Andhra HC (Pre-Telangana)
Commissioner Of Gift-Tax vs E.K. Venkateshwar on 17 September, 2001
Equivalent citations: [2002]253ITR220(AP), [2002]120TAXMAN639(AP)
JUDGMENT S. Ananda Reddy, J.
1. At the instance of the Revenue, the Income-tax Appellate Tribunal referred the following two questions, said to arise out of its order in GTA No. 53 of 1983 for the assessment year 1977-78, for the opinion of this court under Section 26(3) of the Gift-tax Act, 1958, in pursuance of the directions of this court :
"(1) Whether, on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal is correct in law in holding that there has been no gift involved in the transfer of goodwill on the reconstitution of the firm of which the assessee is a partner, on April 1, 1976 ?
(2) Whether, on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal's finding that even if the consideration is not adequate, the gift is exempt under Section 5(1)(xiv) of the Gift-tax Act, is rational and reasonable ?"
2. The brief facts leading to the above reference are as under : The assessee has been and continues to be the managing partner of M/s. South Indian Mining and Slab Co. at Bethamcherla. The firm extracts Cud-dapah stones (rough slabs) in its stone quarry. It incidentally gets lime stone lumps. Both these activities are in the nature of mining activity, though it sells yellow ochre powder by way of trade. The assessee's son, Sri E. V. Rajendra Sarma was working as sales manager for about ten years prior to April 1, 1972, when he was admitted as a partner with a 3/32 share while the assessee had a 5/32 share besides goodwill. The share is in both profits and losses. The said firm was reconstituted by a deed with effect from April 1, 1976. As per the said deed, the share of the assessee is reduced from 5/32 to 1/16 and the share of his son was increased to a 3/16th share. Apart from this the goodwill of the firm, which was allotted to the assessee under the deed dated April 1, 1972, was re-assigned to the assessee's son. When further change in the constitution occurred with effect from April 1, 1976, the assessee was 64 years old, but weak in health due to continuous infection of lungs, diminished eyesight and poor hearing. He uses a hearing aid. He did not have any balance in his accounts other than his fixed capital as he had drawn his profits. As per the son, Sri E. V. Rajendra Sarma, he had worked in the firm for about ten years as an employee and for four years as a partner. Only the assessee and his son were active partners. The assessee's son is said to be familiar with the Government procedures and bears the main burden of the day-to-day management. It is the assessee's case that the assessee's responsibilities were getting reduced from the arrangement which was with the concurrence of the other partners, it is evident from the deed that the reward was to match the responsibilities of management of the firm. Other partners also stood to gain by the goodwill remaining intact as all the partners had the benefit of goodwill by way of profits during the subsistence of the firm. Sri E. V. Rajendra Sarma had a capital of about Rs. 30,000 at the relevant time. The partnership share was with reference to the capital contribution. The partnership deed envisaged greater finance and it is for this reason that the capital was also doubled from Rs. 80,000 to Rs. 1,60,000. The capital contribution from the other partners was increased for this purpose. Even the partnership deed dated April 1, 1972, placed on the assessee's son greater responsibilities than on the other partners, while the partnership deed dated April 1, 1976 placed even additional responsibilities on him. The assessee's son happened to be the youngest of all the partners (his age is 34 years while the other partners were much older than him). The assessce's son is also said to have attended college (B.Sc.) in a subject connected with mining, though he did not complete the course, but had been actively associated with the firm on full time basis ever since he left college. Though the assessee had a larger share (including higher sales) out of profits, he took equal responsibility than hitherto to share a larger loss in the event of loss and to a larger liability in case liabilities exceeded the assets in the event of dissolution. In short, it is the case of the assessee that the reduction of his interest in the firm on the one hand and the increase of his son's interest was due to his own poor health, reduced responsibilities and reduced investment on his part on the one hand and the greater financial participation, greater responsibilities and the greater interest shown by his son to the satisfaction of all the partners on the other hand.
3. On the above facts, the Assessing Officer felt that there was a transfer giving rise to a deemed gift liable to gift-tax and therefore issued notice under Section 13(2) of the Gift-tax Act (hereinafter referred to as "the Act") for the assessment year in question, in response to which the assessee filed a "nil" return. Thereafter the Assessing Officer after hearing the assessee concluded that the reduction of the share of the assessee in the partnership firm as a result of reconstitution under the fresh partnership deed, dated April 1, 1976, and also the goodwill, which was exclusively reserved for the assessee was transferred to his son and the same would amount to transfer of an asset giving rise to a gift liable to gift-tax. Accordingly, the Assessing Officer computed the gift liable to gift-tax and levied a gift-tax of Rs. 59,992. This was contested by the assessee before the Commissioner (Appeals). The Commissioner (Appeals) dealt with the transfer of goodwill as well as the reduction of the share in the partnership firm of the assessee and the increase in the share of the assessee's son were dealt with separately. With reference to the transfer of goodwill, it was held that under the terms of the partnership deed, the partners have retained the power to amend, restrict or delete the conditions of the partnership deed, with the consent of all the partners in writing in terms of clause 25 of the partnership deed dated April 1, 1972. Therefore, in terms of the said powers while reconstituting the firm by a new partnership deed dated April 1, 1976, the firm had reassigned the goodwill to the assessee's son, who is also one of the partners. The Commissioner (Appeals) was of the opinion that the said goodwill was being assigned and reassigned from time to time as and when there were fresh partnership deeds reconstituting the firm, which was in existence since 1920. The learned Commissioner also felt that no partner would have any specific interest in any of the partnership assets including the goodwill. Therefore, it was only the firm, which was the owner of the goodwill, which had reassigned the same to the assessee's son and there was no transfer by the assessee in favour of his son, who is also a partner of the firm. The learned Commissioner also held that in order to effect transfer of such an asset, a registered document is necessary and even in the absence of such a registered document, the same would not amounts to transfer. Coming to the alteration of the shares, i.e., the decrease of the assessee's share in the partnership firm and proportionate increase in the share of the assessee's son, who is also another partner, it was held that the said change in the profit sharing ratio was as a result of bona fide reconstitution of the firm and there was no gift or transfer of property. According to the Commissioner (Appeals), it was proved with reference to the facts and circumstances of the case that there was introduction of additional capital as well as devoting of more time to the business by the assessee's son, who is a partner and the same would constitute adequate consideration. Therefore, it was held that there is no transfer in respect of both the aspects and accordingly allowed the appeal. The Department carried the matter in appeal to the Income-tax Appellate Tribunal. The Tribunal on the facts, recorded earlier, did not agree with the finding of the Commissioner (Appeals) with reference to transfer of an asset either with reference to the goodwill or with reference to the reduction in the profit sharing ratio of the assessee. The Tribunal also reversed the finding of the Commissioner (Appeals), where it was held that in order to constitute a transfer, a registered document is required with reference to the goodwill, which reads--"Hence, the arrangement considered in this appeal certainly involves a transfer and that too a transfer of movable property, which did not require registration." But, however, the Tribunal considered the aspect of adequacy of the consideration as well as exemption under Section 5(1)(xiv) of the Act. The Tribunal referred to and relied upon a decision of this court in the case of CGT v. G. Ethirajulu with reference to the exemption available under Section 5(1)(xiv) where this court held (page 368) :
"In the present case, the gift could perhaps be said to have been made bona fide for the purpose of the business since the Tribunal found that the assessee admitted the three others as partners with a view to facilitate the carrying on of the business and to earn more profits . . .
It appears to be essential, in order to claim the benefit of Section 5(1)(xiv), that the business should continue to be that of the same person who made the gift."
4. The Tribunal thereafter found that the argument "whether there was adequate consideration" was not raised in the above decision rendered by this court. But such an argument was advanced in the present case and with reference to the said contention the Tribunal recorded the following finding :
"We have found that there is a transfer in the arrangement here notwithstanding the fact that it was a partnership agreement. It is true that all the partners had to agree to the transfer of goodwill from the assessee to his son. We have every reason to believe that they agreed because they were also convinced that the transfer of the goodwill from the father to the son with consequent increase in share in the son's favour was for the better management of the business and ultimately for increased profits for the benefit of all."
5. The Tribunal thereafter referred to a number of decisions cited before it and finally held--"It is therefore clear that in the facts of the assessee's case even if we were to go only with reference to Section 5(1)(xiv) the arrangement would qualify for exemption on the ground that the reservation of goodwill in favour of the assessee's son and increased share including salary and the expense of the assessee were for the purposes of the business and in the course of business."
6. On the above findings the Tribunal confirmed the order of the Commissioner (Appeals), though it did not agree with some aspects of the order of the Commissioner (Appeals).
7. Before us, learned standing counsel for the Department contended that as there was a transfer of goodwill from the assessee to his son and also reduced profit sharing ratio of the assessee as a consequent proportionate increase in the profit share of the son, the same would result in transfer, as was found by the Tribunal. But the same is not supported by any consideration and the same therefore amounts to a gift or a deemed gift, liable to gift-tax.
8. Learned counsel relying upon a judgment of the Supreme Court in the case of CGT v. Chhotalal Mohanlal contended that the questions referred to this court are to be answered in favour of the Revenue.
9. Though notice was served on the assessee, none appeared for the assessee.
10. The facts set out earlier are not in dispute. Basing on the admitted facts set out by the Tribunal, it had recorded a finding that the transfer was for adequate consideration by way of increased capital contribution as well as additional responsibilities, thereby reducing the responsibility of the assessee as well as the reduction to share lesser loss as well as lesser liabilities in case the liabilities exceed the assets and simultaneous increased share of profits of the assessee's son with increasing responsibilities and to share a larger loss in the event of loss and to a larger liability in case the liabilities exceed the assets, in the event of dissolution. In the light of the said findings recorded by the Income-tax Appellate Tribunal, we do not find that there is any merit in the present contention of the Department that the transfer involves a gift liable to gift-tax. Though learned counsel relied upon a judgment of the apex court in the case of Chhotalal Mohanlal , that was a case where the share of the father was reduced and the resultant reduced share was given to two of his sons, who were admitted to the benefits of the partnership. In that case though the Tribunal as well as the High Court held that there was no gift, on appeal the apex court reversed the decision of the High Court holding that there was a gift within the meaning of Section 2(xii) of the Gift-tax Act, 1958, by the person in respect of a part of the goodwill. It was further held that goodwill is a property and when minors are admitted to the benefits of partnership in a firm and the share of an existing partner is reduced thereby, the right to the money value of the goodwill stands transferred and the transaction constitutes a "gift" under the Gift-tax Act, 1958. The facts in that case clearly show that there is no claim with reference to the new partners, any introduction of capital or sharing the burden of the responsibilities of running the business. In the absence of any such considerations, it was held that it was a gift liable to gift-tax. In the present case, the facts are totally different. There was a contribution to increased capital by the partner, whose share in the partnership firm was increased, apart from shouldering the additional responsibilities of carrying on the business of the partnership firm, which was treated as adequate consideration for the transfer of the asset. In the light of the above facts of the present case, the above judgment of the apex court relied upon by learned standing counsel has no application.
11. Under the above circumstances, we answer the questions in the affirmative, against the Revenue and in favour of the assessee.
12. No costs.