Per Shri S. K. Chander, Accountant Member - This appeal by the revenue is directed against the order of the AAC dated 2-4-1982 relating to the assessment year 1978-79, before we crystallise the issue we like to have a look at the factual canvass of the case which is as under.
2. There was a firm working under the name and style of Mohri Ram Ram Lal, Commission Agents, Kaithal. It was constituted by three partners, namely, Sarvshri Mohri Ram, Ram Lal and Amar Lal, having one-third share in its profits and losses. This constitution continued up to 31-3-1977. With effect from 1-4-1977 Shri Rajinder Kumar, M. Com. s/o Shri Ram Lal, 25 years, Shri Harbhagwan, B. A. s/o Shri Amar Lal, 26 years and Smt. Kailash Wati, w/o Shri Jaggan Nath were admitted as new partners. Sharvshri Rajinder Kumar and Harbhagwan were working with the firm for about two years on the date they were admitted as partners.
They respectively contributed Rs. 21,060 and Rs. 10,000 as capital.
Smt. Kailash Wati contributed Rs. 15,000 as her share of the capital. A clause in the instrument of partnership provided that the capital of the firm/partners shall be as per books. These amounts were in the books of the firm in respect of the new partners when they joined the partnership firm. The profits and losses sharing ratio of the new partners, who were all sui juris, was one-sixth each.
3. The GTO took the view that Sarvshri Mohri Ram, Ram Lal and Amar Lal surrendered their 50 per cent share in the profits of the firm in favour of the three persons who were taken as partners. According to him, this surrender of the share in favour of others was a gift made by the original partners on 1-4-1977 jointly to others. This, according to him, was liable to gift-tax under the Gift-tax Act, 1958 (the Act). He, therefore, proceeded to work out the value of this gift.
4. According to the GTO the right to share in profits of firm is the property and surrender of this right in favour of others is a gift. I am also of the opinion that AOP is liable to gift-tax. According to him, this was the value of the goodwill of the firm 50 per cent of which had been gifted. Therefore, he took the value of the gifted asset at Rs. 49,340. After exemption of Rs. 5,000 under section 5 of the Act the taxable gift was determined at Rs. 44,340. This was taxed and a demand of Rs. 3,434 was created by the order dated 2-12-1980.
5. When the matter came up in appeal, the AAC reversed this order of the GTO relying upon the judgments cited before him holding that the new partners were taken in for the purpose of the extension of the business and for getting fresh financial resources. As such, there was no gift which was liable to tax because a gift, if any, was in course of carrying on the business and for the purpose of the business which was exempt under section 5(1) (xiv). Hence, the grievance of the revenue.
6. Relying upon the judgment of the Madras High Court in the case of CGT v. V. A.M. Ayya Nadar  73 ITR 761, it was contended by the revenue that goodwill was an asset which had been gifted and the action of the GTO was supported by this judgment. It was also submitted that if upon the proper scrutiny of the change in the constitution of the firm it appears that the share of a major erstwhile partner is reduced and the amount of share reduction has been given to the new partner, there may result an assignment or alienation of property liable to gift-tax. The AAC, therefore, erred in reversing the order of the GTO and in allowing the assessee a relief.
7. On the other hand, the learned counsel for the assessee submitted that the revenue is not examining the issue in proper perspective because there was no alienation of the property or transfer of goodwill in any form because in the books of account the goodwill did not exist and in fact there was no goodwill of a firm which was doing the business of commission agent. It was further submitted that the new partners two of whom were working earlier with the firm had also brought in capital and started functioning as working partners. The reconstitution of the firm was for the induction of new blood and finance and it was in the interest of the business. The reconstitution was in course of carrying on the business of the assessee and for the purpose of the business of the assessee and as such, no gift was involved.
8. After careful consideration of the rival submissions, we find that no case made our by the revenue for an interference in the order of the AAC. The revenue has relied upon the judgment of the Madras High Court in the case of V. A.M. Ayya Nadar (supra), but facts of that case were entirely different insofar as there was redistribution of share of the profits as between one partner and certain others who are all partners, involving a transfer of the right which had the effect of diminishing a partners interest and correspondingly increasing the value or quantum of the shares held by the other partners. This is not the case before us because there is induction of three new partners and there is no redistribution of the shares of the profits as between one partner and the others who were already partners. Therefore, the revenue cannot seek any support from this judgment. Insofar as the reliance placed upon the judgment of the Bombay High Court in the case of CGT v. Premji Trikamji Jobanputra  133 ITR 317 is concerned, it also gives no help to the revenue because there the Honble Court observed that if upon the proper scrutiny of a change in the constitution of a firm by admitting a minor to the benefits of a partnership, it appears that the share of a major erstwhile partner is reduced and the amount of share reduction has been given to his minor child, who has been admitted to the benefits of the partnership, there may result an assignment or alienation of property. In such a case, a transfer of property takes place. It would be clear in comparison with the facts of the case before us and the ratio of this judgment that it does not fit into this case. In the present case, there is no admission of a minor to the benefits of partnership and there is no corresponding reduction in the share of the partner whose minor has been admitted to the benefits of partnership. On the other hand, it is a clear case of reconstituting a firm with new blood and new finances brought into for the purpose and for the benefit of the business of the firm.
9. On the other hand, the Andhra Pradesh High Court in the case of CGT v. Chalasani Subbayya  144 ITR 295, has held that it is not open to the department to pick out one of the assets of the firm, namely, the goodwill, and say that a retiring partner has relinquished his share in the goodwill and levy gift-tax thereon. In the case of a transfer of the partners interest, what is transferred is his interest in the partnership firm and not any particular share in any particular asset of the partnership firm. Even if the subject-matter of the gift is treated as a relinquishment of the retiring partners share in the goodwill of the firm, it is not exigible to gift-tax under the provisions of the Act.
10. Examining the issue before us on merits, we find firstly, it is not anywhere recorded in the books of the account or in the relevant partnership deed that there was a goodwill of the firm. In any case, in the books of account no goodwill of the firm was recorded. The deed of reconstituion clearly shows that the new partners came in with capital to contribute to the finances of the firm. Two of them had gained experience in the working and were well educated. The claim of the revenue that there was goodwill and that the goodwill had been gifted in the manner described by the GTO does not find support from anywhere.
In any case, it is clear that the admission of the new partners was for continuing the business and was in the business interest. As such, there was no question of any gift-tax involved in such reconstitution.
The gift-tax assessment made by the GTO was without justification.
11. It may also be noticed that the Andhra Pradesh High Court, while observing that there is no gift involved even if the subject-matter of the gift is treated as a relinquishment of the retiring partners share in the goodwill of the firm, it is not exigible to gift-tax under the Act, followed the judgment of the Supreme Court in the case of CGT v.P. Gheevarghese, Travancore Timbers & Products  83 ITR 403. It is thus clear that according to settled law, the GTO had not found anything by any of asset which had been gifted by the existing partners by taking three new partners on the terms and conditions recorded in the partnership deed which has been set out (supra). The AAC was fully justified in allowing the appeal of the assessee.