Karnataka High Court
D.C. Shah And Ors. vs Commissioner Of Gift-Tax, Karnataka on 10 December, 1980
Equivalent citations: (1981)21CTR(KAR)96, [1982]134ITR492(KAR), [1982]134ITR492(KARN), [1981]6TAXMAN179(KAR)
JUDGMENT Srinivasa Iyengar, J.
1. These references under the Gift-tax Act arise in relation to the reconstitution of a partnership firm carrying on business in the name and style of Shah Chhaganlal Ugarchand, Akkolkar at Nippani, on two occassions, namely, January 1, 1964 and November 19, 1968, when fresh documents of partnership came to be executed. The following are the question referred by the Tribunal for the opinion of this court:
2. In T.R.C. No. 14 of 1977:
"Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that there was a taxable gift by the assessee when his share of profit in the firm was reduced from 19 paise to 14 paise and that of his son, Kiran D. Shah, was increased from 9 paise to 14 paise ?"
3. In T.R.C. No. 15 of 1977 :
"Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that there was a taxable gift by the assessee when his share in the profits of the firm was reduced from 28% to 19% and 9% share was given to his son, Shri Kiran D. Shah ?"
4. In T.R.C. No. 1 of 1977 :
"Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that there was a taxable gift by the assessee when his share of profit in the firm was reduced from 5% to 3% and 2% was given to his brothers ?"
5. In T.R.C. No. 10 of 1977:
"Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that on the assessee's retirement from the firm in which he had 9% share, which was given on his retirement to his 3 sons, viz., P. Y. Nagaonkar, A. Y. Nagaonkar and V. Y. Nagaonkar in equal shares of 3% each, there was a taxable gift under Gift-tax Act, 1958 ?"
6. In T.R.C. No. 11 of 1977:
"Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that there was a taxable gift by the assessee when his share of profit in the firm was reduced from 5% to 4% and 1% was given to his brothers ?"
7. In T.R.C. No. 18 of 1977:
"Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that on the assessee's retirement from the firm, there was a gift under the Gift-tax Act, 1958 ?"
8. Though there is more than one reference, it is possible to state the facts so as to cover all the cases comprehensively.
9. Prior to the execution of the document on January 1, 1964, there were 11 partners constituting the firm. They agreed to admit another person as a partner, namely, Kiran Devichand Shah, who was the son of Devchand Chhaganlal Shah who has been described in the deeds of partnership as the managing partner. He was allotted 9 paise in a ruppe as his share in the profits and losses of the firm. Devichand Chhaganlal Shah had 28 paise out of a rupee as his share in the profits and losses. Under the deed of partnerships dated January 1, 1964, his share in the profit and loss was fixed at 19 paise and so far as the other partners were concerned, there was no change in their share in the profit and loss of the firm.
10. The GTO was of the opinion that there was a gift to the extent of 9 paise in a rupee and, accordingly, evaluated the right to share in the future profits assumed to be transferred by capitalising it and brought the same to gift-tax. He was of the opinion that in the light of the decision of the High Court of Madras in CGT v. V. A. M. Ayya Nadar , there was a redistribution of the shares among the partners and, therefore, there was a gift. D. C. Shah, managing partner, was the person who was made liable to the gift-tax.
11. On appeals preferred by him, the AAC, while holding that there was a transfer of property by virtue of the redistribution of the shares in the profits, held that it could not be said that it was without consideration and that it was with adequate consideration and, therefore, there was no liability of gift-tax. It has to be mentioned in this connection that K. D. Shah was a creditor of the firm, he having invested a sum of about Rs. 2,35,000 and was entitled to interest on that amount prior to his being inducted as a partner. On his becoming a partner, this amount was treated as capital by him and he was also entitled to interest on the capital just as other partners were also entitled to interest on the capital invested by them. The document of January 1, 1964, does not specifically refer to this investment of capital but it has been found as a fact that he did invest this AAC held that there was no gift and there was adequate consideration for K. D. Shah becoming a partner in the firm.
12. The department preferred further appeals to the Income-tax Appellate Tribunal. The Tribunal was of the opinion that the consideration cannot be said to adequate. It agreed with the conclusion reached by the AAC in regard to there being a transfer of property. Accordingly, it reversed the decision of the AAC and held that the levy of gift-tax was correct and remanded the matter to the AAC as he had not gone into the question of evaluation of the gift.
13. By a document dated November 19, 1968, there as a further reconstitution of the firm. One of the partners, namely, Raghunath Gundappa Nagaonkar died on November 13, 1968. Two other partners, namely, Bhaichand Chhaganlal Shah and Yeshvant Gundappa Nagaonkar retired from the partnership. The firm was reconstituted, in the light of these circumstances, inducting four new persons, namely, Uday Bhaichand Shah, Satej Bhaichand Shah, Prafulla Yeshwant Nagaonkar and Anil Yeshwant Nagaonkar and also admitted four minors to the benefits of the partnership. They were Vinod Yeshvant Nagaonkar and Pramod Madhukar Nagaonkar, Pradeep Madhukar Nagaonkar Nagaonkar and Sanjiv Madhukar Nagaonkar. The minors who were admitted to the benefits of the partnership were the grandchildren of the deceased partner, Raghunath Gundappa Nagaonkar. Two of the new partners were sons of Bhaichand Chhaganlal Shah and the other two were the sons ofthe other partner who retired from the partnership. The share of the partners were rearranged. One of the minors who was admitted to the benefits of the partnership was allotted a four paise share in a rupee and the other three paise in a rupee. Among the four partners newly inducted, one of them was allotted a five paise share in a rupee and the others were allotted a four paise share each. D. C. Shah was allotted 14 paise share in a rupee and K. D. Shah's share was increased by 5 paise. R. Y. Nagaonkar's share was reduced by 2 paise and Ramesh Nagaonkar's share was reduced by one paise. On the basis of such redistributio, the GTO was of the opinion that there was a gift of 5 paise in a rupee in favour of K. D. Shah from D. C. Shah and the corresponding fall in the share of the other partners also amounted to a gift in favour of the sons who had been made partners or admitted to the benefits of the partnership, and, accordingly, assessments were made. These were cancelled by the AAC, but on further appeals by the department to the Tribunal, the AAC's order was reversed and the matters remanded to him as he had not gone into the question of evaluation of the gift. The Tribunal wrote a detailed order in the case of D. C. Shah and B. C. Shah and applied the conclusion reached therein to the other four cases.
14. The finding of the authorities so far as the persons taken in as partners and persons admitted to the benefits of the partnership under the deed dated November 19, 1968, has been that each one of them contributed moneys by way of capital.
15. It is contended for the petitioners that there was no transfer as such of any property of the persons treated as donors and there could, therefore, be no question of gift resulting and further it could not be said that there was any transfer made gratuitously or without adequate consideration so as to be fastened with a liability to gift-tax. It is urged that the admission as partners was with adequate consideration, as capital was contributed by those persons and they had to attend to the business of the partnership and thus had to render service. The decision of the Supreme Court in CGT v. P. Gheevarghese, Travancore Timbers and Products , and of the Gujarat High Court in CGT v. Karnaji Lumbaji , that of the High Court of Allahabad in CGT v. Sardar Wazir Singh , and of the Bombay High Court in CGT v. Smt. V. Lalita B. Shah [1979] 118 ITR 794, and other cases referred to therein and that of the High Court of Madras in CGT v. Ali Hussai n M. Jeevaji [1980] 123 ITR 420, and other cases referred to therein are relied upon for the petitioners. The learned counsel for the department sought to place reliance on the decision of the High Court of Madras in CGT v. Smt. V. Lalita B. Shah [1979] 73 ITR 761, and the decision of the same High Court in CGT v. K. P. S. V. Duraiswamy Nadar [1973] 91 ITR 473, which followed the former.
16. Before proceeding further, we may refer to one submission made by the learned counsel for the department. He contended that it had been admitted that there was a transfer of property by the alleged donor, D. C. Shah, to K. D. Shah who was inducted as a partner and the statement of the case proceeds on that basis. This is not correct. There is no finding as such by the Tribunal. In the earlier part of the statement of the case, while narrating the course of the proceedings, the conclusion of the GTO to the effect that D. C. Shah had relinquished 9 paise share in the firm's profit in favour of his son without consideration, was mentioned. In the petitioners is mentioned. The AAC set out the said contention in para. 3 of his order in the appeal filed by D. C. Shah as follows:
"The authorised representative states that the Madras case relied upon by the Gift-tax Officer is distinguishable on facts. In that case, there was only a realignment of the share of the existing partner whereas in the case under consideraton, the change was brought about by admission of a new partner. In a partnership firm since all the partners are instrumental in bringing about any changes in the constitution of the firm, it cannot be said that it was the assessee's action alone that has brought about this change. When a partner is admitted, he becomes entitled to the share in the profit and other assets also. But so long as a partnership subsists, all the assets are said to belong to the firm only. It is, therefore, the firm, i.e., the partners taken collectively, which determines the respective shares of the individual partners depending on their contribution towards the carrying on of the business. Hence, in admitting a new partner, there was no gift by any one individual partner, even though the profit sharing ratio of one of the partners is affected thereby."
17. In para. 4 of the order of the AAC, the contention put forth that the gift must be of an existing property and not of any future property and that the right to share in future profits cannot be considered to be a property at all, was mentioned. In para. 6 of his order, the AAC repelled that contention as follows:
"The assessee's contention that there is no transfer of any property and hence no liability to gift-tax cannot be accepted. It has been held by the Madras High Court in the case of ayya Nadar , that a right of a partner to share in profits is as much property as a right of a partner to share in the assets of the firm. The right of a partner which entitles him to share in the profits of the firm is a valuable right and capable of transfer. Accordingly, distribution of a part of that right involves transfer of property. If the transfer is gratis or there is inadequate consideration, the same would amount to a gift chargeable to tax under the Gift-tax Act. The assessee's contention on this issue is accordingly rejected. The Gift-tax Officer's finding that there is transferred to another is upheld."
18. The Tribunal agreed with this conclusion of the AAC in para 4 of its order:
"We have considered the rival contentions. The first question is whether there was a gift of right to 9% share in the profits of the firm by D. C. Shah to his son, Kiran D. Shah. The Appellate Assistant Commissioner has answered this question in the affirmative relying on the Madras High Court ruling in CGT v. V. A. M. Ayya Nadar . The Madras High Court has held the same view in (CGT v. A. M. Abdul Rahman Rowther). We have followed this ruling in G.T.A. No.20 (Bang) 74-75 dated 11-11-1975. Following these rulings, we hold that the Appellate Assistant Commissioner was correct in holding that the redistribution of the profit-sharing ratio between the assessee and his son Kiran D. Shah, on the latter's admission as a partner, amounted to a gift by the assessee to his son, Kiran D. Shah."
19. It is clear that the AAC only dealt with the contention that had been referred to in para. 4 of his order and it is with this conclusion that the Tribunal agreed to reject the contention of the petitioner. Therefore, the contention that either there was a finding of fact that there was a transfer as such from D. C. Shah to K. D. Shah to the extent of any share or that this was a fact admitted by the assessee, has no basis. This is also clear from the questions referred as they are merely based on the allotment of shares to the new partners or persons admitted to the benefits of the partnership.
20. The deeds of partnership don't make any mention of transfer of any share to the persons inducted as partners or admitted to the benefits of the partnership from any particular person. The terms of the deed of partnership decided on not refer to transfer of any share at all. Consequent on the induction of new persons, the shares of all the partners are specified. Merely because the share in profits and losses allotted to the one or the other person is reduced compared to the position obtaining earlier to the reconstitution of the firm and allotement is made to the new partners, it cannot be assumed that the allotment to the new partners is of the reduction effected. The Supremem Court is Gheevarghese's case emphasised the necessity of considering the terms of the document. The document has to be read as a whole. The constitution of a partnership is a matter of contract and the terms have to be looked into in order to find out whether there was a transfer on the basis of which a gift could be inferred.
21. The preamble to the deed of partnership that was executed on January 1, 1964, read as follows:
"The following parties, viz: 1. Shri Devchand Chhaganlal Shah 2. Shri Raghunath Gundappa Nagaonkar 3. Shri shantilal Rupchand Shah 4. Shri Madhukar Raghunath Nagaonkar 5. Shri Popatlal Bhaichand Shah 6. Shri Kantilal Bhaichand Shah 7. Shri Shashikant Bhaichand Shah 8. Shri Rajanikant Yeshvant Nagaonkar 9. Shri Ramesh Yeshvant Nagaonkar 10.Shri Bhaichand Chhaganlal Shah 11.Shri Yeshvant Gundappa Nagaonkar were carring on business as partners with specified shared under the name and style of Shah Chhaganlal Ugarchand, Akkolkar, at Nippani, under an instrument of partnership executed on 29-10-1962.
WHEREAS partners Nos. 1 to 11 have decided to admit Shri Kiran Devchand Shah as a capitalist partner from 1-1-1964 and carry on the said business in partnership as before by taking over all the assests and liabilities as on 31-12-1963.
As a result of this, a change has occurred in the constitution of the firm from 1-1-1964. Hence, this new deed of partnership is sexecuted on the terms and conditions hereinafter set out below..."
22. The names of all the 12 partners are mentioned and it was stated that the partnership had commenced from January 1, 1964, and its duration shall be at will. In clause 6, the shares of all the 12 persons were specified. In para. 9 the constitution of the firm earlier to January 1, 1964, was mentioned. Clause 10 stated that D. C. Shah, as the managing partner, shall be paid a sum of Rs. 1,000 per month in addition to the other benefits he was entitled to enjoy as a partner. He was to be managing partner for his life. Clause 12 of the deed mentioned that all other parners should devote as much time to the furtherance of the partnership business as they may think proper, necessary and advisable. Para. 15 stated that the partners shall at all times during the continuance of the partnership devote their attention to the partnership business diligently and faithfully employ themselves therein. These were the main clause apart from other usual terms that are to be found in a deed of partnership. Similar were the contents of the deed dated November 19, 1968. After specifying the names of 12 partners who were carring on business as partners with specified shares under an instrument of partnership executed on January 1, 1964, it proceed to state that partner No. 2, Raghunath Gundappa Nagaonkar, died on November 13, 1968, and partners Nos. 10 and 11, Bhaichand Chhaganlal Shah and Yeshvant Gundapppa Nagaonkar, had expressed their desire to retire from the partnership and the remaining partners decided to admit 4 persons as capitalist partners from November 14, 1968, and to admit four other minors to the benefits of the partnership with effect from November 14, 1968, and to carry on business in partnership as before by taking over all the assets and liabilities as on November 13, 1968. It further stated that as a result of this, a change had occurred in the constitution of the firm from November 14, 1968, and hence a new deed of partnership was executed on the terms and conditions set out therein. After mentioning the names of 13 persons who were majors as partners, it was stated that the partnership shall be deemed to have commenced on and from November 14, 1968, and its duration shall be at will. Thereafter, in cl.6 of the deed a specification was made of the proportion in which the profits and losses had to be shared by the partners. As in the earlier instance, clause 9 mentioned the shares of the partners who were carrying on the business prior to November 14, 1968. Clause 10 provided for D. C. Shah being the managing partner and to be paid Rs. 1,000 as before. The clauses similar to clause 12 and cl.15 in the deed of January 1, 1964, were also inseted as clauses 12 and 16 in the new deed of partnership.
23. It is not permissible to dissect or tear the contents into several parts and construct a contract as if it was made by a specific person with another specific person. To do so will be to frame a contract quite different from the one entered into by the parties. Having regard to the recitals in the deed of partnership, it is not at all possible to make out any transfer of property as such by any particular individual in favour of another so as to result in any gift. By the contract evidenced by the deeds, persons are admitted as partners or to the benefits of the partnership (in the case of minors). It is, as a consequence, that the respective shares are specified. The rights accruing to them are incidents of they having become partners and not by virtue of the transfer of any such property.
24. In Gheevarghese's case decided by the Supreme Court, the assessee who was the sole proprietor of a business, converted it into a partnership consisting of himself and his two daughters. The capital of the partnership was Rs. 4 lakhs out of which the contribution of the assessee was Rs. 3,50,000 and contribution of the capital in a sum of Rs. 25,000 each by the two daughters was effected by transfer of Rs. 25,000 from the assessee's account to the account of each of the daughters. The assessee had filed a return in respect of the gift of Rs. 50,000 in favour of his daughters representing the share capital contributed by them. But the GTO held that, in addition, the assessee had gifted a one-third share each in the goodwill of his business to his daughters. The Tribunal had held that the gift was only of 1/8th share in the goodwill, but that the gift to the daughters was exempt under s. 5(1)(xiv) of the G.T. Act, 1958. Ultimately, when the matter was taken up to the Supreme Court, the liability to tax on the basis of transfer of goodwill was negatived. The Supreme Court reframed the question as follows:
"Whether, on the facts and in the circumstances, any gift-tax was payable on the goodwill of the assessee's business. If the answer be in the affirmative how much share in the goodwill was liable to such tax ?"
25. The first part of the question was answered the second part of the observed that there was no necessity to answer the second part of the question. The Supreme Court also answered the question of the provision of s. 5(1)(xiv) being attracted. It was held that, on the facts and circumstances of the case, the said provision was not attracted. Accordingly, the liability to gift-tax in respect of Rs. 50,000 had to be maintained.
In the course of its judgment, the Supreme Court, after referring to the several material clauses of the agreement, observed as follows (p. 409):
"The departmental authorities, in the present case, never treated all the assets and property of the assessee which were transferred to the partnership pertaining to his proprietary business as a gift nor has any suggestion been made before us on behalf of the revenue that the property and assets valued at Rs. 4,00,000 were the subject-matter of gift. All that the departmental authorities did, and that position continued throughout, was that they picked up one of the assets of the assessee's proprietary business, namely, its goodwill, and regarded that as the subject of gift having been made to the daughters who were the other partners of the firm which came into existence by virtue of the deed of partnership. This approach is wholly incomprehensible and no attempt has been made before us to justify it."
26. It appears to be clear that the only transfer that was considered as amounting to a gift was the transfer of capital to the extent of Rs. 50,000. The right accruing to the daughters by virtue of they being inducted as partners was held not to amount to a gift. The learned counsel for the department suggested that there is no such categorical enunciation by the Supreme Court is clear enough and clearly implies that mere inducting of persons as partners would not result in a transfer as such, resulting in a gift.
27. The Gujarat High Court also had to consider a similar case in CGT v. Karnaji Lumbaji , where fresh persons were admitted as partners in an existing firm. There was a reduction of the share in regard to one of the persons as a consequence of the redistribution of the shares among all the partners. The GTO had come to the conclusion that to the extent of 19 np. share in the goodwill of the firm, there was a gift. The contention of the assessee was that there was no transfer by the assessee of any existing property and even if there was a transfer it was not without consideration in money or money's worth. The Tribunal had upheld the claim of the assessee. The contention put forth by the assessee before the High Court was that there was no transfer as such of any property and there was no liability to any gift-tax, while the contention on behalf of the department was that on account of the reduction in the share of the assessee on the introduction of the two partners, there must be held to be a transfer or disposition from the assessee to the two partners. The learned judges held that the contentions of the revenue would raise interesting questions of construction, but it was not necessary to examine them as, on the facts circumstances in the case, the transfer could not be said to be without consideration in money or money's worth and there was, therefore, no gift within the meaning of s. 2(xii). It is, therefore, seen that in order to find out if there was any gift, the terms of the document are material as also any other evidence that may be brought on record. The learned judges proceeded to elucidate the nature of a partnership and how the rights and liabilities arise and stated as follows (p. 352):
"Now, obviously when the partners in an existing firm admit a new partner, they would do for one of two reasons - either because he is going to bring finance or because he is going to attend to the business of the firm. Here, in the present case, Mohanlal Karnaji and Govindlal Karnaji were paid employees to the firm and they were sufficiently experienced in the business of the firm. The result of admitting them as partners obviously was that the firm would be saved the remuneration which would otherwise be payable to them as employees. Moreover, as pointed out be the Tribunal, they had experience of running the business and, as partners, they would be able to attend to the business and give the benefit of their experience to the firm. It is, therefore, not possible to say that the admission of Mohanlal Karnaji and Govindlal Karnaji as partners in the firm was gratuitous without any consideration. The burden of proving that a particular transfer is a gift is upon the revenue and it is for the revenue to show that the transfer is without consideration."
28. The High Court of Bombay in the case of Raman Lal Nagji & Dhirajlal Nagji v. CED [1979] 118 ITR 785 followed the decision of the Gujarat High Court in CGT v. Karnaji Lumbaji , referred to above, and a similar reasoning was adopted by the Allahabad High Court in CGT v. Sardar Wazir Singh and the Madras High Court in CGT v. Ali Hussain M. Jeevaji [1980] 123 ITR 420. The learned judges of the Bombay judges of the Bombay High Court referred to several other decision and in particular to the decision in CED v. Kantilal Nemchand [1978] 115 ITR 89 (Bom). That was a case where a father had taken his son as a partner in a business, and subsequently increased his share in the profits also. The question that arose was whether it amounted to a gift as that question became material in the estate duty proceedings as to whether the property transferred was liable to estate duty under s. 10 of the E.D. Act. Tulzapurkar J., who delivered the judgment, observed as follows (p. 791):
".....both initially as well as on the occasion when the profit-sharing proportion was reshuffled, the parties intended that for whatever share was granted to the son, the son will have to work in the business as a proprietor till November 9, 1950; in other words, the son was under an such business was carried on by both the partners in consultation with each other. Devoting time, energy and attention by the son to the partnership son as a partner and giving him initially 6 annas share and later on increasing that share to 12 annas.....
It was sought to be urged by Mr. Joshi that the physical labour to be contributed by the son might afford adequate consideration for giving him reshuffled on November 10, 1956, for additional share of 6 annas granted to the son there was no adequate consideration and as such at least that relinquishment by the deceased in favour of his son should be regarded as a gift, to which the provisions of section 10 would apply. It is not possible to accept even this contention. As we have stated above, presumably on account of advancing age the father wanted his son to take over the business, retaining small responsibilities with himself. It would be reasonable to assume that an additional share was granted to the son is view of the son accepting additional responsibilities of the business."
29. So far as the case relied on by the GTO and the Tribunal, namely, in CGT v. Ayya Nadar , though that had been followed in the decision in CGT v. Duraiswamy Nadar in referred to or in a few cases of the Madras High Court that has not been referred to or in a few cases where a reference is made to that decision it was distinguished or not applied. If the ratio of the decision in Ayya Nadar's case is that a mere reallocation of shares on a reconsititution of a firm results in a gift to the extent of the difference in the shares compared to the period earlier to the reconstitution, we are unable to subscribe to that enunciation. As we have mentioned earlier, there must be some material from which it could legitimately be inferred that there was a gift. Having regard to the nature and constitution of a firm and the implication of the judgment of the Supreme Court in Gheevarghese's case , a mere reallocation of shares would not result in a gift. In the instant cases, it is clear that in the case of K. D. Shah there was a contribution of the capital to the extent of Rs. 2.35 lakhs and in the case of the subsequent reconstitution also there was a contribution of capital by the new partners or persons admitted to the benefits of the partnership; that would be sufficient or adequate consideration for being inducted as partners or admitted to the benefits of the partnership. Quite apart from that, the clauses in the deed made it obligatory upon them to participate in the business and work for it diligently. That would also constitute adequate consideration. We have noticed that at the time of the reconstitution of the firm in 1968, there was no further capital introduced by K. D. Shah, but his share in the profits was increased by 5 paise, as also that the share of D. C. Shah was reduced to 14 paise in a rupee. It is obvious that K. D. Shah had been in the business for nearly four years and it is reasonable to assume that the incease in the share was made on account of his capacity to shoulder more responsibilities on account of his having gained further experience. Merely because the share of D. C. Shah came to be reduced by 5 paise share of D. C. Shah came to be transferred to K. D. Shah.
30. The Tribunal rejected the contention that there was adequate consideration from K. D. Shah at the time he was introduced as partner in 1964. It observed that he was a creditor to the extent of above 2.35 lakhs and had advanced moneys and it was the very same money that was introduced as capital and, therefore, it could not be said that he did bring in any new capital. We are unable to accept this reasoning as correct. There is a vast differece between being a creditor and being a partner and between a loan advanced by a creditor and a capital invested by a partner. By introducing the capital he risks it in the adventure of the business, whereas in the case of an ordinary creditor, he could claim it back at any time. The risk of losing the capital is also there if the business should end in a failure. The Tribunal also observed that having regard to the profit potentiality of the firm the introduction of the capital to the extend of Rs. 2.35 lakhs cannot be said to be adequate. It observed that the capital was about Rs. 7 lakhs on January 1, 1964, and Rs. 16.64 lakhs on November 14, 1968, and, therefore, much stress cannot be laid on the introduction of the capital of Rs. 2.35 lakhs. It is difficult to appreciate this reasoning. The introduction of capital on January 1, 1964, would be about one-third whereas K. D. Shah was entitled to profits of only 9 paise in a rupee. The question whether the consideration was adequate or not has to be considered in the light of all the circumstances and the exigencies of the business of the firm. As obsevred by the Gujarat High Court in CGT v. Karnaji Lumbaji , the burden is upon the department to show that the consideration was not adequate. No material at all was brought on record to justfy any such conclusion. The Tribunal did not also accept the submission for the assessee that the partners who were inducted were to render service and, therefore, there was adequate consideration. Its reasoning was that D. C. Shah was to be the managing partner and, therefore, the other members had nothing to decided on with the affairs of the business. Merely because D. C. Shah was to be the managing partner, it does not mean that the other partners were sleeping partners with no responsibilities at all. There was an obligation upon all of them to strive for the progress of the business. Apparently for administrative conveninence or overall guidance one was nominated as the managing partner; that does not mean that the service to be rendered by the other partners was either view taken by the Tribunal that there was no adequate consideration is clearly opposed to the material on record.
31. In our opinion, the view taken by the Tribunal is contrary to law and not warranted on the facts and circumstances of the case. We. therefore, answer the questions referred in each of these cases in the negative, viz., that the Tribunal was not right in holding that there was taxable gift by the assessee.