Madras High Court
Income-Tax Officer vs K. P. A. T. Rajamony Nadar. on 8 February, 1990
Equivalent citations: [1990]33ITD172(MAD)
ORDER
Per D. S. Meenakshisundaram, Judicial Member - This is an appeal by the revenue objecting to the order of the Dy. Commissioner (Appeals) holding that the gift of the assessees right to share 80% of the profits of the business was completely exempt under section 5(1) (xiv) of the Gift-tax Act, 1958.
2. This appeal arises out of the gift-tax assessment made on the late Rajamony Nadar, by his legal representative Shri R. Karunakaran. Shri Rajamony Nadar was the sole proprietor of the business carried on by him under the name and style of Shenbagam Match Works at Sivakasi. With effect from 1-4-1978, he entered into a partnership with his two sons and two daughters-in-law and in this partnership he had a 20% share. According to the Gift-tax Officer, the assessee Rajamony Nadar had relinquished his right to 80% of the profits of the business in favour of his two sons and two daughters-in-law, which amounted to a deemed gift, which was liable to gift-tax under the Gift-tax Act. He determined the value of this alleged gift by adopting the super-profit method for determining the goodwill of the business, and arrived at the value of this gift at Rs. 77,304, which he brought to charge in the hands of the assessee.
3. The assessee appealed objecting to this assessment and contended that the late Rajamony Nadar was 58 years old at the time of entering into the partnership with his sons and daughters-in-law, that he was suffering from heart ailment and could not look after his business personally and that therefore he took his two sons and daughter-in-law as partners, who had agreed to contribute capital to the partnership business as and when required. It was further submitted that on account of the ill-health of Rajamony Nadar there was a decline in the profits of the business, as could be seen from the figures of profits set out in the assessment order by the Gift-tax Officer himself while computing the value of the gift in the super profit method. It was argued that his two sons were Engineering Graduates, that one of them was working in Minnsota University, U. S. A. and the other was working in Travancore chemicals and Manufacturing Co. Ltd., Kalamassery, Kerala, that both these sons resigned their jobs and joined the father in partnership to look after the partnership business and that the two daughters-in-law had promised to contribute adequate capital as and when necessary. It was therefore argued that the late Rajamony Nadar had taken these four partners only for the purpose of expansion of the business, that there was no element of gift involved as there was adequate consideration for taking the four persons as partners and that as the admission of these four persons as partners was supported by valid and adequate consideration, it must be held that the alleged gift, if any, must be held to have been made bona fide for the purpose of the business carried on by the late Rajamony Nadar and therefore it would be exempt under section 5(1) (xiv) of the Gift-tax Act. In support of these contentions, the assessee relied on the judgment of the Madras High Court in CGT v. G. Shanmugam [1979] 118 ITR 890. The Dy. Commr. (Appeals) accepted the assessees contentions and allowed the appeal by following the said decision of the Madras High Court. It is against this order of the Dy. Commissioner (A) that the department has come up on further appeal to the Tribunal.
4. We have heard Shri S. K. Jha, the learned departmental representative and also perused the written submissions sent by the assessee on 31-10-1989.
5. In our view, the decision of the Dy. Commissioner (Appeals) cancelling the gift-tax assessment as right and the same has to be upheld. It is seen from the assessees written submissions that the late Rajamony Nadar had carried on the business of Shenbagam Match Works as a sole proprietor for about 30 years, that he had converted this business into a partnership concern from 1-4-1978 by taking two of his sons, who are Engineering Graduates and two of his daughters-in-law, who are the wives of two other sons. It is stated that all these four persons had capital account balances to their credit and had further promised to contribute additional capital and when necessary for the purpose of the business and has also agreed to share the profit and losses of the business equally with their father. The assessee, Rajamony Nadar was 58 years old and was suffering from heart ailment, which prompted him to take his two sons and two daughters-in-law into partnership. It is further stated in the written submissions that the business of the firm after the formation of the partnership had developed and increased manifold, as could be seen from the sales turnover of Rs. 5.26 lakhs in 1977-78 to Rs. 30.20 lakhs in 1987-88. It is further stated that Rajamony Nadar expired on 2-12-1981. There is no dispute about these facts stated by the assessee in his written submissions.
6. On the above facts it is the assessees contention that the four partners were taken in by Rajamony Nadar of the purpose of expansion of his business and for obtaining fresh financial resources, which would constitute adequate consideration in money or moneys worth and therefore there could be no gift, much less a deemed gift, as alleged by the Gift-tax Officer. In support of these submissions, the assessee has relied on the decision of the Madras High Court in G. Shanmugams case (supra) and CGT v. T. S. Shanmugham [1977] 110 ITR 237.
7. In T. S. Shanmughams case (supra) the assessee had taken his two sons who were assisting him in his business as his partner in the said business and after carrying on the business in partnership for two years there was a change in the profit sharing ratio of the three partners, so that the assessees share of profit was reduced, while the shares of his two sons were increased. This reduction in the assessees share of profit and consequential increase in the share of the other partners was held to be a gift and was brought to charge by the gift-tax Officer under the Gift-tax Act. Their Lordships of the Madras High Court held that the Tribunal was wrong in its view that generally when a partnership firm is reconstituted resulting in the reduction of the share of profits of some partners and the consequential increase in the share of profits of others, it would do not result in a gift exigible to tax under the Gift-tax Act, by applying the earlier decisions of the Madras High Court in the cases of CGT v. A. M. Abdul Rahman Rowther [1973] 89 ITR 219, CGT v. V. A. M. Ayya Nadar [1969] 73 ITR 761 and CGT v. K. P. S. V. Duraiswamy Nadar [1973] 91 ITR 473. Their Lordships, however, accepted the assessees contentions and further held that in view of the finding of the Tribunal that the gift was made bona fide in the course of carrying on the business and for the purpose of the business, the case fell within the ambit of the exemption under section 5(1) (xiv) and hence was not liable to gift-tax.
8. The next decision in the case of G. Shanmugam (supra) was also a case of sole proprietor converting his individual business into a partnership by taking his two nephews, who were already his employees, as partners and giving each of them 25% of the profits. The nephews did not contribute any amount towards their capital, nor did they pay any amount towards the goodwill of the firm. The departments claim that gift-tax was leviable on the transfer of the goodwill to his two nephews consequent on the formation of the partnership was negatived by the Tribunal on the ground that the gift was made in the course of carrying on of the business and for the purpose of the business and hence exempt under section 5(1) (xiv) of the Gift-tax Act, 1958. This decision of the Tribunal was affirmed by the High Court, who held that the clause in the partnership deed read with the circumstances leading to the formation of the partnership indicated that the intention of the donor was to continue the business even if the partners taken in, were to the firm, and hence the Tribunal had material to come to the conclusion that the transfer was in the course of the carrying on of the business and hence the gift was exempt from taxation. Their Lordships followed their earlier decision in T. S. Shanmughams case (supra) as well as the decision of the Kerala High Court in the case of V. O. Markose v. CIT [1975] 98 ITR 504.
9. In Addl. CGT v. A. A. Annamalai Nadar [1978] 113 ITR 575 (Mad.) the assessee, who was carrying on commission business in sanna leaves and pods, converted the said business into a partnership by taking his major son, who was already working with him as an employee, and admitted his two minor sons to the benefits of partnership, each of them being entitled to a 25% share in the profits. The Gift-tax Officer held that the business of the assessee enjoyed a good will and, by taking his three sons into the partnership, the assessee transferred 75% of the goodwill of the business and estimating the same at Rs. 24,501 subjected it to gift-tax. This was confirmed by the AAC, but the Appellate Tribunal held that the transfer of the decision of the Gujarat High Court in CGT v. Karnaji Lumbaji [1969] 74 ITR 343, there was no gift by the assessee attracting gift-tax. When the matter was taken to the High Court by the department, the Lordships of the Madras High Court held that in view of the capital contribution by the three sons and rendering of services and agreement to share the losses by the major son, there was adequate consideration for the conversion of the proprietary business into a partnership business and hence there was no question of any gift of goodwill to the major son, while, as far as the minor sons were concerned, there was no transfer of any assets as such to them, so that there could be no gift of any goodwill in their favour.
10. In our view, these three decisions of the Madras High Court clinch the issue in favour of the assessee and against the revenue. In fact, the facts of the present case are almost similar to the facts in the case of A. A. Annamalai Nadar (supra). A perusal of the assessment order shows that what the department in fact seeks to tax is only the goodwill, though they say in the body of the order that what they seek to tax as a deemed gift is the alleged relinquishment of right to share in the profit by the assessee in favour of his our partners. The figures of profits for five years from assessment years 1973-74 to 1977-78 set out in the assessment order show that the profits of the business were declining, as could be seen from the fact that in the assessment year 1976-77 there was a steep fall in the profits to Rs. 38,210 from Rs. 1,29,691 in the earlier year 1975-76 and that there was a further decline in the profits in the next year to Rs. 3,915. Therefore, it is clear that the assessee had taken his two sons and two daughter-in-law only for the purpose of assisting him in the business, as he was unable to personally attend to the same due to his ill-health, and also for obtaining financial resources for the expansion of his business. It is not denied that four partners had brought in capital in the partnership business and had also further agreed to contribute additional capital and had also agreed to share the profits and bear the losses in the business equally with late Rajamony Nadar. All these covenants in the partnership deed would constitute adequate consideration for taking these partners by the assessee on 1-4-1978 and there could be no gift, much less a deemed gift, as held by Their Lordships in the case of A. A. Annamalai Nadar (supra).
11. The learned departmental representative, Shri Jha, vehemently contended that the gift-tax assessment was properly made, in view of the decision of the Madras High Court CGT v. S. Rukmani Ammal [1973] 87 ITR 549. This decision is clearly distinguishable on facts, as in that case there was no evidence that the major sons or any of them had any specialised knowledge or experience so as to be able to assist the assessee in the development and management of the business. Their Lordships further held that there was nothing in the said case to indicate the earning of the profits with the efficiency of the management by the sons. Their Lordships further held that there was nothing in the said case to indicate the earning of the profits with the efficiency of the management of the sons. Their Lordships further held that in fact the inclusion of the minor sons also in the partnership clearly showed that the object of entering into the partnership was to benefit the sons and not for advancement or improvement of the business. On the contrary, the facts of the present case are entirely different, as we have discussed above, Therefore, this decision is not applicable to the facts of the present case.
12. Similarly, the decision of the Kerala High Court in C. K. Krishnankutty Nair v. CGT [1977] 110 ITR 541 is distinguishable on facts from the present case. There, the dispute was regarding the gifts in favour of the daughters and there was no material in the said case to come to the conclusion that those gifts were necessary and justified in order to carry on the business or that they were truly and really for the purpose of the business. In fact, this decision was pressed into service by Shri Jha to contend that it was not necessary to take the two daughters-in-law, who were taken as equal partners. This argument overlooks the factual position that these daughters-in-law had already amounts standing to their credit in their capital accounts which they had contributed as their capital to the partnership business and had further agreed to contribute additional capital as and when necessary, apart from agreeing to bear the losses of the business while sharing the profits also, equally with the other partners. Therefore, this decision of the Kerala High Court would be of no assistance to the revenue in the present case.
13. The learned departmental representative argued that it was not the case of the assessee that there was no gift involved in the present case and that his case was only that such gift was exempt under section 5(1) (xiv) of the Act, he therefore submitted that in a departmental appeal it was not open to the Tribunal to examine whether there was any gift at all involved in the present case. In support of these submissions Shri Jha relied on Addl. CIT v. Gurjargravures (P.) Ltd. [1978] 111 ITR 1 (SC), K. Bhuvanendran v. CAIT [1974] 94 ITR 139 (Ker.) and CWT v. A. V. Reddy Trust [1989] 180 ITR 263/43 Taxman 101 (AP). We are unable to accept any of these contentions for the simple reason that a perusal of the ground of appeal filed by the assessee before the AAC shows that the assessee had challenged the findings of the GTO by contending that there was no gift at all. This would be clear from ground No. 2, which reads as follow :-
"The learned Gift-tax Officer is in error in rejecting the claim of the assessee that there is no liable for gift-tax."
Again, in ground No. 6 the assessee has contended as follow :-
"Thus it has been well established that the assessee has converted his sole proprietary business only for the purpose of the business. The new partners were taken in for the purpose of expansion of business and for getting fresh financial resources and the existence of consideration in money or moneys worth having been established, there is no gift to be deemed."
Thus, it would be clear that it was the case of the assessee before the departmental authorities that there was no gift involved, much less a deemed gift, which would be liable to tax in his hands. Therefore, it is well within the jurisdiction of the Tribunal to examine this contention of the assessee and come to an independent conclusion, apart from what the Dy. Commissioner (Appeals) has stated in his appellate order. Further, the Appellate Tribunal is not confined to the grounds of appeal raised before it while deciding an appeal. This would be clear from Rule 11 of the Income-tax Appellate Tribunal Rules, 1963, which reads as follow :-
"Grounds which may be taken in appeal :
11. The appellant shall not, except by leave of the Tribunal, urge or be heard in support of any ground not set forth in the memorandum of appeal, but the Tribunal, in deciding the appeal, shall not be confined to the grounds set forth in the memorandum of appeal or taken by leave of the Tribunal under this rule :
Provided that the Tribunal shall not rest its decision on any other ground unless the party who may be affected thereby has had a sufficient opportunity of being heard on that ground."
Moreover, the decisions of the Madras High Court in the cases of CIT v. Indian Express (Madurai) (P.) Ltd. [1983] 140 ITR 705 and CED v. R. Brahadeeswaran [1987] 163 ITR 680 have held that the Appellate Tribunal have ample jurisdiction to raise any new or additional point for the first time in the appeal before the Tribunal, even though it had not been raised in any form at any of the earlier stages and in such a situation the Tribunal is duty bound to entertain that ground and render a determination either themselves or by remanding the matter for further investigation into facts, if so warranted. Their Lordships have pointed out that this view of the Tribunals jurisdiction had commended itself to the Supreme Court because, the appellate power under the taxing enactments is in no way different in substance from the assessment power exercisable by the assessing authority in the first instance. In the present case, the point which we have raised regarding whether there was any gift at all involved in the present case is not a new point, but was already raised by the assessee before the departmental authorities, as could be seen from the grounds of appeal quoted above filed before the Dy. Commissioner (Appeals), and on the facts and materials already contained in the assessment order, we have reached the conclusion that there could no gift at all having regard to the declining trend in the business carried on by the late Rajamony Nadar before he formed the partnership business with his children. We therefore reject the objections of the revenue on this issue.
14. Shri Jha further relied on the decision of the Supreme Court in CGT v. Dr. George Kuruvilla [1970] 77 ITR 746. A perusal of the three decisions of the Madras High Court, which we have relied on to accept the assessees case and confirm the Supreme Court in the case of George Kuruvilla was considered by Their Lordships of the Madras High Court in all these cases. We therefore respectfully follow the three decisions of the Madras High Court in G. Shanmughams case (supra) and hold that there was so gift involved, much less a deemed gift on an alleged relinquishment of share of profits by the assessee, which would attract liability to gift tax in the present case. Even otherwise, any such alleged gift would be exempt under section 5(1) (xiv) of the Act, as held by the Madras High Court in the three decisions referred to above. Accordingly we confirm the order of the Dy. Commissioner (Appeals).
15. In the result, the appeal is dismissed.