1972 (11) TMI 7 - HC - Income Tax

Partnership Share Reallocation: Taxable Gift & Gift Tax Liability

Commissioner of Gift-Tax, Madras Versus KPSV. Duraiswamy Nadar (Decd.) (By Legal Representative).

The High Court held that the reallocation of shares in a partnership, specifically the transfer of one-sixth share in the goodwill of the firm, ... Gift Tax Act, 1958 - assessee in this case is a Hindu undivided fammily and it was one of the three partners of a firm - Whether re-distribution of profit-sharing ratio among partner attract gift-tax provisions and whether the value of gift is to be calculated on the goodwill or on the entire assets Issues:1. Whether the reallocation of shares in a partnership, resulting in a diminution of one partner's interest and an increase in the interest of others, constitutes a gift chargeable to gift-taxRs.2. Whether the redistribution of shares in a partnership, specifically the transfer of one-sixth share in the goodwill of the firm, amounts to a taxable giftRs.Analysis:The judgment pertains to a Hindu undivided family, a partner in a firm, which underwent a change in profit-sharing ratio through a supplementary deed. The Gift-tax Officer contended that the reallocation of shares, without consideration, constituted a gift to the other partners. The Appellate Assistant Commissioner disagreed, stating it was a reallotment of shares and not a transfer of property. The Tribunal concurred, emphasizing that partners can alter profit-sharing ratios without it being construed as a transfer unless expressly done. The Tribunal held that no transfer or surrender occurred, thus no gift tax liability. The revenue appealed to the High Court, questioning the Tribunal's decision.The High Court referenced a previous case and opined that redistributing profit-sharing involves a transfer of property constituting a gift. The Court differed from the Tribunal's view and held that the redistribution of shares did amount to a gift chargeable to tax. However, the Gift-tax Officer had evaluated the transaction as a gift of one-sixth share in the goodwill of the firm. The Court highlighted that goodwill is an asset of the partnership and should be considered in valuing the gift. The Court directed the revenue to re-value the gift, refraining from providing a specific valuation method.In conclusion, the High Court answered the question in the negative, favoring the revenue. The Court directed the revenue to re-value the gift, including the one-sixth share in the entire firm's net assets, which should encompass the goodwill. The revenue was awarded costs, and the question was answered in the negative.