1. J. N. Marshall, the assessee, was originally the proprietor of two businesses, viz., (1) J. N. Marshall & Co. (Engineering) and (2) J. N. Marshall & Co. (Spirax and Steel Department). The former business was converted into a partnership business with effect from February 1, 1946, by taking M. N. Marshall as a partner. It was provided in the instrument of partnership that on dissolution of the firm the stock-in -trade, goodwill and other assets would belong to the assessee alone. The second business was also converted into a partnership business with effect from February 1, 1956, by taking the assessee's son, S. J. Marshall, as a partner. In the partnership deed relating to the second business, it was expressly provided that on the termination of the partnership for any cause whatsoever the stock-in-trade, goodwill and assets of the partnership business shall belong to Jeejeebhoy (assessee) alone and Shiamak, the other partner, would be entitled to the amount, if any, actually invested or other moneys brought in by him and standing to his credit as appearing from the books of account of the partnership and he would be entitled to his share of profits remaining to be paid at the date of the termination of the partnership and the amount standing to the credit of his capital account.
2. On February 1, 1959, new partners were admitted into both the firms. The reconstituted firms consisted of the following partners having shares mentioned against their individual names :
Engineering Department Rs.1. Shiamak J. Marshall 0-4-02. Jeejeebhoy N. Marshall 0-3-03. Maneckji N. Marshall 0-3-04. Shehernaz Hoshang Dalal 0-3-05. Maharookh Darius Forbes 0-3-0--------1-0-0--------Spirax and Steel DepartmentRs.1. Shiamak J. Marshall 0-4-02. Jeejeebhoy N. Marshall 0-4-03. Maneckji N. Marshall 0-2-04. Shehernaz Hoshang Dalal 0-3-05. Maharookh Darius Forbes 0-3-0---------1-0-0---------
Both the deeds of partnership as regards the goodwill contain the following provision :
'The goodwill of the firm shall belong to Shiamak J. Marshall, Shehernaz H. Dalal and Maharookh D. Forbes.'
3. The GTO took the view that on creation of the reconstituted partnership with effect from February 1, 1959, the assessee, who was solely entitled to the goodwill of the business, gifted it to the parties mentioned in the clause reproduced above, viz., his son and two daughters. Proceedings were initiated under s. 16(1) of the G.T. Act (hereinafter referred to as 'the Act') by issue of a notice on December 14, 1964, to bring under charge the gifts which had escaped assessment for the year 1959-60. The assessee filed a 'nil' return before the GTO and contended before him that the proceedings initiated under s. 16(1) were invalid. There is no taxable gift involved in the creation of the new firms. The contentions urged on behalf of the assessee were rejected by the GTO and he valued the goodwill of both the firms at Rs. 6,30,735 and after giving statutory exemption of Rs. 10,000 the balance of the amount was assessed to gift-tax.
4. In an appeal preferred by the assessee before the AAC, the validity of the initiation of the proceedings was not challenged. The only contention that was urged on behalf of the assessee was that there was no gift of good will and alternatively the valuation adopted by the GTO was excessive. The first contention urged on behalf of the assessee was rejected by the AAC, but on going through the accounts of the two business for the past years, he held that the engineering firm had no goodwill since the average result of the running of the business in the preceding five years was a loss. In the case of the second firm, viz, Spirax and Steel Department, he computed the value of the goodwill at Rs. 3,02,835 and directed that taxable gift should be computed by substituting Rs. 3,02,835 in the place of Rs. 6,30,735 adopted by the GTO.
5. In a further appeal before the Tribunal it was, inter alia, contended that the assessee was not liable to gift-tax as there was no gift as contemplated by the provisions of the Act which would subject the assessee to a liability of gift-tax. Objections were also raised as regards the actual computation of the goodwill as done by the AAC. The Tribunal relied upon the decisions of the Benches of the Tribunal in Bombay in case of admission of new partners where the view was taken that there was no question of any assessment under the Act on the footing that the new partners received a portion of the existing goodwill of the business as gift. The Tribunal, inter alia, pointed out that there was no permissible rule to pick out one of the conditions of the contract and regard it as bringing into effect a unilateral act of bounty by one of the contracting parties. The Tribunal also relied upon the decision of the Supreme Court in the case of Addanki Narayanappa v. Bhaskara Krishnappa, : 3SCR400 . According to the Tribunal, in this decision, the Supreme Court pointed out the whole concept of partnership. Ordinarily, the right of a partner during the subsistence of the partnership is to get his share of profits from time to time as may be agreed upon amongst the partners and after the dissolution of the partnership or upon retirement of a partner from partnership of the value of his share in the net partnership assets as on the date of dissolution or retirement after deduction of liabilities and prior charges. The Tribunal took the view that there was no immediate gift of goodwill to the three partners so as to attract liability to gift-tax. The Tribunal, accordingly, held that the assessee was not liable to any gift-tax.
6. It is from this order of the Tribunal that the following question has been referred to us for our determination :
'Whether, on the facts and in the circumstances of the case, the disposition of the goodwill in clause 6 of the partnership deed dated April 15, 1959, relating to the Spirax and Steel Department attracted liability to gift-tax ?'
7. Mr. Joshi on behalf of the revenue submitted that the material question that has to be considered in the present case is whether on constitution of the new firm of J. N. Marshall & Co. (Spirax and Steel Department) by a partnership deed dated April 15, 1959, there was a gift of goodwill of that business by the assessee to the three partners, viz., Shiamak, Shehernaz and Maharookh. He submitted that under the earlier deed of partnership pertaining to this business, the assessee was exclusively entitled to the goodwill of the business upon termination of the partnership and that on admission of the three new partners therein the assessee ceased to have complete interest in the goodwill and the same was gifted by him to the above three persons. He submitted that such a provision in the newly constituted partnership deed is a gift within the meaning of the Act and is subject to gift-tax as contemplated by the Act. Mr. Dastoor, on the other hand, on behalf of the assessee submitted that when there is a change in the constitution of the firm by taking up other partners, it is not permissible to the taxing authorities to pick up a single item pertaining to an asset like goodwill in respect of which some provision in the partnership deed has been made. He urged that goodwill is a peculiar type of asset, the value of which goes on fluctuating depending upon the nature of the business and prospects therein. An item like goodwill cannot be taken, according to his submission, in mere isolation. He also urged that when a firm is reconstituted in the manner it has been done in the present case, there is no question of a gift of a goodwill. He urged, assuming for the sake of argument, that goodwill simpliciter can be the subject-matter of a gift, having regard to the facts of the present case there was no gift of goodwill as there was consideration. It should not be overlooked that when there was a reconstitution of the firm of J. N. Marshall & Co. (Spirax and Steel Department), there was an overall arrangement and the onus is upon the revenue to show that there was no consideration in the present case. He submitted that if regard be had to the provisions of the deed of partnership and the normal incidents of partnership as contemplated by the Partnership Act, there was adequate and valuable consideration. He urged that if it is the contention of the revenue to show that there was no consideration, the burden is entirely upon the revenue which, in the present case, has not been discharged at all. He relied upon a large number of cases to support his submissions.
8. Prior to January 1, 1956, the assessee was carrying on the business as merchant, contractor and of buying and selling or importing machinery, electrical and other equipments and all other items usually utilised in this branch of business and as consulting engineer in the name and style of J. N. Marshall & Co. in its Spirax and Steel Department as a sole proprietor thereof. With effect from January 1, 1956, the assessee took his son, Shiamak, as a partner upon the terms and conditions which are contained in the deed of partnership which was executed on June 27, 1956. Under clause 4 of the partnership deed, Shiamak was to look after the business and carry on the same to the best of his ability and to the greatest advantage of the partnership and he was to keep the secrets of the said business and give to the assessee a true and correct account of the goods, monies and all business affairs which may be committed to his charge or come to his hands. Under clause 5 of the partnership deed, the net profits of the said business were to be shared by the two partners in the following proportion. The assessee was entitled to 10 annas share while Shiamak was entitled to 6 annas share. The losses of the business were also liable to be borne in the same proportion including loss of capital. Clause 11 of this partnership deed is material and its provisions are as under :
'11. On the termination of presents for any cause whatsoever the stock-in-trade, goodwill and assets of the said business shall belong to the said Jeejeebhoy alone and the said Shiamak or his heirs, executors and administrators, as the case may be, shall be entitled to the amount, if any, actually invested or the other moneys brought in by him and standing to his credit as appearing from the books of account of the partnership and the said Shiamak or his executors shall be entitled to his share of the profits remaining to be paid at the date of the termination of the partnership and the amount standing to the credit of his capital account and in this respect the accounts passed by the auditors of the firm shall be final and binding.'
9. It is quite clear from these provisions of the partnership deed that Shiamak was to look after the day to day affairs of the business of the partnership and on termination of the partnership for any reason whatsoever, he was merely entitle to the amounts standing to his credit either by way of investment or otherwise and his share of profits which remained to be paid on the termination of the partnership. There was an express stipulation in the partnership deed that on termination of the partnership, the stock-in-trade, goodwill and other assets of the partnership were to belong exclusively to the assessee.
10. There was a change in the constitution of this firm with effect from February 1, 1959, upon the terms which are contained in the partnership deed dated April 15, 1959. As a result of this reconstitution, the two existing partners agreed to admit three more partners, viz., Manekji N. Marshall, Shehernaz Hoshang Dalal and Maharookh Darius Forbes, as partners with effect from February 1, 1959. The duration of this partnership was to be at will. The capital of the partnership business was to be contributed by the partners as and when required. Clauses 5 and 6 of this partnership deed are as under :
'5. The shares of the parties hereto in the profits and losses of the partnership business shall be as follows : Rs.1. Shiamak J. Marshall 0-4-02. Jeejeeboy N. Marshall 0-4-03. Maneckji N. Marshall 0-2-04. Shehernaz Hoshang Dalal 0-3-05. Maharookh Darius Forbes 0-3-0--------1-0-0--------6. The goodwill of the firm shall belong to :1. Shiamak J. Marshall2. Shehernaz H. Dalal3. Maharookh D. Forbes.'
11. It is apparent from the earlier deed of partnership and the new deed of partnership that the provision under the earlier deed of partnership was that on termination of the firm the stock-in-trade, goodwill and assets of the partnership business were to belong exclusively to the assessee while so far as the assets of the reconstituted firm are concerned, in the absence of any specific provision to the contrary under the ordinary law of partnership the same were to belong to the five partners in proportion to their respective shares in the profits and losses of the partnership business after discharging the partnership liability. However, specific provision was made as regards the goodwill of the business. Under clause 6 of this deed, the goodwill of the business was to belong to Shiamak, Shehernaz and Maharookh. It is by reason of this provision in the deed that the question referred to us has arisen. The argument on behalf of the revenue is that since under the earlier deed of partnership on termination the assessee was the sole and exclusive owner of the goodwill and under the reconstituted deed of partnership, the goodwill was to belong to the three persons mentioned above, there was a gift of goodwill by the assessee to these three persons only and was subject to liability of gift-tax as provided in the Act. The GTO took the view that, as the assessee being the exclusive owner of the goodwill of the two firms, transferred the same to his son and daughters without any adequate consideration whatsoever, the transfer of the goodwill has to be treated as a gift made within the meaning of s. 4 of the Act. According to him, the goodwill is an asset capable of being valued independently. He interpreted the provisions of the partnership deed to mean that this was a case of clear and unequivocal gift chargeable to tax. He was unable to accept the contention on behalf of the assessee that full consideration passed from each of the partners to the other and there was no question of any gift by any one of the partners including the assessee to any other. He valued the goodwill of both the businesses at Rs. 6,30,735 and after giving statutory exemption in respect of Rs. 10,000 subjected the sum of Rs. 6,20,735 to gift tax. In an appeal, the AAC took the view that upon reading all the relevant provisions of the partnership deeds it was quite clear that prior to February 1, 1959, the goodwill, if any, possessed by the two business was the sole and exclusive property of the assessee and as a result of the deed of partnership which came into force with effect from February 1, 1959, the goodwill became the property of his son and two daughters. He held that inasmuch as the goodwill built up into two business up to February 1, 1959, passed from the assessee to his son and daughters without any consideration whatsoever, the GTO was perfectly justified in holding that a gift has been made by the assessee. So far as the valuation was concerned, he altered the valuation as we have pointed out while narrating the facts.
12. In second appeal before the Tribunal, objections were raised not only to the valuation but also as regards the liability to pay gift-tax because it was one of the primary contentions on behalf of the assessee that there was no gift within the meaning of the Act. The Tribunal took the view that the relevant provisions under the partnership deed pertaining to the goodwill did not operate as an immediate gift of goodwill to the three partners so as to attract the liability to gift-tax.
13. The charging provision contained in s. 3 of the Act. It provides that, subject to the other provisions contained in the Act, there shall be charged for every assessment year commencing on and from the 1st day of April, 1958, a tax (hereinafter referred to as gift-tax) in respect of the gifts made if any, made by a person during the previous year (other then gifts made before the 1st day of April, 1957) at the rate or rates specified in the Schedule. It is quite clear from the provisions of this section that gift-tax can be levied only if there is a gift as defined in this Act. The word 'gift' at the relevant time is defined in s. 2(xii) as under :
'2. In this Act, unless the context otherwise requires, - ...... (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 of any property deemed to be a gift under section 4.'
14. In order that a gift within the meaning of the Act has taken place, the following essentials should be fulfilled :
1. There must be a transfer by one person to another.
2. The transfer must be of any existing movable or immovable property.
3. The transfer must be made voluntarily, and
4. The transfer must be made without consideration in money or money's worth.
15. If any one of the above ingredients is not fulfilled, there would be no gift within the meaning of the Act which can be subjected to gift-tax. Under s. 2(xii), the word 'property' includes any interest in property, movable or immovable, and the expression 'transfer of property' is defined in s. 2(xxiv) as under :
''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.'
16. It is quite apparent from the above provisions that in order that a transfer may amount to a gift, one of the essential conditions that must be fulfilled is that such transfer must be without consideration in money or money's worth. If there is consideration in money or money's worth for a transfer, then there will be no gift within the meaning of the Act. What we have to consider in the present case is that having regard to the provisions of the earlier partnership deed and the later partnership deed and the provisions of the Partnership Act, can it be said that when under the later partnership deed the goodwill of the firm was to belong to the son and the two daughters, there was transfer without consideration in money or money's worth It is quite clear that under the earlier partnership deed executed on June 27, 1956, between the assessee and the son, it is expressly provided that on termination of the partnership, the goodwill, inter alia, was to belong exclusively to the assessee. However, when three new persons were introduced as partners in this firm by the execution of the partnership deed dated April 15, 1959, which came into force with effect from February 1, 1959, the goodwill of the firm was to belong only to three persons, viz., Shiamak, Shehernaz and Maharookh. If regard be had to the provisions of the later deed of partnership, it is quite clear that no cash amount has been paid by any of these partners for getting the goodwill. What we have to consider in the present case is whether there was consideration in money's worth. If there is consideration in money's worth, then it is quite clear, having regard to the definition of the word 'gift' that the transfer cannot amount to gift. The very definition of the word 'partnership' under the Partnership Act shows that it is a relation between persons who have agreed to share the profits of a business carried on by all or any of them acting for all. As the history of the business shows, originally there was a proprietary business of the assessee. In the Spirax and Steel business he took his son as partner with effect from January 1, 1956. Under this deed, the profits and losses of the business were to be shared by the father and the son in the proportion of 10 annas and 6 annas, respectively. However, on dissolution, the goodwill, inter alia, was to belong to the father exclusively. However, when three more partners were added as a result of the deed with effect from February 1, 1959, under the deed of partnership which was executed on April 15, 1959, the goodwill was given to the son and two daughters. Now, it is quite clear from the provisions of the earlier deed that the son was to attend to the business and the assessee was not to look after the day-to-day affairs. When three new partners were added, one was the brother of the assessee and the other two were his daughters, the son continued to be a partner. We do not know the age of the brother who became a partner in this business for the first time under that deed. But so far as the son is concerned, by this time he has got a little more experience in this business as he has conducted the business from and after the execution of the earlier partnership deed. Under a. 12 of the Partnership Act, every partner has a right to take part in the conduct of the business and each partner is bound to attend diligently to his duties in the conduct of the business. Thus, it is quite clear that a partnership is a result of a contract between persons who come together for the purpose of carrying on business and each one undertakes obligations which are either of a contractual nature or, subject to contract to the contrary, laid down under the Partnership Act and these obligations form the consideration for the rights which each one has under the contract of partnership. Whenever a new partner is introduced in an existing firm, his share in the firm would extend to such of the assets as are specified under the partnership agreement but he would also equally share in the liabilities that may be incurred by the firm. He would be subject to all the obligations, contractual as well as statutory, which attach to a partner of a firm. Thus, it is quite apparent that whenever a new partner or partners are introduced in an existing firm, such newly added partners not only have a share in the profits of the firm but subject to the contract to the contrary may be liable to share the losses of the firm. They may have to contribute capital. They may have to look after the business of the firm. It cannot, therefore, be said that when a new partner is added and given a share in the profits and losses of the firm, there is a gift as such. If was, however, urged by Mr. Joshi on behalf of the revenue that so far as the present partnership is concerned, the profits and losses of the firm are to be divided amongst the five partners in accordance with their respective shares mentioned in clause 5 of the partnership deed; but so far as the goodwill was concerned, it is the property of only three persons, viz, the son and the two daughters of the assessee. He, therefore, submitted that so far as the goodwill was concerned, prior to this agreement it was the property of the father, viz, the assessee. There was a gift in respect of the goodwill to the son and two daughters. It will not be permissible to consider one clause of a partnership deed in isolation. All the rights and obligations of the partners as arising from the partnership deed read with the provisions of the Partnership Act have to be considered. So far as Shiamak was concerned, prior to this deed he had 6 annas share in the partnership, but his share was reduced to 4 annas and he has been given a share in the goodwill. As the provisions of the earlier partnership deed indicated, he was to look after the business of the firm and by this time he had gained experience and such experience would be useful to the partnership. So far as the daughters are concerned, it is undoubtedly true that they have been made partners in this business for the first time; but having regard to the mutual rights and obligations of the partners under the provisions of the Partnership Act, it cannot be said that simply because goodwill to is given to the son and the daughters, there is a gift of the goodwill to them or at least a share of the goodwill to the two daughters. Actually, having regard to the mutual rights and obligations of all the partners, consistent with the provisions of the Partnership Act, it cannot be said that there is a gift of the goodwill to the son and the two daughters as a result of the provisions of clause 6 of the partnership deed. It was urged on behalf of the revenue that Maneckji, the brother of the assessee, was also made a partner for the first time when this deed was entered into. He was given a share of two annas in the profits and losses, but so far as the goodwill was concerned, he has not been given any interest therein. There is no reason why such a provision was made in the partnership deed. We do not know any particular details as regards the experience of Maneckji qua goodwill with which we are concerned, nor do we have any material on record to indicate whether he is of such an age as can diligently and efficiently look after the day to day affairs of the partnership firm. It is undoubtedly true that there is no cash consideration in respect of the goodwill given by the assessee to his son and two daughters when the rights in goodwill were conferred upon them. But having regard to the definition of the word 'gift', even consideration in money's worth is permissible and if such consideration exists, then one of the essential elements to constitute a gift will be absent. It should not be overlooked that the burden of proving that a particular transfer is a gift is upon the revenue and it was for the revenue to show that the transfer was without consideration. Such onus has not been discharged by the revenue. Not a word is to be found in the order of the GTO or the AAC to indicate that rights qua goodwill were conferred upon the son and the two daughters without consideration. The factors we have indicated earlier, viz., the obligations on the newly added partners to work in the business, their liability to share the losses that may be suffered by the business, the reduction of the share in the profits of the son, and similar other factors, clearly go to show that there is consideration in money's worth when under the new deed of partnership the rights qua goodwill, which prior to the execution of the deed belonged to the assessee, are now vested in the son and the two daughters. Such evidence by itself is sufficient to indicate that for transfer of a share in the goodwill to the son and the two daughters by the father there was consideration in money's worth. Such a conclusion, in our opinion, is by itself sufficient to come to the conclusion that the transfer does not amount to a gift within the meaning of s. 2(xii) of the Act. We need not consider, having regard to this finding, the question whether other ingredients of the definition of the word 'gift' are fulfilled in the present case or not as consideration in money's worth is by itself sufficient to exclude the transfer from the category of gift.
17. Our attention was invited to a number of cases, but we feel that it is unnecessary to refer to the same. Suffice it for the present purpose if reference is made to an unreported decision of the Division Bench of this court in Gift-tax Reference No. 3 of 1966 CGT v. Smt. Lalita B. Shah decided by Vimadalal and my brother, Desai JJ., on November 18, 1975 (since reported in : 118ITR794(Bom) ). A question similar to the one with which we are concerned came up for consideration in this case before this court. This was a case in which the father, who was carrying on the profession of a chartered accountant and tax consultant as a sole proprietor, took his son as a partner therein. The question arose whether by taking his son as partner and giving him a particular share not only in the profits of the business but also in the goodwill of the business, there was gift within the meaning of the Act which was subjected to gift-tax. Before the Division Bench on behalf of the revenue reliance was sought to be placed upon a decision of the Kerala High Court in CGT v. Ganapathy Moothan : 84ITR758(Ker) , wherein upon a sole proprietary concern being converted into a partnership business in rice-milling and paddy, it was held that the goodwill must be deemed to be one transferred to the partnership as it was incidental to the business. That case was distinguished by the Division Bench on the ground that the Kerala High Court emphasised that there was no consideration on the part of the assessee in transferring the goodwill to the new partnership. According to the Division Bench of this court, the approach of the Kerala High Court was not correct inasmuch as there has been no 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 considering each item separately by itself. The Division Bench pointed out that 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. It was pointed out that a partnership is a contract, i.e, an agreement enforceable at law which must be supported by consideration. Reference was made by the Division Bench upon a passage in Lindley on Partnership, 13th edn., at page 113, wherein it is stated :
'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 partnership is not invalidated by an 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.'
18. The Division Bench points out that by an agreement of partnership there is a conferment of mutual rights and the undertaking of reciprocal obligations which would constitute for each of the parties the respective consideration for his 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 a partnership, particularly a professional partnership as arises in the instant case, was one without any consideration. Thus, it is quite clear that the Division Bench has clearly taken the view that where in a sole proprietary concern a new partner is taken up as a partner and is given a share not only in the profits and losses but including the goodwill, there is not gift of the goodwill as there is consideration in money's worth.
19. It is unnecessary, therefore, to refer to the other cases that have been cited at the Bar nor is it necessary to decide the various other contentions which have been urged by Mr. Dastoor on behalf of the assessee as, in our opinion, there is consideration in money's worth and the transfer cannot amount to a gift within the meaning of s. 2(xii) of the Act and the liability to gift-tax cannot arise.
20. Accordingly, our answer to the question referred to us is in the negative and against the revenue. The revenue shall pay the costs of the assessee.