1. There was a partnership firm under the name and style of Messrs. S. R. P. Ponnuswamy Chettiar, carrying on business in retail in textiles. The partners and their respective shares in the profits and losses were as under :
1.S.R.P.Ponnuswamy Chettiar30%2.P. Jagatheesan, Son of No. 116% 3.P. Murugesan do.5%4.P. Venkatesan do.16%5.P. Sivanandan do.16%6.P. Krishnamoorthy do.16%
2. Four partners, who are the assessees in these references, retried from thepartnership with effect from April 17, 1964. At the time of retirement, asstated by the Appellate Assistant Commissioner in his order, they tookwhatever they were entitled to from the partnership firm, namely, theamounts of capital invested along with profits and shares to their credit.The firm was reconstituted with the continuing two partners andcertain others by a deed dated July I, 1964, and that partnership becameeffective from April 17, 1964, namely, the date on which the four assesseesherein retired. The Gift-tax Officer came to the conclusion that as a resultof the retirement from the partnership firm, the assessees herein had relinquished their respective interests as shown above in the partnership firm and since the right of a partner to share in the profits of the firm is property capable of transfer and since the retirement of the assessees from the partnership firm had resulted in relinquishment of the interest in the partnership firm, there was diminution of the assessee's interest and corresponding increase in the value of shares in the hands of the continuing partners and, in the circumstances, the assessees relinquishing their rights in the partnership firm constituted gifts. The Gift-tax Officer valued the rights of all the partners to share the profits of the firm at 2 to 21/2 times of the average profits during the preceding three years and the value of the rights of all the partners to share the profits of the partnership firm was taken by him at Rs. 2 lakhs and the respective assessee's shares were worked out on the percentage shown already and the amounts so arrived at were subjected to gift-tax.
3. Appeals were preferred to the Appellate Assistant Commissioner. The Appellate Assistant Commissioner held that when the assessees retired from the partnership firm, they were given whatever they were entitled to as per the partnership deed, namely, the amounts of capital invested along with profits and shares and there was no question of the assessees relinquishing their shares of interest with intent thereby to diminish the value of their own property and increase the value of the property of the continuing partners on retirement ; consequently, there was no question of liability to gift-tax, with the result the Appellate Assistant Commissioner set aside the assessments made by the Gift-tax Officer. Against the order of the Appellate Assistant Commissioner, the department preferred appeals to the Income-tax Appellate Tribunal. Before the Tribunal, the contentions of the department were that on account of the retirement of the assessees from the partnership, the continuing partners had full rights over the entire profits of the firm and to that extent the assessees surrendered the right of their shares in the profits without consideration which involved gift of property and that the gift-tax assessments made by the Gift-tax Officer were, therefore, proper. As against this, the assessees contended that since the retirement of the assessees from the partnership firm was as per the provisions of the partnership deed, there was no relinquishment of the assessees' rights in the partnership firm in favour of any one and, therefore, there was no liability to gift-tax. The Tribunal held that as a result of the assessees retiring from the partnership firm, there was no scope for transfer of any property falling under one or other provisions of Section 2(xxiv) of the Gift-tax Act. The Tribunal further held that after retiring from the partnership firm, what is received by the assessees astheir respective shares in the net partnership assets, after deducting liabilities and prior charges on settlement of accounts, does not result in transfer of any interest in property from the retiring partners to the continuing partners in the assets of the partnership and there was no transfer of property falling under one or other provisions of Section 2(xxiv) of the Gift-tax. Act. In this view, the Tribunal upheld the order of the Appellate Assistant Commissioner and dismissed the appeals preferred by the department.
4. It is the correctness of this conclusion of the Tribunal that is challenged by the department by applying for and obtaining a reference of the following question for the opinion of this court :
' Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in holding that the assessee was not liable to pay gift-tax under the Gift-tax Act, 1958, on the ground that he did not relinquish his right to share in the profits of the partnership on his retirement in favour of the continuing and newly admitted partners ?'
5. We may point out that the question is identical in all the four references.
6. We are clearly of the opinion that the conclusion of the Tribunal is correct. From the question reproduced above, it is clear that, according to the department, the subject-matter of the gift was a right to share in the profits of the partnership. It is not in dispute that when the assessees retired from the partnership, they received their share in the assets of the partnership including their share of profits up-to-date. Consequently, the only contention of the department, which has been made clear to us, is that, by retirement, the partners have relinquished their rights to receive the profits in future and that constituted a gift. We are unable to accept this argument. In the first place, even when the right of a partner to share the profits of the firm is considered to be ' property ', there is no question of a retiring partner having a right to share the future profits. If so, such a non-existent right cannot be ' property ' as contemplated by the statute. The learned counsel for the revenue repeatedly contended before us that even when a partner retires from a partnership after receiving his share of assets and profits' of the partnership, still he gives up his right to receive future profits and that would constitute a gift. The acceptance of this argument of the revenue will lead to the strange proposition that in the case of every retirement of a partner from a partnership a gift of a right to receive future profits of that partner is involved and such a proposition is obviously untenable. Further, if such a proposition is a valid one, a question will naturally arise as to what should . happen to the liability of the retiring partner to share the future losses. Is there to be a set-off or adjustment If so, will not the liability to share the future loss neutralise the right to share the future profits The learned counsel for the revenuehas no answer to any of these questions. We are, therefore, of the opinion that there is no substance in the contention of the revenue, and the moment a partner retires from the partnership, he will have no right to receive anv future profits in the said firm and hence there is no question of his giving up any such right. The learned counsel strongly relied on a decision of this court in Commissioner of Gift-tax v. V. A. M. Ayya Nadar : 73ITR761(Mad) . In that case, what happened was that the assessee therein was a partner of a firm under the name and style of V. A. M. Rathinarn Brothers, which carried on business at Virudhunagar. It had nine partners with four minors admitted to the benefits of the partnership. The assessee had a third share in the profits of the firm as well as its liabilities. By a deed dated March 31, 1958, the firm was reconstituted with effect from January 31 of that year. By that time, one of the minors having become a major, he was taken as a full-fledged partner and the remaining minors continued to have the benefits of the partnership. One further change was that the assessee was allotted a one-ninth share out of the one-third share and the balance of two-ninths share was distributed as between two other partners. The Tribunal found that notwithstanding the distribution of two-ninths share, the assessee's share capital remained as it was prior to January 31, 1958, and that the transfer if at all was only of a two-ninths share in the future profits and losses of the business. Under these circumstances, the question that came up for consideration was whether there was a gift by the assessee of the right to receive his 2/9th share of the profits of the firm. This court held that the same constituted a gift. This court observed (page 763) :
' Quite apart from this reasoning, we are inclined to think that a right of a partner to share in the profits is as much property as a right of a partner to share in the assets of the firm. It is the right of a partner which entitles him to a share in the profits of the firm and that, as we think, is a valuable right and capable of transfer at least as between the partners by common consent. When so much is clear, we encounter no difficulty in approving the next step that when there is distribution of a quantum of the share of profit as between its original holder and certain others who are all partners, it involves a transfer of the right which has the effect of diminishing the assessee's interest and correspondingly increasing the value or quantum of the shares earlier held by the other two partners. On that view we think that the distribution by way of realignment of the one-third share of the assessee did involve transfer of property amounting to a gift chargeable to tax.'
7. We are clearly of the opinion that that case has no bearing whatever on the present case. In that case, a partner, Who Was entitled to 1/3rd share, by realignment was allotted only 1/9th share and the balance of 2/9th sharewent to other partners. At the same time, that partner's share of the capital was not reduced and he continued to be a partner. Consequently, in view of his continuing as a partner, he had a right to share the profits, so long as he continued. But he got that right reduced from 1/3rd to 1/9th without at the same time reducing his share of the capital proportionately with the result 2/9th share in the profits was treated as gift. In the present case, the assessees have retired from the partnership. The moment they have retired, their right to a share in the future profits of the firm came to an end and, therefore, there is no question of their giving up any right to share the future profits. In view of this, the decision of this court in V.A.M. Ayya Nadar's case : 73ITR761(Mad) referred to above cannot be of any assistance whatever to the case of the revenue in the present references. Under these circumstances, we answer the question referred to this court in the affirmative and in favour of the assessee in each of these references. The assessees being different individuals, they will be entitled to their costs and the counsel's fee is fixed at Rs. 500 each.