Commissioner
of Gift Tax Gujarat Vs. Chhotalal Mohanlal [1987] INSC 116 (16 April 1987)
Misra
Rangnath Misra Rangnath Pathak, R.S. (Cj) Dutt, M.M. (J) Citation: 1987 Air
1412 1987 Scr (2)1042 1987 Scc (2) 612 Jt 1987 (3) 8 1987 Scale (1)823
ACT:
Gift
Tax Act, 1958---Section 2(xii) & 4--Goodwill of partnership-- Whether can
be transferred--Whether such transfer a 'gift'.
HEADNOTE:
Under
a deed of partnership dated 12.11.1958, a firm by the name M/s. Chhotalal
Vedilal came into existence with Chhotalal Mohanlal (the assessee), Gunvantilal
Chhotalal and Pravin chandra Vedilal, as partners, each having 7 annas, 4 annas
and 5 annas share respectively in the firm. This position continued until on
9.11.1961 when a change took place in the constitution of the firm. Under the
new deed, Pravinchandra Vedilal retired. One Ramniklal Chhotalal became a
partner with 4 annas share. The share of the assessee, Chhotalal Mohanlal was
reduced. For the remaining 4 annas, two minor sons of the assessee were
admitted to the benefits only of the firm.
In
the assessment year 1963-64, the Gift Tax Officer concluded that the assessee
had deprived himself of 19% share In the profits and had gifted away 19% share
in the goodwill of the firm in favour of his two minor sons. He valued the
.goodwill and treated 19% thereof as taxable gift.
In
the appeal before the Appellate Assistant Commissioner the assessee took the
stand that the gift was not of a share of the goodwill but in respect of the
right to receive future profits. He valued that right and since the amount was
higher than what the Income Tax Officer has estimated, he enhanced the quantum.
In
further appeal by the assessee the Tribunal held that in the circumstances of
the case there could be no gift of goodwill and found that the right to receive
future profits could not be subject matter of a gift as the transfer did not
relate to existing property and the situation did not give rise to any gift
which could be made liable to tax under the Act.
In
the Reference the High Court upheld the view of the Tribunal.
1043
In the appeal to this Court on behalf of the Revenue, it was contended that the
order of the Gift Tax Officer was right and the Appellate Assistant
Commissioner, the Tribunal and the High Court had gone wrong in holding that
the arrangement under the deed of 9.11.1961 did not give rise to a taxable
event under the Act.
Allowing
the appeal,
HELD:
1. Goodwill of a firm is an asset. [1045E] Khushal Khemgar Shah & Ors. v.
Khorshed Banu Dadiba Boatwalla & ANR., [1970] 3 SCR 689, followed.
2.
Once goodwill is taken to be property and with the admission of the two minors
to the benefits of partnership in respect of a fixed share, the right to the
money value of the goodwill stands transferred, the transaction does constitute
a gift under the Gift Tax Act, 1958. [1046F]
3.
Since there has been no dispute about valuation of the goodwill as made by the
Gift Tax Officer, with the conclusion that there has been a gift in respect of
a part of the goodwill the transfer of the benefit of the partner- ship
constitutes a gift under the Act. [1046F-G] Commissioner of Gift Tax v. Nani
Gopal Mondal, 150 ITR 469; M.K. Kuppuraj v. Commissioner of Gift-Tax, 153 ITR
481;
Sirehmal
Nawalkha v. Commissioner of Income-Tax, 156 ITR 714 and Commissioner of Gift
Tax, Bombay v. Premji Trikamji Jobanputra, 133 ITR 317, approved.
Civil
Appellate Jurisdiction: Civil Appeal No. 2027 of 1974.
From
the Judgment and Order dated 8.10.1973 of the Gujarat High Court in Gift Tax
Reference No. 3 of 1971.
Wazir
Singh, K.C. Dua and Ms. A. Subhashini for the Appellants.
The
Judgment of the Court was delivered by Ranganath Misra, J. This appeal is by
certificate under a Deed of Partnership dated 12.11.1958, a Firm by name M/s
Chhotalal Vedilal came into existence with three partners, Chhotalal Mohanlal
1044 (the assessee). Gunvantilal Chhotalal and Pravinchandra Vedilal. These
three partners had 7 annas, 4 annas and 5 annas share respectively in the firm.
This position continued until on 9.11. 1961 relevant to assessment year 1963-64
with which this appeal is concerned, a change took place in the constitution of
the firm. Under the new deed, Pravin chandra Vedilal retired; no change took
place in respect of Gunvantilal Chhotalal; one Ramniklal Chhotalal became a
partner with 4 annas share. The share of the assessee Chhotalal Mohanlal was
reduced to 4 annas; for the remaining 4 annas two minor sons of Chhotalal being
Kiritkumar and Deepak Kumar were admitted to the benefits only of the
firm--Kiritkumar having 12 percent and Deepak Kumar having 13 per cent. No
alteration was, however, made regarding the share capital standing in the name
of the assessee.
The
Gift Tax Officer came to the conclusion that the assessee had deprived himself
of 19 per cent share in the profits and had gifted away 19 per cent share in
the good- will of the firm in favour of his two minor sons. He valued the
goodwill and treated 19 per cent thereof as taxable gift. The Appellate
Assistant Commissioner before whom the assessee appealed adopted a different
stand. According to him, the gift was not of a share of the goodwill but in
respect of the right to receive future profits. He valued that right and since
the amount Was higher than what the Income-tax Officer had estimated, following
the requirements of law he enhanced the quantum. In further appeal by the
assessee the Tribunal held that in the circumstances of the case there could be
no gift of goodwill. As appears from the statement of the case, the Revenue did
not seek to support the order of the Income tax Officer but pleaded for
sustaining the order of the Appellate Assistant Commissioner. The Tribunal
further found that the right to receive future profits could not be
subject-matter of a gift as the transfer did not relate to existing property.
According to it, the situation did not give rise to any gift which could be
made liable to tax under the Act. The following question relevant for the
purpose of the appeal was referred to the High Court for its opinion at the
instance of the Revenue:- "Whether on the facts and in the circumstances
of the case, the benefit of partnership given to minors Kirit Kumar Chhotalal
and Deepak Kumar Chhotalal was a gift under the Gift Tax Act, 1958?" The
High Court answered the question against the Revenue and up- 1045 held the view
of the Tribunal. This appeal has, therefore, been carried by the Revenue.
In
spite of service of notice of appeal the respondent has not appeared. Counsel
appearing in support of the appeal has contended that the order of the Gift Tax
Officer was right and the Appellate Assistant Commissioner, the Tribunal and
the High Court had gone wrong in holding that the arrangement under the deed of
9.11.1961 did not give rise to a taxable event under the Act, so far as the
assessee was concerned.
"Gift"
is defined in section 2(xii) of the Act:- "'Gift' means the transfer by
one person to another of any existing movable or immovable property made
voluntarily and without consideration in money or money's worth, and includes
the transfer of any property deemed to be a gift under section 4." In
support of the appeal, learned counsel further relies upon decisions of
different High Courts to which we shall presently refer. Before doing so it
would be appropriate to indicate that in Khushal Khemgar Shah & Ors. v.
Khorsheed Banu Dadiba Boatwalla & ANR., [1970] 3 SCR 689 this Court has
held that goodwill of a firm is an asset, In Commissioner of Gift Tax v. Nani
Gopal Mondal, 150 ITR 469 after referring to a number of authorities of this
Court and different High Courts a Division Bench of the Calcutta High Court
concluded thus:- "From the cases cited above, it appears that goodwill of
a partnership business is a property of the firm in which a partner is entitled
to a share. Although the above cases are under the Estate Duty Act, yet the
principle laid down in the said cases regarding the nature of goodwill of a
firm and the right of a partner in respect thereof is applicable to the instant
case. In this connection, it may be mentioned that according to section 14 of
the Indian Partnership Act, property of a firm includes goodwill of the
business. Further, according to section 29(2), if a partner transfers his
interest and the transferring partner ceases to be a partner, the transferee is
entitled as against the remaining partners to receive the share of the assets
of the firm to which the transferring partner is entitled to. It further
appears that under proviso to section 53 of the Indian Partnership Act, 1046 in
case of dissolution, a partner or his representative may buy the goodwill of
the firm and under section 55(1) of the Act, in settling the accounts of a firm
after dissolution, the goodwill shall, subject to contract between the parties,
be included in the assets and it may be sold either separately or along- with
other properties of the firm ......
Upon
transfer, the share or interest in the property of the firm of the transferring
partner including the goodwill becomes the share or interest of the transferee.
In the instant case, Nani Gopal Mondal by the deed of gift transferred his
share or interest in the firm which included his share of goodwill also. Hence,
for the purpose of payment of gift-tax, the value of one-third share of the
assessee in the goodwill shall also be taken in account." In M.K. Kuppuraj
v. Commissioner of Gift-Tax, 153 ITR 481 the Madras High Court was called upon
to deal with a case of this type where minors were admitted to the benefits of
partnership firm and the assessee's interest in the firm suffered the detriment
by relinquishment of a portion of his interest. The High Court found that
relinquishment of 8 per cent profit was in favour of the minors who were
admitted without any consideration. It held that the transaction constituted a
gift by the assessee in favour of the minors.
The
ratio in Sirehmal Nawalkha v. Commissioner of Income- Tax, 156 ITR 714 as also
in Commissioner of Gift Tax, Bombay v. Premji Trikamji Jobanputra,' 133 ITR 3
17 support the stand of the Revenue that the transaction constitutes a 'gift'.
Once
goodwill is taken to be property and with the admission of the two minors to
the benefits of partnership in respect of a fixed share, the right to the money
value of the goodwill stands transferred, the transaction does con- stitute a
gift under the Act. Since there has been no dispute about valuation of the
goodwill as made by the Gift Tax Officer, with the conclusion that there has
been a gift in respect of a part of the goodwill, the answer to the question
referred has to be in the affirmative, that is, it constitutes a gift under the
Act. The appeal is allowed and the conclusion of the High Court is reversed.
Since the respondent has not appeared, there will be no order for costs.
A.P.J.
Appeal allowed.
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