1. These appeals by the department relate to the assessment year 1979-80, for which the accounting period ended on 31-3-1979.
2. The firm Sellwell Tea Agencies, Cochin 2, originally consisted of two partners, viz., D.S. Ratnakar and his son, R. Anil, who are the two assessees in the present appeals. They had a 60 per cent and 40 per cent share, respectively. On 30-9-1978, the firm was reconstituted. R.Ashok another son of Ratnakar and the younger brother of Anil was admitted to the partnership. In the reconstituted firm Ratnakar's share went down from 60 per cent to 40 per cent and that of Anil from 40 per cent to 30 per cent. Ashok had a 30 per cent share. The GTO held that there has been a gift to the extent of 20 per cent of his share by Ratnakar and to the extent of 10 per cent of his share by Anil. The GTO took the average profit for 5 years (Rs. 93,262) and reduced therefrom interest on capital at 12 per cent (Rs. 19,427) and 15 per cent of the profits as managerial remuneration (Rs. 13,989). The balance amount came to Rs. 59,746. This was capitalised by three times and treated as the value of the right to share the profits of the firm. 10 per cent of the amount was brought to tax as gift in the hands of Anil and 20 per cent of the amount in the hands of Ratnakar. It may also be mentioned that Ashok had brought in a capital of Rs. 22,000.
3. The AAC took note of the fact that Ashok had brought in a capital of Rs. 22,000 and further that he was an active partner in the firm. Prior to his admission to the firm he had worked in the firm and had gained experience. It was held by the AAC that under the circumstances mentioned above the reduction of the shares of Ratnakar and Anil did not amount to a gift. He, therefore, cancelled the assessments. (The observation of the AAC in his order that the incoming partner is not related to Ratnakar does not seem to be correct.) Aggrieved by the same, the department has come up in appeal.
4. The grounds taken by the department are common and are to the following effect. The AAC has not recorded a clear finding as to whether there was a transfer and whether the consideration, if any, for the transfer was adequate. He also erred in [presuming that the capital invested by the incoming partner constituted consideration to the other partners. The capital contribution belonged to the incoming partner and the firm had only the use of the money. The AAC also erred in holding that the previous experience of the incoming partner was relevant. He should have held that even if the incoming partner had contributed any labour or skill, it would not constitute any consideration for the transfer.
5. At the time of the hearing, the arguments advanced by the learned departmental representative were to the above effect. He also relied upon the decision of the Kerala High Court in V.O. Markose v. CGT  98 ITR 504, wherein it was held that when one of the partners transferred 50 per cent of his interest in the assets of the firm to a newly admitted partner, there was a transfer amounting to gift.
Reliance was also placed on the decision in CGTv. V.A.M. Ayya Nadar  73 ITR 761 (Mad.), wherein it was held that when there is a realignment of profit sharing ratio by the partners of a firm, there is a transfer of property amounting to gift. The decision of the Kerala High Court in CGT v. Ganapathy Moothan  84 ITR 758, was relied upon in support of the position that the capital contribution by the incoming partner was only for the purpose of working of the partnership and that it did not constitute consideration to the partners whose shares suffered a reduction in the reconstitution.
6. As against this, it was contended by the learned Counsel for the assessee that the right to share future profits is not an existing property and that there can be no gift with regard to a non-existing property. This contention is apparently based on the decision of the Madras High Court in Addl. CGTv. P. Krishnamoorthy  110 ITR 212.
That related to a case of retirement and the position is quite different when it comes to the reduction in the share of a continuing partner. This has been made clear by the Madras High Court itself in the decision in N.K. Kuppuraj v. CIT  17 Taxman 96. The learned Counsel for the assessee then relied upon clauses 8, 9 and 14 of the partnership deed and pointed out that the legal representative or the heir of a deceased partner will be entitled to claim only such benefit as accrued to the deceased as disclosed by the accounts. This provision occurs in Clause 14 of the partnership deed. It does not apply even to the retirement of a partner. The right to share future profits of a continuing partner is not affected by these clauses and they are not of any help to the assessee in contending that the right to share future profits has no value. It was then contended that the right to share in the profits accrues only when the accounts are closed and that there was, therefore, no present right to gift. In the light of the decisions referred to earlier, the right to share profits cannot be treated as a nonexistent property merely because the accounts are to be closed on a subsequent date.
7. Lastly, it was contended by the learned Counsel for the assessee that in view of the contribution of capital by the incoming partner and also the fact that he had previous experience in the business and had become a working partner, there was sufficient consideration and that there was, therefore, no gift. In support of the contention, the learned Counsel relied upon the decision of the Madras High Court in CGT v. Ali Hussain M. Jeevaji  123 ITR 420. In this case, following the decision of the Gujarat High Court in CGT v. Karnaji Lumbaji  74 ITR 343 and the earlier decisions of the Madras High Court in Addl. CGTv. A.A. Annamalai Nadar  113 ITR 574 and CGT v.N. Palaniappa Mudaliar  113 ITR 440, it was held by the Madras High Court that the 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 that if these elements are present, there will be no gift attracting liability to tax. But it may be noted that the Madras High Court itself had taken a different view in V.A.M. Ayya Nadar's case (supra) and in the case of N.K. Kuppuraj (supra). Recently, in some other cases, this Tribunal, following the decision of the Bombay High Court in CGT v.Premji Trikamji Jobanputra  133 ITR 317, had held that the question whether there is a gift will depend upon (i) whether the value of the assets of the old firm including its goodwill exceeded its total liabilities, and (ii) whether the incoming partner had brought in any capital and if there is a capital contribution by the incoming partner, there can be no gift in respect of the goodwill. This will hold good even when what the department has brought to tax is the right to share profits. It would appear that the recent unreported decision of the Kerala High Court in CGT v. V.M. Philip [IT Reference No. 269 of 1979, dated 1-8-1984] is definitely in favour of the view that there will be no gift when there is capital contribution. In that case, the assessee had converted a proprietary concern into a partnership by transferring 50 per cent of his interest to his son, who was taken in as a partner.
The son had contributed a sum of Rs. 1 lakh as capital. The High Court noticed that the father had entered into the partnership agreement with his son for the purpose of taking over the plantation business and that the son had contributed Rs. 1 lakh as capital. It was held by the High Court that : On the face of this transaction no gift is involved. But the finding of the Gift-tax Officer as to the existence of a gift and the liability to pay tax thereon was not challenged by the assessee.
Assuming, therefore, that the transaction was in the nature of a gift, even so, as rightly, in our view, found by the Tribunal, consideration in the sum Rs. 1,00,000 had passed from the son to the father for the benefits conferred on the son by being admitted in the partnership.
The capital brought in, in the present case, cannot be said to be illusory or totally inadequate. The incoming partner, who had experience in the business earlier, had come in as an active partner.
Under the circumstances, following the decision of the Kerala High Court, referred to above, we hold that there was no gift in the present case which will attract gift-tax.