P. Govindan Nair, C.J. - The questions that arise for consideration in these Tax Cases under the Gift Tax Act, 12958 relate to the assessment for the year 1965-66 and the question framed in the two cases and referred to us for our opinion read as follows :-
T.C. No. 186 of 1974 :
'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 in respect of that part of his right to share in the profits of the firm as a partner, which he had surrendered in favour of his sons' ?
T.C. No. 196/1974 :
'Whether on the facts and in the circumstances of the case, the Appellate Tribunal was right in holding that assessee was not liable to pay gifts tax in respect of that part of his right to share in the profits of the firms as a partner which he had surrendered in favour of his sons' ?
These tax cases relate to the two partners in a firm which was reconstituted on 1-4-1964. The two partners are N.S.S. Ganapathia Pillai and N.S.K. Vadivel Pillai. The former had five major sons and one minor son and the latter had two major sons and 2 minor sons on the date of the reconstitution of the firm i.e. on 1-4-1964. The reconstitution was effected by taking in all the ten children the two erstwhile partners also as partners, the minors being admitted to the benefit of the Partnership. The capital contributions of Ganapathia Pillai and Vadivel Pillai were Rs. 18,000/- each. This capital was distributed to the children after retaining certain amounts. It is not clear from the statement of the case or from the order of the Tribunal the exact manner in which the capital contribution took place. The partnership deed says that each of the sons had to get Rs. 3,000 each. This must be the basis of the distribution of the capital assets. The Partnership deed proceeded to state the manner in which the profits of the business should be shared by the various partners taken into the partnership and the minors who were admitted to the partnership.
2. The Gift Tax Officer took the view that the right to a share in the profits of a firm is property and the profits originally being shared by the two fathers when the right to a share was extended to the sons as well, there has been transfer of the fight to a share in the profits and such transfer of the right to a share in the profits was transfer of property and this transfer having taken place without any quid pro quo, there was a gift which was liable to tax under the Gift Tax Act. The value of the property gifted was determined by finding out the average profits of the firm for three years that exited before it was reconstituted and after multiplying by three, the value of Rs. 1,10,000 was reached. In the case of each assessee, it was stated by the Gift Tax Officer that he will be entitled to one half of the sum of Rs. 1,10,000. In the case of Ganapathia Pillai, by referring to the proportion in which the profits were divided 37.1/2 per cent of the profits was taken as having been gifted. The value of this was fixed at Rs. 41,250/- there having been an earlier assessment of tax for Rs. 9,000/- After giving the statutory exemption of Rs. 5,000/- the taxable gift was determined at Rs. 45,250/-. Similarly in the case of Vadivel Pillai, the Gift Tax Officer fixed the value of the property gifted at Rs. 34,375 and after including the value originally assessed and after deduction the statutory exemption of Rs. 5,000/- the taxable gift was determined at Rs. 35,375/-. The Appellate Assistant Commissioner reversed the finding of the Gift Tax Officer in the appeals taken by the assessees and in further appeals, the Tribunal after adverting to the decision of this Court in Commr. of Gift Tax vs. V.A.M. Ayya Nadar, agreed with the assessees counsel that there was no justification for imposing any additional gift tax than that imposed earlier.
3. On behalf of the Revenue, it is contended before us that the case is covered by the decision of this Court in Commissioner of Gift Tax vs. V.A.M. Ayya Nadar, that the decision of the Tribunal is incorrect and that, therefore, the question referred to us must be answered in favour of the revenue.
4. We do not consider that we should deal with the principle decided by this Court in the aforesaid decision. As we read the Partnership deed, there has been a distribution of the capital assets of the firm. The assets belonged to the assessees Ganapathia Pillai and Vadivel Pillai. It was taken that there has been distribution of these assets to their children. It was not disputed that such distribution involved transfers without consideration. Therefore, it is conceivable that such transfers may amounts to gifts in law. Consequently, those transfers will become liable to gift tax. It was on that basis the original assessment were made. The further question was then mooted as to whether apart from the gifts arising from the transfer of the capital assets, there should be further gift tax imposed on the properties said to have been or alleged to have been transferred by the Constitution of the firm and the provision in then partnership deed of the reconstituted firm that the profits should be shared after reconstitution in a particular manner. It is evident that the distribution of profits among the partners after reconstruction was on a different basis from that which obtained before the reconstitution of the firm. It is only natural since the partners who were to share the profits changed. But the question is whether by the partnership deed, there has been any transfer of the right to share in the profits of merely a transfer of the capital assets of he firm, the rights to shares in the profits stemming from as a consequential result of the transfer of the capital assets. On reading the partnership deed. We feel no doubt that the transfer which has been effect was the transfer of the capital assets of the firm and nothing else.
5. The right to receive the profits arose out to the capital contribution. We to do not consider that the right to share the profits arose on the facts and circumstances of this case on the basis on any transfer of a right to share in future profits assuming without deciding that there could be transfer of property that had to come into existence in future and that such transfer would become a gift under the Gift Tax Act. As we stated earlier, the gifts in this case consisted only of the transfer of the capital assets of the firm and it appears that such transfer already attracted gift tax and the donors were subjected to gift tax by the earlier orders of assessment to gift tax. We do not think therefore that there is any justification for importing any further gifts or in attempting to tax on that basis.
6. In the light of the above, we answer the two questions referred to us in the affirmative i.e. in favour of the assessees and against the Department. The assessees will have his costs from the revenue one set including Advocates fee of Rs. 250.00.