Case: M/S.Sree Narayana Chandrika Trust Vs. Commnr. Of Gift Tax, Kerala

on the basis of the written-down value of the machinery in the books of accounts. Within a short time the partners floated another partnership and brought in the said machinery as their capital contribution thereto at a value which was almost three times the written down value. The newly floated partnership sold the machinery to another concern for a still higher price. The Gift Tax Officer held that the assessee firm had made a gift of the machinery to each of its five partners for inadequate consideration and, therefore, the transaction was assessable to gift tax. This Court distinguished the judgment in Sunil Siddharthabhai (supra) and held that when there is a dissolution of partnership or a partner retires and obtains in lieu of his interest in the firm an asset of the firm, no transfer is involved for the reason set out in the passage quoted above. But the position is very different, when, during the subsistence of a partnership, an asset of the partnership becomes the asset of only one of the partners thereof, there is, in such a case, a transfer of that asset by the partnership to the individual partner. Where such transfer is for less than the value of that asset, there is a deemed gift to the extent of the difference under the provisions of section 4(1)(a) of the Gift Tax Act, 1958. Learned counsel for the Revenue contended that what was said by this Court in B.T. Patil case (supra) was equally applicable to the case of the present appellant before us.13. Although it may be possible to say in the appellants case that relinquishment of the share of a profit/loss by a partner in favour of the inducted partner may amount to a transfer, we are unable to accept the contention that it was for inadequate consideration so as to amount to a taxable gift within the meaning of section 4(1)(a) of the Gift Tax Act. The learned counsel for the assessee has drawn our attention to the judgment of the Karnataka High Court in D.C. Shah vs. Commissioner of Gift Tax, Karnataka [134 ITR 493]. That was also a case where, upon reconstitution of the firm, an incoming partner who contributed certain amount of capital was given a share in the partnership which was relinquished in his favour by an existing partner. The High Court held that having regard to the nature and constitution of a firm and the implication of the judgment of the Supreme Court in Gheevarghese case [1972 ITR 83, 403] a mere reallocation of shares would not result in a gift. The fact that there was some contribution by the incoming partners coupled with the obligation under the partnership deed upon the incoming partner to participate in the business and work for it diligently would constitute adequate consideration. There was an obligation upon all the partners to work for the progress of the business, albeit for administration convenience or overall guidance one of them might have been nominated as a managing partner, but that does not mean that the service to be rendered by other partners was either negligible or in any way diminished or could be left out of account. Hence, it was held that there was adequate consideration for the transfer by way of reallocation of shares. The judgment in DC Shah (supra) came to be appealed to this Court at the instance of the Revenue. The appeal came to be disposed of by this Court by a judgment in Civil Appeal Nos. 4551-56 of 1984 on September 25, 1996, wherein it was held "that the share of one partner is decreased and that of another partner correspondingly increased does not lead to the inference that the former had gifted out to the latter. The profit sharing ratio in a firm can vary for a number of reasons, among them the ability of partners to devote time to the business of the firm. The gift of a partners share to another partner has to be established be relevant evidence. The onus of doing so is on the Revenue. It has not been discharged in the present case." 14. The facts found in the present case are that the incoming partner (M.U. Indira) had contributed Rs. 25,000 towards her share of the capital. The value of her services or usefulness to the firm as partner has not been disputed by the Revenue authorities. As pointed out by this Court in D.C. Shah case (supra), the mere fact that upon reconstitution of the firm the share of one partner decreased and that of another increased cannot lead to the inference that the former had gifted the difference to the incoming partner. There is no other material placed on record by the Revenue to show that, in the facts and circumstances of the case, particularly taking into consideration the obligations of all the partners in the partnership deed dated 1.10.1982, there was inadequate consideration for the reallocation of 12% of the share in favour of the incoming partner. In our view, the contribution of Rs. 25,000 towards the capital together with the obligations undertaken of sincerely and faithfully carrying on the business for common advantage of the firm was adequate consideration for reallocating the share of the profits and giving 12% of the share in favour of the incoming partner M.U. Indira. That C.K. Jinan was the managing partner and C.N. Purushuthaman was the administrative head, did not take away the obligations of the other partners including those of M.U. Indira which arose generally under the Partnership Act, as well as under the partnership deed dated 1.10.1982.15. We are of the view that even assuming that there was a transfer of 12% of the share profit/loss in favour of the incoming partner M.U. Indira by the appellant assessee, it was not a situation of transfer for inadequate consideration so as to amount to a taxable gift within the meaning of section 4(1)(a) of the Gift Tax Act, 1958.

Decision (1 = appeal accepted, 0 = rejected): 1

Explanation:
1[ds]14. The facts found in the present case are that the incoming partner (M.U. Indira) had contributed Rs. 25,000 towards her share of the capital. The value of her services or usefulness to the firm as partner has not been disputed by the Revenue authorities. As pointed out by this Court in D.C. Shah case (supra), the mere fact that upon reconstitution of the firm the share of one partner decreased and that of another increased cannot lead to the inference that the former had gifted the difference to the incoming partner. There is no other material placed on record by the Revenue to show that, in the facts and circumstances of the case, particularly taking into consideration the obligations of all the partners in the partnership deed dated 1.10.1982, there was inadequate consideration for the reallocation of 12% of the share in favour of the incoming partner. In our view, the contribution of Rs. 25,000 towards the capital together with the obligations undertaken of sincerely and faithfully carrying on the business for common advantage of the firm was adequate consideration for reallocating the share of the profits and giving 12% of the share in favour of the incoming partner M.U. Indira. That C.K. Jinan was the managing partner and C.N. Purushuthaman was the administrative head, did not take away the obligations of the other partners including those of M.U. Indira which arose generally under the Partnership Act, as well as under the partnership deed dated 1.10.1982.15. We are of the view that even assuming that there was a transfer of 12% of the share profit/loss in favour of the incoming partner M.U. Indira by the appellant assessee, it was not a situation of transfer for inadequate consideration so as to amount to a taxable gift within the meaning of section 4(1)(a) of the Gift Tax Act,that case a partner of a partnership firm having retired, two minor sons of an existing partner were admitted to the benefits of the partnership. This Court held that relinquishment of the share of an existing partner in favour of the minors who are admitted to the benefits of the partnership without any consideration amounted to a gift by the said partner in favour of the minors. The reason was that the goodwill of the firm is the property of the firm and, upon admission of the two minors to the benefits of the partnership, the right to the money value of the capital stands transferred. Since this transfer is without consideration, insofar as minors are concerned, the transaction would amount to a taxable gift under the giftthe position is very different, when, during the subsistence of a partnership, an asset of the partnership becomes the asset of only one of the partners thereof, there is, in such a case, a transfer of that asset by the partnership to the individual partner. Where such transfer is for less than the value of that asset, there is a deemed gift to the extent of the difference under the provisions of section 4(1)(a) of the Gift Tax Act, 1958. Learned counsel for the Revenue contended that what was said by this Court in B.T. Patil case (supra) was equally applicable to the case of the present appellant before us.13. Although it may be possible to say in the appellants case that relinquishment of the share of a profit/loss by a partner in favour of the inducted partner may amount to a transfer, we are unable to accept the contention that it was for inadequate consideration so as to amount to a taxable gift within the meaning of section 4(1)(a) of the Gift Taxwas also a case where, upon reconstitution of the firm, an incoming partner who contributed certain amount of capital was given a share in the partnership which was relinquished in his favour by an existing partner. The High Court held that having regard to the nature and constitution of a firm and the implication of the judgment of the Supreme Court in Gheevarghese case [1972 ITR 83, 403] a mere reallocation of shares would not result in a gift. The fact that there was some contribution by the incoming partners coupled with the obligation under the partnership deed upon the incoming partner to participate in the business and work for it diligently would constitute adequate consideration. There was an obligation upon all the partners to work for the progress of the business, albeit for administration convenience or overall guidance one of them might have been nominated as a managing partner, but that does not mean that the service to be rendered by other partners was either negligible or in any way diminished or could be left out of account. Hence, it was held that there was adequate consideration for the transfer by way of reallocation of shares. The judgment in DC Shah (supra) came to be appealed to this Court at the instance of the Revenue. The appeal came to be disposed of by this Court by a judgment in Civil Appeal Nos.of 1984 on September 25, 1996, wherein it was held "that the share of one partner is decreased and that of another partner correspondingly increased does not lead to the inference that the former had gifted out to the latter. The profit sharing ratio in a firm can vary for a number of reasons, among them the ability of partners to devote time to the business of the firm. The gift of a partners share to another partner has to be established be relevant evidence. The onus of doing so is on the Revenue. It has not been discharged in the present case."