2000 (9) TMI 68 - SC - Income Tax

Retirement from partnership not considered gift for tax

Commissioner Of Gift-Tax Versus TM Louiz

The Supreme Court dismissed the civil appeal, affirming that the retirement of a partner from a firm did not amount to a gift for gift-tax assessment ... Whether no element of gift was involved when the assessee retired from the firms in which he had been a partner ? Held that:- When a partner retires from a partnership, the partnership continues. The assets and the goodwill of the firm continue to remain the assets and the goodwill of the firm. All that the retiring partner gets is the value of his share in the partnership assets less its liabilities. It cannot, in such circumstances, be held, assuming that the retiring partner received less than what was his due, that the difference was something that he had transferred to the continuing partners within the meaning of 'transfer of property' for the purposes of the Gift-tax Act or that there was a gift liable to gift-tax. The word 'settlement' in the definition of 'transfer of property' in the Gift-tax Act takes colour from the context of the definition and its neighbouring words and means a settlement upon trust and not a settlement of accounts. Therefore, that the view taken by the Appellate Assistant Commissioner, the Tribunal and the High Court was the right view. Appeal dismissed. Issues:1. Whether the retirement of a partner from a firm constitutes a gift for the purpose of gift-tax assessmentRs.Analysis:The assessment year in question was 1973-74, where the assessee retired from two firms as a partner. The Gift-tax Officer assessed gift-tax on the basis that the retirement constituted a gift due to the surrender of rights in the firms. The Appellate Assistant Commissioner supported the assessee's claim that it was not a voluntary act but a relinquishment of rights, hence not a gift. The Revenue argued that the retirement involved a relinquishment of shares, constituting a gift. The Tribunal held that the retiring partner was entitled to the value of their share in the partnership assets, emphasizing it was not a transfer of interest to the continuing partners. The High Court concurred with the Tribunal's view, leading to the appeal before the Supreme Court.2. Interpretation of 'gift' and 'transfer of property' under the Gift-tax Act:The learned Attorney-General highlighted the definitions of 'gift' and 'transfer of property' in the Gift-tax Act. The definition of 'gift' involves the voluntary transfer of property without consideration, while 'transfer of property' encompasses various forms of alienation. The Attorney-General argued that the retirement involved a settlement of accounts, constituting a gift under the Act. Reference was made to precedents, such as CGT v. Nani Gopal Mondal and CGT v. Chhotalal Mohanlal, to support the argument.3. Analysis of precedents and their applicability:The judgment in CGT v. Nani Gopal Mondal dealt with an express gift of goodwill share, not relevant to the current case. CGT v. Chhotalal Mohanlal involved a partnership reconstitution leading to a gift of goodwill share to minor sons. The Supreme Court clarified that for a gift to occur, there must be a voluntary transfer of property, which was not the case in the present scenario. The Court differentiated the facts of the current case from the precedent cited, emphasizing the absence of a transfer of property in the retirement scenario.4. Interpretation of 'settlement' in the context of the Gift-tax Act:The Court explained that the term 'settlement' in the definition of 'transfer of property' refers to a settlement upon trust, not a settlement of accounts. In the context of the retirement from a partnership, the retiring partner only receives the value of their share in the assets, without any transfer of property to the continuing partners. The Court upheld the view that the retirement did not constitute a gift liable to gift-tax under the Act.In conclusion, the Supreme Court dismissed the civil appeal, affirming the decisions of the lower authorities and holding that the retirement of a partner from a firm, in this case, did not amount to a gift for gift-tax assessment purposes.