1989 (7) TMI 22 - HC - Income Tax

Reconstitution of Firm & Minors' Shares: Gift Tax Implications Under Consideration

The High Court of Rajasthan held that the reconstitution of a firm and adjustment of shares among partners, involving the admission of minors, constituted ... Firm, Gift, Gift Tax Issues:Whether the Tribunal was justified in holding that no gift was made by the assessee to the minors.Analysis:The High Court of Rajasthan addressed a reference made by the Income-tax Appellate Tribunal regarding the Gift-tax Act, 1958, for the assessment year 1973-74. The case involved a partner in a firm who reduced his share from 50% to 30% due to the admission of minors to the partnership. The Gift-tax Officer considered this reduction as a gift and assessed gift-tax. However, the Tribunal disagreed, stating that such reconstitution of a firm and adjustment of shares among partners does not constitute a gift under the Act. The Tribunal relied on a decision of the Gujarat High Court. The Tribunal did not thoroughly consider the contribution made by the minors towards the firm's capital, which the Appellate Assistant Commissioner viewed as inadequate consideration for the shares allotted to them. The High Court noted that the assessee did not appear for the hearing.The High Court considered the Supreme Court's decision in a similar case where minors were admitted to a partnership, and it was held that the transaction constituted a gift under the Act. The Court emphasized that the right to the money value of goodwill stands transferred with the admission of minors to the partnership. The High Court highlighted another decision where the relinquishment of profits without consideration was deemed a gift. Based on these precedents, the High Court concluded that the Tribunal's decision, relying on the Gujarat High Court's judgment, could not be upheld.Regarding the minors' contribution to the firm's capital, the High Court noted that the Tribunal did not thoroughly examine this aspect, unlike the Appellate Assistant Commissioner. The Commissioner viewed the minors' contribution as token and not adequate consideration for the shares allotted to them. The High Court agreed with the Commissioner's view that the transfer of shares to the minors without consideration amounted to a gift. Consequently, the High Court allowed the reference, directing the Tribunal to reconsider the matter and assess whether the minors' contributions were adequate consideration for the shares allotted to them. The High Court emphasized that the Tribunal should conduct a detailed examination in this regard. No costs were awarded in the judgment.