In my view, this cannot be considered to be an aspect of the question referred to us and it was open to the assessee to raise this question in any appropriate manner, which has not been done. It may be mentioned only in passing that this contention raised on behalf of the assessee appears to have been rejected by the Supreme Court in CGT v. Gheevarghese : 83ITR403(SC) and the Kerala High Court in CGT v. Ganapathy Moothan : 84ITR758(Ker) . In my view, it is not proper for me to go into this aspect of the matter.
29. I agree and have nothing to add.
30. The questions as reframed are answered as follows :
Question No. (1) - In the affirmative.
Question No. (2) - In the negative in regard to both the sections.
31. The Commissioner must pay the assessee's costs of the reference.