Income Tax Appellate Tribunal - Mumbai
Altaf V. Isani vs Third Gift-Tax Officer on 3 March, 1987
Equivalent citations: [1987]22ITD178(MUM)
ORDER
A.V. Balasubramanyam, Judicial Member
1. These gift-tax appeals, all by the revenue, were for the sake of convenience, heard together. They arise out of identical set of facts.
2. The appeals relate to gift-tax assessment, relating to years 1979-80 and 1980-81, framed against ten different individuals. They are :
(1) Shri Altaf V. Isani (2) Smt. Sherbanoo J. Virani (3) Shri Iqbal I. Virani (4) Smt. Salma V. Isani (5) Shri Vasanali H. Isani (6) Shri Nizarali I. Virani (7) Smt. Leila V. Isani (8) Shri Tahir V. Isani (9) Smt. Razia I. Virani (10) Shri Mehboob I. Virani Of the above, parties at Sl. Nos. 7 and 9 were minors at the material time relating to these assessments.
3. There are two family groups - Virani group and Isani group. The ten assessees, whose names are listed in the earlier para, are members of either Virani group or Isani group. The assessees, barring the minors were partners of three firms each having a certain specified share which varied from firm to firm and partner to partner, while the minors (Leila and Razia) had been admitted to the benefits thereof. The firms were (1) M/s. Isani Enterprises, (2) M/s. Ismail Jusab Virani, and (3) M/s. Isani Traders. Not all the assessees were partners in all the three firms. While few were partners in one, the composition in the other two firms was different. There were also some others in the partnership of the same family group but they are not assessees before us.
4. Two family Trusts by name 'Virani Trust' and 'Isani Trust' had been founded in August, 1978 and the beneficiaries under the two Trusts are no other than the members of Virani group and Isani group.
5. During the previous year relevant to the assessment year 1979-80, Virani Trust was taken as a partner in M/s. Isani Enterprises with 50% share and as a result thereof 50% of the share of each existing partner got reduced. For example, Altaf V. Isani had 2% share in M/s. Isani Enterprises and by the induction of Virani Trust into the firm, his share got reduced to 1%. Similarly, Isani Trust was admitted to the partnership with 50% share each in M/s. Ismail Jusab Virani and M/s. Isani Traders resulting in reduction of share of the individual partners by 50%, similarly as it happened in the case of the partners of M/s. Isani Enterprises. When the Gift-tax Officer issued notice under Section 16(1), the assessees filed 'Nil' return. The GTO framed assessment under Section 15(3), against all of them, holding that there was a deemed gift in favour of the Trust on account of reduction in share. He made his own computation of the value of the deemed gift and, after allowing the available exemption, fixed the taxable gift in each case.
6. In the previous year relevant to the assessment year 1980-81, the assessees, who had reduced their share in the three firms as explained above, released and relinquished their entire right to future profit of the firms in favour of the Virani Trust or Isani Trust, as the case may be. To the notices issued under Section 16(1), the assessee, as in the preceding year, filed 'Nil' return of gift. The GTO made assessment under Section 15(3) holding that there was a deemed gift.
7. There were appeals by all of them. The Appellate Assistant Commissioner passed separate orders in the case of each assessee, but consolidated the order for the two assessment years in one. She sustained the gift-tax assessments made in the two years for identical reasons. The order reads that facts were not in dispute and that the decision of the Bombay High Court in the case of CGT v. J.N. Marshall [1979] 120 ITR 613, relied upon by the assessees, was not applicable and that the transfer made attracted the provisions of Section 4(1)(b). Agrrieved by the same, the assessees are on further appeal.
8. Shri Parikh, arguing for the assessees, contended that Section 4(1)(b), referred to by the AAC in her orders, is not at all applicable and the assessments cannot be sustained under that provision. Shri Subramanian, the learned departmental representative, also did not dispute this Clause (b) is not the provision that can be applied to a case like this. We presume Clause (b) stated in the appellate order is a mistake for Clause (c). Shri Parikh contended that no case of gift could be made out even if the facts are examined in the context of Section 4(1)(c) and before getting into a discussion on this issue, we may dispose of a point raised by him.
9. The orders of the GTO as well as that of the AAC were critically commented upon to say that they were perfunctorily made and that they do not even show how the value of the deemed gift had been computed. He even went to the extent of stating that the matter should not even be remanded to have the Revenue a second inning supporting himself with some observations in the decision of the Jabalpur Bench of the Tribunal in the case of GTO v. Mahboob Mohammad [1986] 19 ITD 576. For the Revenue, it was urged that the non-co-operation by the assessees in not furnishing relevant facts and figures have greatly contributed to the poorness of the orders, for, they, who were in possession of facts, did not reveal anything, but filed 'Nil' returns. It was also contended that for lapses (if any) on the part of the Officers, Revenue should not be made to suffer on that account and there a duty cast upon the higher authority to protect the interest of the State. Mahboob Mohammad's case (supra) really does not lend assistance to the point canvassed by Shri Parikh. That was the case where there was total lack of material to show even a prima facie case of gift. Such is not the position obtaining here. As we later on point out, these are cases of a different type altogether.
10. It was argued by Shri Parikh that the firms did not possess any self-generated goodwill of conceivable significance to say that the release or surrender had any money value in the hands of the donee to bring about a deemed gift. Alternatively, he argued that assuming that there was a deemed gift in the first year when the assessees reduced their share by 50%, there was, however, no gift in the second year when they all retired. The case law cited by him are :
Sharadkumar Shrikishan v. CGT [1986] 27 Taxman 390 (MP), CIT v. Shrevankumar P. Patel [1986] Tax. 83(3)-450 (MP), Manaklal Motilal Agrawal v. CGT [1984] 147 ITR 670 (MP), Smt. Urmila, widow of Champaklal J. Shah v, CED, J.N. Marshall's case (supra) and Addl. CGT v. P. Krishnamoorthy [1977] 110 ITR 212 (Mad.), besides several judgments of the various benches of the Tribunal, the extracts of which are in the paper book filed by him. We have gone through all these cited cases. None of the case law has any comparison on facts. The claim of the assessees cannot succeed on the statement that the retiring partner has no right to claim future profits. Whether the goodwill had a value or not is a matter of subjective consideration. The assessees who had a certain extent of share reduced it to 50% by making a release or surrender in favour of the Trusts. In the next year, the remainder was also released and thus the entire goodwill was acquired by the Trusts. The business performance of the three firms in the past four or five years can be seen from the paper book filed by the assessees and the details do present a good picture. It is not as though the partners were able to get some added advantage by inducting the Trusts into the firms in 1979-80 and an argument of Shri Parikh in this behalf has to be repelled. It was stated that the trustees were men with business background and their presence in the firms was an added advantage. It is not as though these trustees are permanent and according to the trust deeds they may change. The trustees, as on the date the Trusts became partners, were only floating men whose office in the Trust could come to a close at any time. If really that was the object, why then the assessees cut off from the firms totally in 1980-81 by releasing all that they had. After all, the beneficiaries of the Trust were no other than persons belonging to the two family groups.
11. The deeds of partnership whereby the assessees became partners in the three firms in 1977 are ad idem. The indenture of partnership whereby Virani Trust or Isani Trust became partners in the firms in September, 1978 are also identical in nature as are the deeds whereby the assessees retired from the firm.
12. According to the terms of dissolution, towards the balance standing to the credit of the partners in the books of the firm, the retiring partners agreed to get paid by the Trusts in convenient instalments. Obviously, there was no money in the Trust to pay off forthwith. Mere return of the capital does not ipso facto mean that the partner's release of the goodwill did not amount to deemed gift. The partner of a firm has right to share profits as also to share assets of the firm. Since the shares of the assessees were realigned when the Trusts were admitted, there is need to value the right to share profits--See Gulanikar on Gift-tax (5th Edition, Page 1210).
13. It is seen from the dissolution deeds brought about in April 1979 that the retiring partners assigned and released all that they had in the firm in favour of the Trust and the relevant portion reads :
...the retiring partners, as beneficial owners hereby assign and release unto the said SHRI ISMAIL JUSAB VIRANI Trustee of VIRANI TRUST, the continuing Party all that share and interest of and in the said business of the said Partnership and the property assets, credits, effects and goodwill thereof and any other rights to hold the same unto the said continuing Party absolutely forever.
As we said earlier, the above statement is found in all the three documents. The firms had goodwill, as can be seen from the statement excerpted above. It cannot be said that the goodwill had generated by the induction of the Trust as a partner in such a short time. We gather from the partnership deeds of 1977 that the firms were doing business even earlier for a fairly long time in a different composition of partnership. Obviously the goodwill must have been acquired by the firms by the business conducted over the years. The right to share in profits is conceptually a little larger than goodwill in content and extent. The business was acquired by the Trusts in entirety without any consideration. The partnership firm in 1977 specifically provided that the business standing in the name of any partner shall be treated as that of the firm.
14. We may usefully refer to the decision of the Madras High Court in the case of CGT v. V.A.M. Ayya Nadar [1969] 73 ITR 761 where the effect of realignment of profit-sharing ratio of partners of a firm is considered and their Lordships held :
The right of a partner to share in the profits of a firm is as much property as a right of a partner to share in the assets of the firm, capable of transfer at least as between the partners by common consent, and hence a redistribution of the share of the profits as between one partner and certain others who are all partners, involves a transfer of the right which has the effect of diminishing a partner's interest and corresponding increasing the value or quantum of the shares held by the other partners. Consequently, the distribution by way of re-alignment of the one-third share of a partner of a firm by which he took only a one-ninth share and the balance, two-ninths, was taken by the two other partners, involves a transfer of property amounting to a gift chargeable to gift-tax.
Following the same, we conclude that by the release and relinquishment, there was a 'gift' within the meaning of Section 4(1)(c) in 1980-81. There was also deemed 'gift' within the meaning of Section 4(1)(c) even in 1979-80 when the assessees' share got reduced by 50% by the admission of the Trusts into the firms.
15. The next question is of valuation. The comment of Shri Parikh that the assessments do not furnish the basis of valuation is not altogether unfounded. At the hearing, even the learned departmental representative was not able to furnish us the basis on which the gift had been valued in the two years. During the hearing, we called for information regarding the business performance of the firms in the last four or five years and it was responded to. Shri Parikh even furnished a computation of his own and which he desires to be adopted by us. According to this working, taxable gift would be far less than what is assessed. We will furnish the details a little later.
16. From the assessment order the basis of valuation is not ascertainable. Shri Parikh suspects that the GTO must have taken profits of one or two years and this, according to him, is not proper. He suggests that at least four or five years' profits should have been considered. As the learned departmental representative also was not able to furnish us the basis on which the GTO had proceeded, we, in the circumstance, are compelled to restore the matter of valuation to the GTO ; but, all the same, wish to set out specific guidelines in this behalf.
17. The basis of valuation is capitalisation of super-profits. We have before us statements furnishing both the returned and assessed income of the three firms in the last 4-5 years. The assessed income is higher than the returned income, and, as such, the former constitutes a reasonable basis in making the computation. In the matter of valuation of a partner's right to share profit of a firm, the CBDT has issued instructions in Circular No. 219, dated May 30, 1977 which is 109 ITR 77 (Statutes). It directs that in a case of business or profession which has been in existence for five years or more, such average annual income shall be the average of the five accounting years immediately preceding the date to which the valuation relates. We, therefore, direct that the GTO shall determine the super-profits taking into consideration the firms' assessed income in the immediately past four or five years, whichever is feasible and acceptable, as the first step and shall do necessary adjustments for non-recorded items (both credit and debit and capital gains), bearing in mind the Board's circular.
18. Shri Parikh claims two adjustments from the assessed profits and in the computation statements filed by him he has deducted 25% towards remuneration to partners and 18% interest on capital. The question is whether they are to be allowed and, if so, the rate.
19. About remuneration to partners, two of the assessees were minors. Four were females and they could not have contributed anything to the conduct of the business. It appears to us that only 3 or 4 male partners alone were managing the business of the three firms. Remuneration depends upon nature and size of business and nature of work. Gulanikar on Gift-tax (5th Edition, Page 1211) says that "a rule of convenience would be a flat deduction of 20% of profit for all the working partners". We direct that 20% deduction be given towards remuneration.
20. With regard to interest, at the outset we must remark that claim of 18% is very much on the higher side. In the deeds of reconstitution of September 1978 whereby the Trusts were admitted into the partnership, it is specifically noted that the capital contributed by the partners shall not bear any interest. Interest was payable only in respect of additional capital introduced by way of loan and no such thing is made out before us. Even so, it would be proper to allow interest on capital on principle. One cannot adopt the rate of interest charged by banks on the loans advanced. Neither we can take the other extreme, interest on deposits. The Board, in the circular, approves deduction of 12% interest. We direct that interest shall be allowed at 12%.
21. Now remains about the purchase value. The super profits are capitalised at three years' purchase in case of non-profession--See Gulanikar in Gift-tax (5th Edition, Page 1211). The circular of the Board says that in case of business firm multiple of three may be adopted. We, therefore, direct that capitalisation shall be made at three years' purchase, considering that the said firms held agencies of consumer durables.
22. In the result, we remit the matter of valuation to the GTO with a direction to compute the value of gift in both the years bearing in mind the observations in this order and the Board's circular and compute the taxable gift for all the assessments in appeal.
23. The appeals shall be treated as allowed for statistical purposes.