COMMISSIONER OF GIFf TAX GUJARAT v. CHHOTALAL MOHANLAL

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 H

p. 1044 Copy page pinpoint

A (the assessee), Gunvantilal Chhotalal and Pravinchandra ,Vedilal. These three partners had 7 annas, 4 annas and 5 annas share respec- tively in the firm. This position continued until on 9.11.1961 relevant to assessment year 1963-64 with which this appeal is conceroed, a change took place in the constitution of the firm. Under the new deed, Pravinchandra Vedilal retired; no change took place in respect of B Gunvantilal Chhotalal; one Ramniklal Chhotalal became a partner with 4 annas share. The share of the assessee Chbotalal Mohanlal was reduced to 4 annas; for the remaining 4 annas two minor sons of Cbhotalal being Kiritkumar and Deepak Kumar were admitted to the benefits only of the firm-Kiritkllmar having 12 per cent and Deepak Kumar having 13 per cent. No alteration was, however, made regard- C ing the share capital standing in the name of the assess.ee.

The Gift Tax Officer came to the conclusion that· the assessee ).. bad deprived himself of 19 per cent share in the profits and had gifted away 19 per cent share in the goodwill ofthe firm in favour of his twp D 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 .)._ E 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 F receive future profits.could not be subject-matter of a gift as the trans- fer 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:-. G "Whether on the facts and in the circumsta0 ces 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?"

H Th('. High Court answered the question against the Revenue and up-

COMMR. OF GIFT TAX v. CHHOTALAL (MISRA, J.I 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. -1 "Gift" is defined.in section 2(xii) of the Act:- c " 'Gift' means the tr311sfer 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." D In support of the appeal, learned counsel further relies upon decisions of different High Courts to which we shall pr~sently refer. Before doing so it would be appropriate to indicate that in Kh~fial Khemgar Shah & Ors. v. Khorshed Banu Dadiba Boatwa!la & 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 Monda/, 150 FR 469 after r~erring to a E -- number of authorities of this Court and different High Courts a Divi- sion Bench of the Calcutta f!igh 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 F 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 cpnµection, it may be mentioned that accori:ling tp section 14 of the Indian Partnership Act, pro- perty of a firm includes goodwill of the business. Further, G 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, H

p. 1046 Copy page pinpoint

A 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 finn after dissolution, the goodwill shall, subject to contract between the parties, be included in the assets. and it may be sold either separ~tely or alongwith other properties of the firm ...... Upon B 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 Monda! hy the deed of gift transferred his share or interest in the firm which included his share of goodwill -l- also. Hence, for the purpose of payment of gift-tax, the c 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 J Madras High Court was called upon to deal:with a case of this type D where minors were admitted. to the benefits of partnership finn 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. hy the assessee in favour of the minors. The ratio in Sirehmal -j._ ' E Nawalkha v. Commissioner of Income-Tax, 156 ITR 714 as also in Commissioner of Gift Tax, Bombay v. Premji Trikamji Jobanputra, 133 ITR 317 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 F share, the right to the money value of.the goodwill stands transferred, the transaction does constitute 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. G 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.