Kerala High Court
Mrs. Rhona Varghese vs Cgt on 19 November, 2002
Equivalent citations: [2003]131TAXMAN139(KER)
Author: G. Sivarajan
Bench: G. Sivarajan
JUDGMENT G. Sivarajan, J.
The matter arises under the Gift Tax Act (hereinafter referred to as the Act). The following question of law is referred for decision to this court at the instance of the assessee :
"Whether, on the facts and in the circumstances of the case, the Tribunal is correct in law and fact in holding that the surrender of share of 30% in the firm by the assessee is liable to gift-tax ?"
2. The assessee was a partner in a firm M/s. P.J. Corporation, Cochin with 50% share of the profits therein. There were two partners. There was a reconstitution of the said firm with effect from 1-4-1989 by which the firm admitted a new partner and 4 minors to the benefits of the partnership firm. As a result of the said reconstitution, the assessee's share in the firm got reduced from 50% to 20%. Since, according to the assessing officer, this transaction will amount to a deemed gift, he issued a notice under section 16 of the Act to the assessee. Pursuant to the said notice, the assessee filed a Nil Return of gift. The assessee contended before the assessing officer that there was no gift of goodwill involved in the transaction since there was no goodwill in the business. It is also pointed out that the partnership firm was engaged in the transporting contract with M/s. Indian Potash Limited, which was being renewed year after year in such a way that there was no certainty that the business will continue for the next year. The assessing authority did not accept the said contention. He has taken the view that in every business, there will be a goodwill, however, small the volume of business conducted by the assessee, that this firm has been in existence right from the year 1981-82 and it had existed upto 31-3-1990 and even afterwards doing the very same line of business and, therefore, the contention that there was no certainty in the business and that there was no goodwill, has to be rejected. In appeal by the assessee, the first appellate authority accepted the assessee's contention that there is no goodwill in the case of a conditional contract. The department took up the matter in appeal before the Tribunal. Relying on the principles laid down by the Honourable Supreme Court, in CIT v. B.C. Srinivasa Setty (1981) 128 ITR 294 (SC) and by following the appellate order in the case of the other partner namely Shri P. Jacob in similar circumstances, the Tribunal held that the firm had a goodwill and there is a gift to the extent of the reduction of the share capital from 50% to 20%.
3. Shri. P. Balakrishnan, learned counsel for the assessee submits that the firm P.J. Corporation in which the assessee is a partner is only engaged in the business of transporting contractors with Indian Potash Limited. He further submits that the said company was inviting tenders from year to year and that the contract is being awarded only to the party who satisfies the conditions stipulated in the tender notice. He also submits that there is no guarantee that the work will be awarded for all the years to the assessee's firm. The counsel, on that basis, submits that in the case of a conditional contract, there is no question of any goodwill and, therefore, there was no justification on the part of the assessing authority or the Tribunal for taking the view that there is goodwill to the business of the firm.
4. We have also heard Shri P. K. R. Menon, learned senior standing counsel for revenue appearing for the respondent. He submits that the Tribunal has entered a categoric finding that the firm P.J. Corporation is having a goodwill but the assessee has not challenged the said finding by raising a question. The senior counsel also submits that the question referred by the Tribunal is only as to whether on the facts and in the circumstances of the case, the Tribunal is correct in law and fact in holding that the surrender of the share of 30% in the firm by the assessee is liable to tax and therefore, the question will have to be decided on the facts as found by the Tribunal. The senior counsel further submits that so long as the facts found by the Tribunal are not in challenge, the answer to the question is self evident that the surrender of the share of 30% in the firm by the assessee is liable to gift tax. The senior counsel also submitted that even on merits, the Tribunal, keeping in mind, the principles regarding the ascertainment of goodwill, had considered the facts of the assessee's case and had correctly found that the firm is having a goodwill. The senior counsel accordingly submitted that the Tribunal was perfectly justified in holding that the transaction is exigible to tax.
5. We will first dispose of the preliminary contention raised by the learned senior standing counsel. In this case, the question regarding the exigibility to gift tax arises only if it is found that the firm is having a goodwill, since the assessing officer has determined the amount of gift only in respect of goodwill. The assessing officer and the Tribunal, after considering the factual situation came to the conclusion that the firm is having a goodwill. However, the first appellate authority, considering the same materials, came to the conclusion that the firm is not having any goodwill. As already noted, the petitioner was made liable to pay gift-tax on the ground that the firm was having a goodwill. Thus, the only controversy was as to whether the firm had any goodwill. If the question referred is viewed in that light, particularly with reference to the wording of the question, 'the Tribunal is correct in law and fact'. We have no doubt that the question referred takes, in a challenge to the existence of goodwill found by the Tribunal. The Honourable Supreme Court in Karam Chand Thapar & Bros. (P) Ltd. v. CIT (1971) 80 ITR 167 (SC) while answering the question referred for decision by the High Court, viz., "Whether on the facts and in the circumstances of the case, the sum of Rs. 18 lakhs paid to Karam, Chand Thapar & Bros. (P) Ltd. was a revenue receipt and as such assessable to income-tax" ?" observed as follows :
"The question as framed does not pose any challenge to the facts found by the Tribunal. it was open to the Commissioner to challenge the facts found by the Tribunal, if the findings in question were not supported by any evidence or if in reaching those findings the Tribunal committed any error of law. But the Commissioner did not challenge those findings on any of those grounds. The question as framed proceeds on the basis that the facts found by the Tribunal are accepted by the Commissioner but he challenges the decision reached by the Tribunal on the basis of those findings. In other words, the question framed should be read as to whether, on the facts and in the circumstances of the case, as found by the Tribunal, the sum of Rs. 18,00,000 paid to the company was a revenue receipt and as such assessable to income-tax.
Curiously enough, despite the fact that the question referred to the High Court for its opinion did not in any manner challenge the correctness of the facts found by the Tribunal, the High Court proceeded to re-examine the material on record and reversed the findings of fact reached by the Tribunal. It came to the conclusion that all the proceedings relating to the termination of the managing agency of the company were not genuine transactions. It further came to the conclusion that the managing agencies held by the company were its stock-in-trade, and, therefore, the amount of Rs. 18 lakhs paid by the managed-company to the company must be considered as a revenue receipt.
In our opinion, it was wholly impermissible for the High Court to disturb the findings of fact reached by the Tribunal. The Tribunal was the final fact-finding authority. The facts found by it could have been challenged only on certain recognised grounds. Neither the High Court nor this court has jurisdiction to reappreciate the material on record to find out whether the facts found by the Tribunal are correct or not. The High Court should not have taken upon itself the responsibility to go into the question whether the findings of fact reached by the Tribunal are correct. The only question that the High Court was called upon to determine was whether, on the facts found by the Tribunal, the receipt in question should not have been considered by the Tribunal as revenue receipt." (p. 170) As already noted, the question referred for our consideration in this case is slightly different in that the Tribunal has posed the question with reference to law and facts. According to us, the decision referred to above has no application in a case where the Tribunal itself has posed the question as to whether the Tribunal is correct in law and facts. Thus, we do not find any merit in the contention of the revenue that the question referred to is not capable of taking in the correctness of the finding of the Tribunal regarding the goodwill.
6. Now, coming to the merits of the matter, we notice that the assessing authority has taken the view that when the share capital of a partner is reduced from 50% to 20% by the induction of new partners and allotment of shares to them, there is a deemed gift exigible to tax under Gift Tax Act. The deemed gift, according to the assessing officer, is in regard to the goodwill. Goodwill is the value of the attraction to customers arising from the name and reputation in skill, integrity, efficient business management or effective service. The Honourable Supreme Court, in B.C. Srinivasa Setty's case (supra) considered the basic features of the goodwill and observed that "it denotes the benefit arising from connection and reputation". A variety of elements goes into its making, and its composition varies in different trades and in different businesses in the same trade, and while one element may preponderate in one business, another may dominate in another business. Its value may fluctuate from one moment to another depending on changes in the reputation of the business. It is affected by everything relating to the business, the personality and business rectitude of the owners, the nature and character of the business, its name and reputation, its location, its impact on the contemporary market, the prevailing socio-economic ecology, introduction to old customers and agreed absence of competition. There can be no account in value of the factors producing it. It is also impossible to predicate the moment of its birth. Its benefits in the business vary with the nature of the business and also from one business to another.
7. The goodwill of a business means every affirmative advantage that has been acquired in carrying on the business, whether connected with the premises of the business or its name or style and even, thing connected with or carrying with it., the benefit of the business. The goodwill also enables the probability that the old customers would resort to the old places. We have per-used the detailed order of the Tribunal passed in the case of the other partner Shri P. Jacob passed on the same day. Keeping in mind the principles laid down by the Supreme Court in Srinivasa Setty's case (supra), the Tribunal considered the question of goodwill thus :
"P.J. Corporation was constituted on 1-4-1980 as a partnership with three partners, for carrying on the business of transporting goods for M/s. Indian Potash Ltd. from the first year onwards the firm was transporting caustic chemicals for that company. It appears that the firm had not done any other business, nor had it transported goods for any other parties. The firm continued the business without interruption. Indian Patash Limited had entrusted with the transporting work with this firm only. There is nothing to show that there was any competition for the assessee in this particular line of business. By the connection and the reputation of the firm, they were able to get the work from the company every year starting from the first year of its formation. If goodwill denotes the benefit arising from connection and reputation (as held by the Supreme Court), it cannot be said that the firm which has been carrying on the transport business for M/s. Indian Potash Ltd. all these years had no goodwill in its business. If the firm had no goodwill in its business, it is difficult to see why the company was entrusting with the same party year after year the work of transporting their goods. In any contract work, there would be some conditions to be fulfilled by the contracting parties. But merely because the firm had to fulfil certain conditions in transporting the goods safely within the required time, it cannot be said that there would be no goodwill generated in such a business."
The Tribunal has entered the aforesaid finding keeping in mind the legal principles laid down by the Supreme Court. According to us, the finding thus entered by the Tribunal is essentially a finding of fact. This court, in exercise of the advisory jurisdiction, can interfere with the said finding of fact only on the ground that such finding is not supported by any material or that the said finding is perverse. We do not find any such infirmity in the order. It is also relevant to note that the other partner had not challenged the order of the Tribunal, For all these reasons, we answer the question specified in the opening paragraph of this judgment in the affirmative, that is in favour of the revenue and against the assessee.