1987 (7) TMI 75 - HC - Income Tax

Court rules relinquishment of profit share as taxable gift under Gift-tax Act, disqualifying exemption.

The High Court upheld the Tribunal's decision, ruling that the relinquishment of the assessee's profit share in the firm to his sons constituted a taxable ... Deemed Gift, Exemptions, Gift Issues:1. Whether the reduction of the applicant's share of profit in the firm amounted to a gift and was liable to gift-tax.2. Whether the applicant was entitled to exemption under section 5(1)(xiv) of the Gift-tax Act.3. Whether the relinquishment of profit-sharing ratio among partners amounted to a gift attracting gift-tax.Analysis:The case involved the assessment year 1974-75 where the assessee and his three sons were partners in a firm, with the assessee initially having a 40% share which was later reduced to 25% through a new deed of partnership. The assessing authority deemed the relinquishment of 15% of the share as a gift, leading to gift-tax implications. The Appellate Assistant Commissioner granted exemption under section 5(1)(xiv) of the Gift-tax Act, but the Appellate Tribunal disagreed, holding the relinquishment as a taxable gift. The Tribunal also found that the gift was not made in the course of carrying on the business, disqualifying the assessee from relief under section 5(1)(xiv) of the Act.The Appellate Tribunal determined that the assessee voluntarily relinquished 15% of his profit share to his sons, constituting a gift under the Gift-tax Act. The Tribunal cited precedents, including the Madras High Court case of CGT v. T. S. Shanmugham, to support the taxability of such gifts resulting from reconstitution of partnership firms. The Tribunal emphasized that the business operations remained unaffected by the profit-sharing adjustment, with the assessee retaining control over major matters despite the reduced share.Regarding the entitlement to relief under section 5(1)(xiv) of the Act, the Tribunal found that the gift was not integral to the business carried on by the firm, as it was a personal surrender by the assessee to his sons. Citing the Supreme Court case of CGT v. P. Gheevarghese, the Tribunal concluded that the lack of a direct connection between the gift and the business operations precluded the assessee from claiming relief. The Tribunal also distinguished the case from the Gujarat High Court decision in CGT v. Chhotalal Mohanlal, noting that all parties involved were adults, unlike the minor involved in the Gujarat High Court case.Ultimately, the High Court upheld the Tribunal's decision, ruling in favor of the Revenue on all three questions of law. The Court agreed with the Tribunal's findings that the relinquishment of profit share constituted a taxable gift and that the assessee was not eligible for exemption under section 5(1)(xiv) of the Act. The Court commended the amicus curiae for their assistance and directed the judgment to be sent to the Income-tax Appellate Tribunal, Cochin Bench.