1. In this appeal by the assessee, the issue involved is whether or not the AAC is justified in upholding the order of the GTO holding that the assessee was liable to gift-tax on surrender of 27 per cent of her share of profits in favour of other partners on account of reconstitution of the firm.
2. The relevant facts in brief are that the assessee, an individual, was a partner in the firm of Diesel Engineers, Madras, holding 67 per cent share therein along with another partner Shri Mahendra R. Patel holding share of 33 per cent. This partnership was evidenced by a deed of partnership dated 3-11-1967. There was a change in the constitution of the firm by which one Shri Rasiklal D. Patel was admitted as third partner which is evidenced by a deed of partnership dated 1-4-1974. As per this deed, the shares of the assessee; Shri Mahendra R. Patel and Shri Rasiklal D. Patel were 40 per cent, 40 per cent and 20 per cent respectively. According to the GTO, the surrender of shares of 27 per cent in favour of the other two partners should be deemed to be gift in terms of Section 41 (c) of .the Gift-tax Act, 1958 ('the Act') and he has determined the value thereof at Rs. 70,000 roundly on the basis of super profits earned in the past five years after adjusting the interest on the capital and remuneration. This amount was brought to tax by the GTO.3. On appeal, the AAC relying on the decision of the Madras High Court in the case of CGT v. V.AM. Ayya Nadar  73 ITR 761, holding that reduction of share of profit in realignment between the partners involved transfer of property amounting to gift chargeable to tax, upheld the order of the GTO and dismissed the appeal.
4. The learned representative of the assessee reiterated the grounds taken in this case and submitted that the AAC erred in his decision in upholding the levy of gift-tax as there was adequate consideration for the surrender of share made by the assessee in favour of other two partners. In this connection, he pointed out that partner Shri Rasiklal D. Patel contributed capital of Rs. 20,000, when he was admitted into the partnership. Similarly partner Shri Mahendra R. Patel contributed capita] of Rs. 40,000. Both these partners are working partners and in fact partner Shri Rasiklal D. Patel is M.Sc. in Electronics and he could handle testing instruments such as ammeter, micro-meter, hardness test meter, etc., in order to ensure that the products of the firm conformed to the ISI standard. They also agreed to share the losses of the firm in the same ratio of their respective share of profits. On the facts and in the circumstances of the case, the learned representative of the assessee submitted that there was sufficient consideration for surrender of shares by the assessee in favour of the other two partners and, thus, the facts of the case squarely fell within the ratio of the Madras High Court's decision in the case of CGT v. Alt Hussain M.Jeevaji  123 ITR 420. Reliance was also placed on the decision of the Tribunal, Madras Bench 'C', in the case of Second GTO v. Smt. G.Saraswathi, Ammal  10 ITD 198, wherein in similar circumstances, following the decision of the Madras High Court in All Hussain M.Jeevaji's case (supra), the Tribunal held that the relinquishment of share in favour of new partners did not constitute gift liable to tax.
5. The learned departmental representative prefaced his submission stating that there could be no quarrel over the proposition laid down by the Madras High Court in the case of .AH Hussain M. Jeevaji (supra).
But according to him, the decision in each case spins on the facts of that case. According to him, the case of the assessee was distinguishable. His contention was that the assessee relied on the decision of the Madras High Court in the case of CIT v. K. Rathnam Nadar  71 ITR 433 before the GTO and that case was not at all relevant to the issue in this appeal inasmuch as that case was concerned with the question of capital gains arising on transfer of goodwill of the firm. Even before the AAC, the assessee has taken the same argument which was also not relevant. Further the incoming partner Shri Rasiklal D. Patel was a master in electronics which was a different line altogether from the line of diesel engines manufactured by the firm. Therefore, his induction into the partnership was only a contrivance or device to reduce the tax liability. The deed of partnership also did not reveal any agreement to the effect that the partners were taken for the purpose of increasing the capital contribution or to acquire expertise in the line of business and, therefore, the motive for taking the new partners was not borne out. In the course of arguments, great stress was made by him on paragraph No.10 of the deed of partnership dated 1-4-1974, which reads as under: 10. Any partner may retire from the partnership at any time by giving the partner(s) not less than one calendar month's notice in writing of his or her intention to do so. A partner retiring as aforesaid shall be entitled to be paid by the other partners within six months of his or her account in the books of the firm on the date of the retirement together with his or her share of profits, if any, till the date but shall not be entitled to any share in the assets or goodwill of the firm.
According to him, a partner retiring from the partnership was entitled to be paid not only his capital but his share of profit too and this showed that the agreement to share the profits or losses of the business by the incoming partners was not bona fide and true.
Therefore, the agreement to share the loss of partnership which was in the nature of executory contract was not fulfilled when the retiring partner walked away with his share of capital and share of profit.
Therefore, he urged that the gift-tax was properly levied and, accordingly, supported the order of the AAC.6. In reply, the learned counsel for the assessee submitted that the Madras High Court in the case of All Hussain M. Jeevaji (supra), at page 426 has clearly held that mere contribution of capital would be enough to take the case out of the category of gift unless the facts established that the contribution of capital was illusory.
7. We have duly considered the rival contentions and the facts of the case. At the outset, we have to observe that the authorities have proceeded on the basis that there was no consideration at all for the surrender of share of 27 per cent ,by the assessee in favour of the other two partners and they decided the issue purely on the basis of the earlier decision of the Madras High Court in the case of V.A.M.Ayya Nadar (supra), wherein it has been held that redistribution of shares of profits between the partners involved a transfer of right which had the effect of diminishing a partner's interest and corresponding increase in the value of shares held by other partners and amounted to gift chargeable to gift-tax. There is no quarrel over the ruling laid down by the Madras High Court in the case of V.A.M.Ayya Nadar (supra). In a later decision of the Madras High Court in the case of M.K. Kuppuraj v. CGT  153 ITR 481, the same view has been reiterated and followed, wherein a partner has surrendered 8 per cent of his share of profit in favour of four minor sons, who were admitted to the benefits of partnership and the Court held that the transaction amounted to a gift, as there was no consideration at all for the admission of minors. As has been stated earlier, the learned departmental representative prefaced his argument by conceding the principles laid down by the Madras High Court in the case of AH Hussain M. Jeevaji (supra). In that case, two of the partners relinquished 50 per cent of their shares in favour of their sons but there was consideration therefor and, hence, there was no gift attracting liability to gift-tax. The High Court held that contribution of capital, rendering of service, sharing the future liabilities or losses of the firm would all constitute consideration for admission of new partners into the firm. Applying the principles laid down by the Madras High Court in the case of Alt Hussain M. Jeevaji (supra) to the assessee's case, we are satisfied that the tests have all been complied with. There is no dispute over the fact that the partners have contributed capital. They had agreed to share the losses of the firm and also rendered services. The Madras High Court has duly noted its earlier decision in the case of V.A.M. Ayya Nadar (supra), but held that there was no liability to gift-tax. Therefore, we are of the view that the AAC was not justified in sustaining the levy of gift-tax made by the GTO.8. We shall now refer to the arguments of the learned departmental representative. In the course of the hearing he admitted, despite his argument that the admission of partners was nothing but a contrivance or device, that the firm is genuine or otherwise, the question of subjecting the assessee to gift-tax on surrender of share would not arise (sic). In the face of this admission, the other arguments were of insignificance. A perusal of paragraph No. 10 of the deed of partnership, which has been relied upon by the learned departmental representative, shows that any partner can retire from the partnership at any time as the partnership is one at will and at least one calendar month's notice in writing is required in this regard. As per this clause, the retiring partner is to be paid his capital and also his share of profits, if any. In our view, the words 'profits, if any' are of significance which denotes that only if the business results in 'profit, the retiring partners would be entitled to it and not otherwise. Further, the amount was to be paid within six months of the date of retirement. Therefore, within a period of six months whatever be the profits or losses up to the date of retirement were bound to be accounted for and adjusted before the retiring partner was paid off.
The clause applies equally to the assessee who was the ex-proprietrix and, therefore, the provisions of this clause are genuine and meant to be applied for all the partners of the firm. Therefore, there is no warrant for the contention of the learned departmental representative that a retiring partner could walk away with his share of profit till the date of retirement. Further clause 5 of the deed of partnership narrates the total capital of the firm and the actual amount contributed by the partners and, therefore, there was no need for agreement to contribute capital as a consideration for admission of new partners.
9. The Tribunal in the case of Smt. G. Saraswathi Ammal (supra) in similar circumstances held likewise by relying on the decision of the Madras High Court in the case of Ali Hussain M. Jeevaji (supra) after duly noting the earlier decision of the Madras High Court in the case of V.A.M. Ayya Nadar (supra). Even the decision of the Madras High Court in the case of M.K. Kuppuraj (supra) is not applicable to the assessee's case, as we have pointed out earlier there is not only consideration but also adequate consideration.
10. In this view of the matter, we set aside the orders of the AAC and the GTO and direct that the transaction in this case was not liable to gift-tax as there was not only consideration but also adequate consideration.