P.D. Mulye, J.
1. The Income-tax Appellate Tribunal, Indore Bench, Indore, at the instance of the assessee, has made this reference under Section 26(1) of the Gift-tax Act, 1958, for the opinion of this court on the following question of law relating to the assessment year 1971-72 of the assessee ;
'Whether, on the facts and in the circumstances of the case, the assessee who settled his accounts on retirement from the partnership without any stipulation as to the existence or valuation of goodwill can be deemed to have made a gift of his share of goodwill in favour of the incoming partner or the remaining partners of the firm ?'
2. The facts giving rise to this reference as per the statement of the case received may be stated, in brief, thus : The assessee is an individual. The assessment year involved is 1971-72 for which the previous year ended on October 30, 1970. The assessee was a partner in the firm styled as M/s. Shrikrishna Nandlal & Co., Barwaha, which carried on the business of purchasing cotton from farmers and selling it to others after getting it processed, having 25 per cent. share during the assessment year under consideration. He retired from the partnership on November 9, 1969. The date of valuation is October 30, 1970. Prior to his retirement, the firm consisted of the following partners : (1) Shri Sharadkumar--25 per cent., (2) Shri Krishna--25 per cent., (3) Shri Kaluram--25 per cent. and (4) Shri Poolchand--25 per cent. After the retirement of the assessee from the partnership, the firm was reconstituted with effect from November 10, 1969, and the partnership consisted of the following partners: (1) Shri Narayanji--25 per cent., (2) Shri Krishna--25 per cent., (3) Shri Kaluram --25 per cent. and (4) Shri Poolchand--25 per cent.
3. On his retirement from the partnership, the assessee was not paid any amount on account of his right to share in the profits of the firm. Since Shri Narayanji became the partner in the firm and was given 25 per cent, share in the partnership, the Gift-tax Officer was of the view that the asseesee surrendered the value of his right to share profits in the partnership in favour of Narayanji, the incoming partner. A notice under Section 16(1) of the Gift-tax Act was accordingly served upon the assessee. In response to the notice, the assessee filed a 'Nil' return on February 26, 1977. It was stated on behalf of the assessee that his retirement from the firm and the admission of Narayanji in his place has no relevance and no gift was involved. The Gift-tax Officer, however, did not agree with this contention. He was of the view that the assessee surrendered his right to share profits in the partnership in favour of the incoming partner andsince this right is property and is capable of transfer/surrender/relinquishment of interest by the assessee, his right to share profits does attract the provisions of Section 4(1)(c) of the Gift-tax Act. The Gift-tax Officer, therefore, proceeded to compute the value of the deemed gift. The value of the deemed gift was determined at Rs. 33,770 and after allowing exemption under Section 5(2), the taxable gift was assessed at Rs. 28,770.
4. The assessee went in appeal before the Appellate Assistant Commissioner of Gift-tax, who, relying upon a judgment of this court passed in M.C.C. No. 459 of 1976 decided on May 2, 1981, in the case of Yashkumar Sachdeva, wherein it has been held that there is goodwill passing even on death, confirmed the order of the Gift-tax Officer. The assessee then preferred an appeal before the Tribunal which dismissed the same by concurring with the finding recorded by the Gift-tax Officer as also by the Appellate Assistant Commissioner. Hence, this reference at the instance of the assessee.
5. The learned counsel for the assessee contended that the firm in which the assessee was a partner was dealing in cotton and had no property and, therefore, was having no goodwill. He further contended that at the time of the retirement of the assessee, the nature of the business of the firm was only to purchase cotton from the farmers and get it processed for others. He also contended that the liability was huge and there was no occasion for the goodwill to have any value. He, therefore, placed reliance on the decision in Addl. CGT v. P. Krishnamoorthy : 110ITR212(Mad) and also on the decision of this court in Manaklal Motilal Agrawal v. CGT : 147ITR670(MP) as well as on the decision of the Supreme Court in CGT v. P. Gheevarghese : 83ITR403(SC) and contended that on the basis of the material on record, only the profits of the firm have been taken into consideration by ignoring the debts and liabilities of the said concern. He further submitted that, in fact, he retired on November 9, 1969, and the new partnership immediately came into existence on the next day, i.e., November 10, 1969, and, therefore, there was no question of fastening liability of the tax upon the assessee by treating it to be a deemed gift.
6. On the other hand, the learned counsel for the Revenue placed reliance on the decision in CGT v. V.A.M. Ayya Nadar : 73ITR761(Mad) and Khushal Khemgar Shah v. Mrs. Khorshed Banu Dadiba Boatwalla, : 3SCR689 to show that goodwill was part of the property of a firm. He, therefore, submitted that as goodwill was an asset of the firm, the assessee is deemed to have gifted his share of the goodwill on his retirement in the absence of any other material having been placed on record.
7. Admittedly, there is no written document placed on record when the assessee retired as a partner nor the new deed of partnership also beenplaced on record. The question, therefore, is whether a gift can be implied in the circumstances like the present one because of the provisions of the Gift-tax Act. The first relevant provision is Section 2(xii) which defines 'gift' to mean the transfer by one person to another of any existing movable or immovable property made voluntarily and without consideration.
8. When we turn to the definition of 'transfer of property' in Section 2(xxiv), we find that the definition is as follows :
''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 (whether general, special or subject to any restrictions as to the persons in whose favour the appointment may be made) 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.'
9. The relevant portion of this definition is to grant or create any partnership or interest in property.
10. Section 4(1)(c) of the Gift-tax Act, with which we are concerned, is as follows :
'(c) where there is a release, discharge, surrender, forfeiture or abandonment of any debt, contract or other actionable claim or of any interest in property by any person, the value of the release, discharge, surrender, forfeiture or abandonment, to the extent to which it has not been found to the satisfaction of the Gift-tax Officer to have been bona fide, shall be deemed to be a gift made by the person responsible for the release, discharge, surrender, forfeiture or abandonment.'
11. In the present case, the Gift -tax Officer computed the value of the deemed gift on the basis of the share of profits for the period 1966-67 to 1970-71, but he has not taken into calculation whether the value of the assets of the earlier firm, including the goodwill, exceeds the total liability of the earlier firm and whether the incoming partner has brought any capital. Unless such questions are determined, it would not be possible to lay down as a general rule that there has been a gift in respect of the goodwillwhenever a firm is reconstituted and the share in the goodwill of one of the partners is reduced as has been held in the decision referred to above Manaklal Motilal Agrawal v. CGT : 147ITR670(MP) .
12. It would also appear from the orders of the Gift-tax Officer and of the Appellate Assistant Commissioner as also the Tribunal that after the assessee retired from the partnership, his share of goodwill was relinquished or abandoned in favour of the new partner, Narayanji, and it is on that basis that the liability to gift-tax has been fastened on the assessee. However, it is interesting to note that in the question referred to this court, the words 'or the remaining partners of the firm' have also been added which has never been the case of the Department. It is settled law that apparent state of affairs should be accepted as correct unless contrary is proved. The gift-tax authorities have not placed any material on record to that effect. Where the partners of a firm retire from the firm after receiving in full the amounts of their capital invested along with profits and shares to their credit and the firm was reconstituted with the remaining partners and others, there was no gift by the retiring partners liable to gift-tax. Even if the right of a partner to share the profits of a firm is property, a retiring partner has no right to share the future profits. It is no doubt true that gift-tax is not necessarily restricted to gifts effected by written documents. If it is possible to effect a gift without an instrument in writing, gift-tax is payable on the same. But the subject-matter of a gift may be such that a written instrument is necessary to perfect a gift. Gift-tax is payable in spite of gifts made during the previous year (sic). Completed gifts alone attract liability to tax.
13. Thus, after hearing the learned counsel and after going through the case law cited, we are of the opinion that considering the facts and circumstances of the present case which are placed on record, the question referred has to be answered in favour of the assessee and against the Department. The reference is answered accordingly with no order as to costs.