Income Tax Appellate Tribunal - Cochin
K. Govindan vs Gift Tax Officer on 3 March, 1996
ORDER
M.M. Cherian, A.M.
1. The assessee has filed this appeal against the order of the CIT(A), Calicut, in respect of the gift-tax assessment, for the asst. yr. 1985-86. The assessee is a partner in the firm of M/s Hindustan Engg. Co., Calicut. During the previous year ending 31st March, 1985, there was a reconstitution of the firm, as a result of which the assessee surrendered 20% of the share in the firm. The GTO was of the view that there was a gift by the assessee in favour of the other partners and accordingly he determined the taxable gift in the hands of the assessee at Rs. 2,61,565. The GTO had proceeded to determine the value of the taxable gift at 20% of three years purchase price on the basis of the average profit of the business for the five preceding years with adjustment towards interest on capital and managerial remuneration. In the first appeal, the CIT(A) allowed deduction for managerial remuneration at Rs. 72,000 as against Rs. 24,000 allowed by the AO. The CIT(A) also allowed interest on capital @ 18% as against 12% allowed in the assessment. There was also a direction by the CIT(A) to allow deduction for the firm's tax in determining the taxable gift. Not satisfied with the relief allowed by the CIT(A), the assessee has preferred the second appeal before the Tribunal.
2. At the time of hearing, the assessee's representative Sri Ravindranathan, CA, submitted that the order of the CIT(A) was opposed to law and facts as he ought to have seen that the reduction in the share of profit on account of the reconstitution of the firm did not amount to a transfer by the partner concerned. According to the learned representative, the CIT(A) ought to have held that there was no transfer for a gift in the case of reduction in the share of profit of a partner when new partners were brought into the partnership. It was also contended that assuming that there was a transfer in the present case that transfer was for valid consideration as the new partners had agreed to contribute their share of capital and they had agreed further to share the loss if any in future and also to work for the business of the firm. According to the learned representative, there was adequate consideration for the transfer and in that sense there was no taxable gift to be assessed in the hands of the assessee. Arguing on the above lines, Shri Ravindranathan made an earnest plea to cancel the gift-tax assessment made in this case.
3. On behalf of the Revenue, Shri K. M. George, Departmental Representative, submitted that when a partnership is reconstituted resulting in the transfer of share of profit of a partner and the consequential increase in the share of profit of others would result in a gift exigible to tax under the Gift-tax Act. The learned Departmental Representative relied on the decision of the Kerala High Court in the case of K. K. Achuthan vs. CIT (1988) 170 ITR 518 (Ker) for the view that surrender of 20% of the share of profit by the assessee would amount to a gift liable to tax in this case. He also drew our attention to the decision of the CGT vs. Chhotalal Mohanlal (1987) 166 ITR 124 (SC) and submitted that in the case of reconstitution of a partnership firm resulting in reduction in the share of profit of a partner, there is a gift within the meaning of s. 2(xii) of the GT Act, 1958. As regards the consideration, Sri George submitted that the new partners had agreed to contribute their share of capital or to share the future loss in the business or to work for the business of the firm, that is not the consideration within the meaning of s. 2(xii) of the GT Act. It was contended that these are not consideration flowing from the new partners to the partner who had surrendered a part of his interest in the firm. According to the learned Departmental Representative, the capital contribution of the incoming partner or their agreement to share the loss in future may benefit the partnership firm but those are not considerations going in favour of the assessee as the donor. It was stated that the CIT(A) had given relief in regard to the computation of the taxable gift and the assessee was not entitled to further relief.
4. We have given anxious consideration to the submissions on rival sides. The question of gift in a case of reconstitution of the partnership and reduction in the share of profit of the partners has been already settled by the decision of the Supreme Court in the case of CGT vs. Chhothalal Mohanlal (supra). In the case of K. K. Achuthan vs. CGT (supra), the position has been further clarified by the Kerala High Court in following terms :
"When a partnership in 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 result in a gift exigible to tax under the Gift-tax Act."
In view of these judicial pronouncements, the contention of the learned representative of the assessee that there is no gift when the assessee surrendered 20% of share of profit in the firm of M/s Hindustan Engg. Co., Calicut, cannot be accepted.
5. As regards the contention that the surrender of the share by the assessee was for valid consideration, it is to be made clear that according to the learned representative, the consideration is "the new partners had agreed to contribute their share of capital, agreed further to share the loss if any in future and also to work for the business of the firm". These may be valid reasons for admitting the new partners to the partnership firm, but it is difficult to accept the claim that these are the considerations received by the assessee from the new partners when he surrendered part of the interest in the firm. If the new partners contribute capital or agreed to share loss in the business in future, or agreed to work for the business of the firm, the firm is no doubt benefited. But that is not the consideration flowing to the assessee for surrending part of his share of profit. Hence, it cannot be accepted that the gift made by the assessee is for consideration in money or money's worth within the meaning of s. 2(xii) of the GT Act.
6. In the circumstances discussed above, we find no reason to interfere with the order of the CIT(A). This appeal filed by the assessee is, therefore, dismissed.