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Commissioner of Gift-tax, Gujarat I Vs. Karnaji Lumbaji - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtGujarat High Court
Decided On
Case NumberGift-tax Reference No. 1 of 1966
Judge
Reported in[1969]74ITR343(Guj)
ActsGift Tax Act, 1958 - Sections 2, 3, 4 and 4(1); Partnership Act, 1932 - Sections 19 and 44
AppellantCommissioner of Gift-tax, Gujarat I
RespondentKarnaji Lumbaji
Appellant Advocate J.M. Thakore, Adv.
Respondent Advocate M.F. Thakkar, Adv.
Excerpt:
.....- gift tax liability - sections 2, 3, 4 and 4 (1) of gift tax act, 1958 and sections 19 and 44 of partnership act, 1932 - assessee transferred his share to new partners - whether such transfer liable to gift tax - provisions of act of 1932 contemplate transfer of interest of partner to third party - transfer made to new partners who were admitted with view to attend to business of firm - transfer not gratuitous - not liable to gift tax as it does not constitute 'gift' as per section 2 (xii). - - let us examine whether these contentions of the revenue are well-founded. 'what is meant by the share of a partner',says lindley in his well-known book on partnership at page 375, is his proportion of the partnership assets after they have been all realised and converted into money, and all..........officer took the view that there was a gift of 19 np. share of the assessee in the goodwill of the firm to mohanlal karnaji and govindlal karnaji and the assessee was therefore liable to gift-tax in respect of that gift and the value of the gift was liable to be measured in terms of 19 np. share in the value of the goodwill. this view taken by the gift-tax officer was affirmed in appeal by the appellate assistant commissioner and the assessee was therefore constrained to prefer an appeal to the tribunal was that the assessee, by admitting mohanlal karnaji and govindlal karnaji as partners in the firm on the terms and conditions recorded in the new partnership deed, had transferred his 19 np. share in the goodwill of the firm toe mohanlal karnaji and govindlal karnaji voluntarily without.....
Judgment:

Bhagwati, C.J.

1. The question which arises in this reference lies in a very narrow compass but, in order to appreciate the question, it is necessary to state a few facts giving rise to the reference. The reference arises out of assessment of gift-tax made on the assessee as an individual for the assessment year 1961-62, the relevant account year being Samvat Year 2016, that is, 1st November, 1959, to 29th October, 1960. Prior to the relevant account year, the assessee and his four sons carried on business in partnership in the firm name of Messrs. K. L. Sons on the terms and conditions recorded in a partnership deed, dated 23rd November, 1953. The share of the assessee in the partnership was four annas in a rupee while the share of each of the four sons was there annas in a rupee. The business of the partnership consisted of buying and selling second-hand drums, case iron, iron scrap. etc., after carrying out necessary repairs. Besides the four sons who were partners with him in the partnership, the assessee had two other sons by the name of Mohanlal Karnaji and Govindlal Karnaji who were working as employees of the partnership. The assessee and his four sons decided to introduce Mohanlal Karnaji and Govindlal Karnaji as partners in the partnership with effect from Kartak Sud 1, Samvat Year 2016, that is, November, 1959, and there was accordingly a change in the constitution of the partnership as recorded in a new partnership deed, dated 2nd November, 1959. The shares of the assessee and his four sons who were original partners in the firm were required to be adjusted as a result of the introduction of Mohanlal Karnaji and Govindlal Karnaji and the shares of the partners in the re-constituted firm were as under :

The assessee ... 6 nPKasturji Karnaji ... 19 nP.Adaji Karnaji ... 19 nP.Varjangji Karnaji ... 19 nP.Nanji Karnaji ... 13 Np.Mohanlal Karnaji ... 12 nP.Govindlal Karnaji ... 12 nP.

2. The shares of Kasturji Karnaji, Adaji Karnaji and Varjangji Karnaji remained practically unchanged but the shares of the assessee and Nanji Karnaji were reduced in order to provide the share of twelve naye paise each to Mohanlal Karnaji and Govindlal Karnaji. The share of the assessee was reduced from 25nP. to 6 nP. and the share of Nanji Karnaji was reduced from 19 nP. to 13 nP. and out of the reduction this made, a share of 12 nP. each was given to Mohanlal Karnaji and Govindlal Karnaji, the balance of one may paise going to Kasturji Karnaji, Adaji Karnaji and Varjangji Karnaji in order to make up their share of 19 nP. of his interest in the firm so as to attract the applicability of the Gift-tax Act. The Gift-tax Officer took the view that there was a gift of 19 nP. share of the assessee in the goodwill of the firm to Mohanlal Karnaji and Govindlal Karnaji and the assessee was therefore liable to gift-tax in respect of that gift and the value of the gift was liable to be measured in terms of 19 nP. share in the value of the goodwill. This view taken by the Gift-tax Officer was affirmed in appeal by the Appellate Assistant commissioner and the assessee was therefore constrained to prefer an appeal to the Tribunal was that the assessee, by admitting Mohanlal Karnaji and Govindlal Karnaji as partners in the firm on the terms and conditions recorded in the new partnership deed, had transferred his 19 nP. share in the goodwill of the firm toe Mohanlal Karnaji and Govindlal Karnaji voluntarily without consideration and there was thereof a gift of 19 nP. share of the assessee in the goodwill of the firm to Mohanlal Karnaji and Govindlal Karnaji. The Tribunal rejected this argument holding that neither during the continuance of a firm nor after its dissolution can a partner be said to have a specific interest in any particular asset of the firm and therefore the assessee did not have any specific interest in the goodwill of the firm which he could be said to have transferred to Mohanlal Karnaji and Govindlal Karnaji by admitting them as partners in the firm. The Tribunal also held that, even if the transaction could be construed as a transfer by the assessee of his 19 nP. share in the goodwill of the firm to Mohanlal Karnaji and Govindlal Karnaji, there was nothing to show that it was made without consideration and it was therefore not possible to say that it was a gift liable to gift-tax under the Act. The Tribunal then proceeded to consider whether the case could be brought by the revenue within clauses (b) and (d) of section 2(xxiv) and held that neither of the two clauses had any application to the facts of the present case. The Tribunal observed that, in any event, even if clause (b) or (d) applied and there was therefore a transfer of property, the element of consideration was not absent and it could not therefore be regarded as a gift. The Tribunal in the end considered the applicability of section 4(c) and came to the conclusion that that provision too had no application, for even if it were assumed that the assessee discharged or surrendered or released his 19 nP. share in the goodwill of the firm, such release, discharge or surrender was not shown to be wanting in bona fides and could not therefore be deemed to be a gift within the meaning of section 4(c). This view taken by the Tribunal is challenged before us in the present reference made at the instance of the commissioner of Gift-tax.

3. Before we examine the arguments advanced on behalf of the parties, it will be convenient at this stage to refer to some of the relevant provisions of the Gift-tax Act. Section 2(xii) defines 'gift' to mean transfer by one person to another of any existing movable or immovable property made voluntarily and without consideration in money or money's worth, and includes the transfer of any property deemed to be a gift under section 4. The expression 'transfer of property' which occurs in this provision is in its turn defined in section 2(xxiv) and according to that definition :

''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 -..........

(b) the grant or creation of any lease, mortgage, charge, easement, licence, power, partnership or interest in property;..............

(d) any transaction entered into by any person with intent there by to diminish directly or indirectly the value of his own property and to increase the value of the property of any other person.'

4. Section 3 is the charging section and it provides that, subject to the other provisions contained in the Act, there shall be charged for every assessment year coming on and from 1st April, 1958, a tax in respect of the gifts made by a person during the previous year. Section 4 by a legal fiction brings within the ambit of the taxing provision certain transfers which are not gifts within the meaning of section 2(xii) by deeming them to be gifts for the purposes of the Act. Clause (c) of section 4 is in the following terms :

'4. For the purposes of this Act, -..........

(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, for feature 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......'

5. We may mention straightway that, though the revenue did refer to section 4(c) in the course of argument, it did not press the argument based upon that provision in view of the finding of fact recorded by the Tribunal that, even if there was any release, discharge or surrender of his 19 nP. share in the goodwill of the firm by the assessee in favour of Mohanlal Karnaji and Govindlal Karnaji, there was nothing to show that such release, discharge or surrender was not bona fide. We will therefore not be concerned with the interpretation of section 4(c).

6. Now, as pointed out above, there were two main grounds on which the Tribunal decided against the revenue. One was that the assessee did not have any specify interest in the goodwill of the firm and there was therefore no existing movable or immovable property which could be transferred by the assessee to Mohanlal Karnaji and Govindlal Karnaji, and the other was that, even if there was a transfer of 19 nP. share in the goodwill of the firm, it was not without consideration in money or money's worth. The revenue challenge the decision of the Tribunal on both the grounds on which it was based. The revenue contended that the interest of the assessee as a partner in the firm was an existing though intangible movable property and it could legitimately from the subject-matter of transfer and it was in fact transferred by the assessee to Mohanlal Karnaji and Govindlal Karnaji to the extent of 19 nP. share when Mohanlal Karnaji and Govindlal Karnaji were admitted as partners in the firm. The revenue also argued that the transfer of this 19 nP. share of the assessee in the firm to Mohanlal Karnaji and Govindlal Karnaji was without consideration sine there was no mention in the partnership deed of any consideration having passed from the latter to the former. Let us examine whether these contentions of the revenue are well-founded.

7. Now there can be no doubt that the interest of a partner in a firm is existing intangible property which can be transferred by him either absolutely or by mortgage or by creation of a charge on it Section 29 of the Partnership Act in so many terms provides as to what shall be the rights of the transfer when a partner transfers his interest in the firm either absolutely or by mortgage or by creation of a charge on it to the transferee. Section 44(e) of the Partnership Act also contemplates a transfer by a partner of the whole of his interest in the firm to a third party. It empowers the court to dissolve the firm at the suit of a partner on the ground that a partner other than the partner suing has in any way transferred the whole of his interest in the firm to a third party. It is undoubtedly true that no partner can predicate that he has a definite share in any particular movable or immovable property of the firm which he can transfer or relinquish, for his interest in the partnership consists not of any definite share in any movable or immovable property of the firm but in a right to have the partnership assets realised and converted into money and applied in discharge of the partnership debts and liabilities and the surplus distributed amongst the partners in accordance with the provisions of section 48 of the Partnership Act.'What is meant by the share of a partner', says Lindley in his well-known book on Partnership at Page 375, 'is his proportion of the partnership assets after they have been all realised and converted into money, and all the partnership debts and liabilities have been paid and discharged. This it is, and this only, which on the death of a partner passes to his representatives, or to a legatee of his share........... and which on his bankrupt passes to his trustees'. The Tribunal was therefore wrong in approaching the problem from the point of view whether the assessee had any definite share in the goodwill of the firm. The assessee certainly did not have any specify share in the goodwill which was only one of the assets of the firm but that was not the property which, according to the revenue, was transferred by the assessee to Mohanlal Karnaji and Govindlal Karnaji. The property which was alleged by the revenue to have been transferred by the assessee to Mohanlal Karnaji and Govindlal Karnaji was 19 nP. share in his interest in the firm and that was certainly property which could from the subject-matter of transfer. But the question is whether it was transferred by the assessee to Mohanlal Karnaji and Govindlal Karnaji when these two gentlemen were introduced as partners with 12 nP. share each in the firm. The argument of the revenue was that there was a transfer of 19 nP. share of the assessee in the firm of Mohanlal Karnaji and Govindlal Karnaji since, as a result of the introduction of Mohanlal Karnaji and Govindlal Karnaji in the firm, the share of the assessee was reduced from 25 nP. to 6 nP. and this reduction in the share of the assessee went to make up the 12 nP. share each of Mohanlal Karnaji and Govindlal Karnaji and there was therefore disposition or alienation of 19 nP. share of the assessee to Mohanlal Karnaji and Govindlal Karnaji. The revenue also urged that in any event, as a result of the admission of Mohanlal Karnaji and Govindlal Karnaji as partners in the firm, an interest was created in their favour and there was therefore transfer of 19 nP. share of the assessee within the meaning of clause (b) of section 2(xxiv). Clause (d) of section 2(xxiv) was also relied upon on behalf of the revenue and it was urged that the transaction of admitting Mohanlal Karnaji and Govindlal Karnaji in the firm was entered into by the assessee with intent thereby to diminish the value of his own property by reducing his share and to increase the value of the property of Mohanlal Karnaji and Govindlal Karnaji by giving them 12 nP. share each in the firm. These contentions of the revenue raise interesting questions of construction but it is not necessary for us to examine them since we are of the view that even if there was a transfer by the assessee of his 19 nP. share in the firm to Mohanlal Karnaji and Govindlal Karnaji, the transfer was not without consideration in money or money's worth and there was therefore no gift within the meaning of section 2(xii).

8. A partnership as defined in section 4 of the Partnership Act is the relationship between persons who have agreed to share the profits of a business carried on by all or any of them acting of all It is a result of a contract between persons who come together for the purpose of carrying on business and each one undertakes obligations which are either of a contractual nature or, subject to a contract to the contrary, laid down under the Partnership Act and these obligations from the consideration for the rights which each one had under the contract of partnership. It is no doubt true that where a new partner is introduced in an existing firm, his share in the firm would extend, the the absence of a contrary agreement, to every property of the firm but he would also equally share in the liabilities of the firm. He would be subject to all the obligations, contractual as well as statutory, which attach to a partner of a firm including, inter alia, the obligation to attend diligently to his duties in the conduct of the business of the firm. He would also be liable to share the losses which arise to the firm subsequent to his introduction as a partners. Now, obviously went the partners in an existing firm admit a new partner, they would do so for one of two reasons - either because he is going to bring finance or because he is going go attend to the business of the firm. Here in the present case. Mohanlal Karnaji and Govindlal Karnaji were paid employees of the firm and they were sufficiently experienced in the business of the firm. The result of admitting them as partners obviously was that the firm would be saved the remuneration which would otherwise by payable to them as employees. Moreover, as pointed out by the Tribunal, they had experience of running the business and, as partners, they would be above to attend to the business and give the benefit of their experience to the firm. It is therefore not possible to say that the admission of Mohanlal Karnaji and Govindlal Karnaji as partners in the firm was gratuitous without any consideration. The burden of proving that a particular transfer is a gift is upon the revenue and it is for the revenue to show that the transfer is without consideration. There is no material brought here to show that Mohanlal Karnaji and Govindlal Karnaji were admitted as partners in the firm without consideration. On the contrary the facts clearly show that they were admitted as partners for consideration, the consideration being that with their experience gained by them as employees they would attend to the business of the firm, no remuneration would be payable to them as was being done till then, they would share not only in the assets but also in the liabilities of the firm and they would also participate in the future losses of the firm, if any. We are therefore of the view that even if there was a transfer by the assessee of his 19 nP. share in the firm to Mohanlal Karnaji and Govindlal Karnaji - a matter on which we do not express any opinion - the transfer was not without consideration in money or money's worth and there was therefore no gift by the assessee to Mohanlal Karnaji and Govindlal Karnaji which would attract the liability to gift-tax under the Act.

9. Our answer to the question referred to us therefore is in the negative. The Commissioner will pay the costs of the reference to the assessee.


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