Per Shri T. Venkatappa, Judicial Member - The assessee was carrying on the business of the proprietary concern. During this year he converted it into a partnership concern by admitting two of his major sons as partners as per the partnership deed executed on 4-11-1975 giving each of them 15 per cent share. They have been taken as working partners. It appears each of them have contributed a capital of Rs. 5,000. The GTO held that there is an element of gift to the extent of 30 per cent in favour of the incoming partners. He proceeded to calculate the value of the goodwill at two years purchase of three years average profits by giving reduction of reasonable amount towards interest on capital and remuneration. Thus, he took the value of the goodwill at Rs. 1,46,450.
Then he valued the relinquishment of right to the extent of 30 per cent at Rs. 44,000. Thus, he estimated the value of the gift transferred at Rs. 44,000. On appeal, the AAC upheld the assessment. Against the same, the present appeal is preferred.
The learned counsel for the assessee submitted that the two sons are taken as working partners and have contributed capital. Thus, there was adequate consideration and there was no gift. He also submitted that gift, if any, is exempt under section 5(1) (xiv) of the Gift-tax Act, 1958 (the Act). The learned departmental representative submitted that by taking the two sons, the assessee has gifted to the extent of 30 per cent and so, there was gift. Thus, the assessment made is valid.
3. We have considered the rival submissions. The proprietary business of the assessee has been converted into a partnership one. He took his two sons as partners giving 15 per cent share to each of them under the partnership deed executed on 4-11-1975. The two sons have been taken as working partners. They have also contributed a capital of Rs. 5,000 each. Thus, in our view, there was adequate consideration for taking them as partners. Thus, the transfer was for adequate consideration and there was no gift.
In CED v. Kantilal Nemchand  115 ITR 89, the Bombay High Court held that devoting time, energy and attention by the sons to the partnership business will have to be regarded as sufficient consideration for taking the sons as a partner. In Ramanlal Nagji and Dhirajlal Nagji v. CED  18 ITR 785 the Bombay High Court held that there is no gift when a partner is inducted in a sloe proprietary business or when shares of partners are reshuffled and the partners given enhanced share of profits, the actual consideration being that the partners was supposed to work and earn profits. In this decision two earlier decision of that Court in CGT v. Smt. Lalita B. Shah  118 ITR 794 and CGT v. Nagji Dullabhaji  118 ITR 804 were followed.
In D. C. Shah v. CGT  134 ITR 492 the Karnataka High Court, on the facts of that case held that there was a contribution of capital as well as participation in business and that would constitute adequate consideration for being inducted as partners. In CGT v. Ali Hussain M.Jeevaji  123 ITR 420 the Madras High Court held that contribution of capital, rendering of service, sharing in future liabilities and losses would all constitute consideration for the admission of new partners into the firm and there was sufficient consideration for the taking of the two partners and, hence, there was no question of any gift liable to tax.
The ratio laid down in the above cases squarely applies to the instant case. The assessee who was aged 55 years has taken his two sons as working partners who have also contributed capital of Rs. 5,000 each and that would constitute adequate consideration for taking them as partners. Thus, there was no gift liable to tax.
4. In the view we have taken, it is not necessary to consider the alternative contention that the gift is exempt under section 5(1) (xiv).