Per Shri V. Balasubramanian, Vice president - The assessee is a partner in the firm of Indian States & Eastern Agency. He carried on a business of dealing in handloom and powerloom material. During the accounting year, the firm admitted Master K. U. Motla, the minor son of a brother of the two partners, to the benefits of the partnership. Originally there were four partners including the brother H. C. Motla and K. C. Motla, the assessee. The minor on admission was entitled to a share of 16 per cent.
2. It would appear that the assessee filed a return of gift-tax declaring deemed gift of Rs. 22,700 as his share in the partnership represented by the reduction if 8 per cent of the profit of the partnership on account of the admission of Master K. U. Motla. Subsequently, however, he filed a letter stating that there was no gift and no gift-tax liability arose. The GTO, however, held that the claim of the assessee could not be accepted. According to him, the realignment or redistribution of the share of profit had the effect of diminishing the partners interest involving it as a transfer of property. The GTO calculated the value of the gift by taking the average profit of the firm for five years ending with the year of the alleged gift, working out the three years purchase price from which the existing value of the goodwill appearing in the books was deducted and calculating the 8 per cent thereof.
3. On appeal, the claim of the assessee was accepted and the AAC held that there was no taxable gift. He came to this conclusion after consideration of several decisions of the High Courts. This is challenged in the departmental appeal.
4. The learned counsel for the department has stressed the points made out in the order of the GTO. Several decisions in support of the department were stressed.
5. For the assessee, it was pointed out that the premises in which the business carried on belonged to the Government and even the Rent Control Act did not apply to it. There was no gift on account of the admission of the minor. The minor introduced no capital in the business. In fact, the admission of the minor to the partnership continued only for two years. Reference is made in this connection to the fact that the total amount received by the minor came to about Rs. 30,000 whereas the value of the gift was assessed at about Rs. 50,000.
6. In the course of the hearing, the decisions in CGT v. Chhotalal Mohanlal : 97ITR393(Guj) , Ramniklal Chhotalal v. CGT (1977) 106 ITR 799 , CGT v. Smt. Lalita B. Shah : 118ITR794(Bom) , CGT v. Nagji Dullabhaji : 118ITR804(Bom) , Addl. CGT. v. A. A. Annamalai Nadar (1978) 113 ITR 574 and CGT v. Premji Trikamji Jobanputra : 133ITR317(Bom) , came up for consideration. In our view, it is not necessary to go into all these decisions as the problem on hand could be decided on the mere factual positions. Apparently, what has happened is that a minor was admitted to the benefits of a partnership in which four partners were there, the minor being entitled to a share of 16 per cent of the profit. The minor did not contribute any capital. It is true that as a result of the realignment of the profit-sharing ratio, two of the old partners had their profit reduced whereas the other two partners retained their same profit. While this is a natural result of five persons sharing the profit of the firm as against four, what is relevant for gift-tax purposes is whether the alleged donor has parted with any property without consideration. The GTO has treated the two partners whose shares were reduced as having parted with a portion of the share of profit without consideration and for this reason held them liable to gift-tax. From the very nature of things, this would appear to be an erroneous approach more so if the nature of a partnership in law is considered. A partnership is an agreement for sharing the profit of a business. Apart from sharing of profit, the other vital element is the principle of agency. No partner, it is well established, can have a right in any asset of the firm, nor can each individual partner deal with the entire assets of the firm in any manner he alone likes. In other words, in point of law, the partnership is a compendious entity whereas no individual partner can with regard to any other partner or any outsider have a financial relations exclusive of the partnership activities. What we want to stress is the mere fact that the one partners share of profit has been reduced does not mean in law that he has parted with the reduced portion of his profit to any one else. The very fundamental basis, therefore, of the GTOs attempt to tax the difference, in our opinion, is misconceived. That apart, the assessee continues to be a partner in the firm. The mere fact that his share of profit has gone down does not in any way affect his rights and obligations with regard to the partnership itself as such. To take an extreme example in the case of a loss is the partnership where the partners have to bring amount to pay up the creditors, it may not by the assessee who is called upon to pay them but some other partner. The minor does not bear the loss. The loss is borne by the major partners. In this sense all the partners would be bearing the loss which if the minor had been a major partner would have been borne by him. What we want to emphasis is that the admission of a minor to the partnership is absolutely unrelated to any one of the partners individually and even as regards the entire partnership, it is a matter of such legal complexity that one cannot hold that any one partner has parted with any asset much less without consideration. There is no transfer of any asset to the minor especially by the assessee or any other partner individually.
7. The method of working out the alleged gift is also confusing. The GTO has worked out the three years purchase price and deducting there-from the book value of the goodwill arrived at a figure 8 per cent of which is treated as taxable gift. Apparently, the 8 per cent is adopted being half of the 16 per cent share of the profit going to the minor. We see no justification for sorting this computation with an average years profit of the firm. This, in our view, has no conceptual basis and represents nothing of importance. If what the GTO though was transfer of goodwill without consideration, the computation of goodwill would have involved a figure of super profit. In working out the super profit of a business even granting that an ordinary handloom business in rented premises not covered by the Rent Control Act has it (sic), the GTO must take into account the normal return on capital and managerial remuneration, etc. Worked out this way, it is not certain at all that the business of the firm would have any goodwill. By being admitted to the benefits of the partnership, the minor has received some profit. But at the time of his admission, one certainly cannot say that there would be a profit at all during the two years he would remain admitted to the partnership (because thereafter he became a major) and this benefit has been given over to him without consideration by the assessee.
8. We have no hesitation in holding that as as matter of pure fact there is no transfer of any asset by the assessee to the minor, which would attract the provision of the Gift-tax Act, 1958. The departmental appeal is dismissed though not for the reasons stated by the AAC.