TaxTMI 
TaxTMI 
2017 (8) TMI 1385
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....firm, besides offering personal guarantee in respect of various financial transactions could be taken as sufficient consideration for the purpose of the exemption under section 5(1)(xiv) of the Act ? These are the main points to be answered by this court in the reference made by the Tribunal, at the instance of the assessees. 2. The sequence of events reveals that the assessees were doing business under the name and style as "Paragon Rubber Industries" by constituting a partnership firm, wherein 4 partners were there. Later, by virtue of the partnership deed dated November 1, 1986, there was a change in the constitution of the firm and two more partners were brought in, virtually making the number of partners as "six", instead of four. As a natural consequence, 25 per cent. of the share possessed by each of the partners came down, virtually suffering a reduction of 8.33 per cent., which in turn was assigned in favour of the incoming partners. The reduction of shares to the said extent, according to the assessing authorities, amounted to "gift" at the hands of the assessee in favour of the newly inducted partners and hence it was sought to be taxed by issuing proceedings under sect....
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....order passed by the Tribunal in this regard is produced as "annexure E". 5. On passing the above order, 3 of the assessees submitted reference applications as R. A. No. 9(Coch)/1999, R. A. No. 10(Coch)/1999 and R. A. No. 11(Coch)/1999 in Gift Tax Appeal Nos. GTA. No. 26 (Coch)93, GTA. No. 27(Coch)93 GTA. No. 28(Coch)93, raising three questions to be referred for adjudication by this court. After considering the point involved, the Tribunal redrafted the issue to be considered as a single question and referred the same to be answered by this court in terms of section 26(1) of the Act. The question referred as above reads as follows : "Whether, on the facts and in the circumstances of the case, was the Tribunal justified in holding that there was gift by the assessee in favour of the incoming partners and if the answer to this question is in the affirmative, was the Tribunal justified in holding that the capital contribution and undertaking to discharge liabilities of the firm by the new partners at the time of their admission to the firm and the action of the new partners in actively working in the management and working of the firm constitute consideration for the surrender of sh....
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....standing counsel for the Revenue submits that, "adequacy of consideration" is a question of fact and that the same has been considered by the Tribunal which is the ultimate authority as per the statute and as such, nothing actually survives to be considered by this court, treating it as a question of law to be answered in terms of section 26(1). It is also pointed out that, there is no dispute as to the "goodwill value" worked out as Rs. 9,60,000, more so, since the firm was consistently making profit at the rate of Rs. 4.97 lakhs during the past 5 years before the reconstitution. Admittedly, only a sum of Rs. 25,000 was pumped in by the newly inducted partners at the time of reconstitution of the firm in the year 1986 and as such, this could not have been accepted as "adequate consideration" to escape the assessment, treating it as eligible for exemption under section 5(1) of the Act. Learned counsel further points out that the question stands already answered by a "three member" Bench of the Supreme Court as per the decision reported in CGT v. Chhotalal Mohanlal [1987] 166 ITR 124 (SC) whereas the decisions sought to be relied on from the part of the assessees have been rendered ....
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....share capital, which led to fixation of profit in favour of the new partner of the firm, resulting in reduction of share of the assessee to 30 per cent. The reduction of the said extent from 45 per cent. to 30 per cent. was taken as "gift" to the newly inducted partner, at the hands of the assessee. When the matter came up for consideration before the Tribunal it was held that no instance of gift exigible to tax was established. But on a reference, this court took the view that the reduction in the share of profit of the assessee constituted a "gift" exigible to tax, which was taken up by the assessee before the apex court. During the course of hearing, the law declared by the Supreme Court in CGT v. D. C. Shah [2001] 249 ITR 518 (SC) was sought to be relied on from the part of the assessee and reference was made to other verdicts as well. CGT v. Chhotalal Mohanlal [1987] 166 ITR 124 (SC) was sought to be relied on by the Revenue. After hearing both sides, the apex court held that the Bench was unable to accept the contention that the transfer was for inadequate consideration so as to amount to a taxable gift within the meaning of section 4(1)(a) of the Gift-tax Act. The view expre....
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....igible to tax in terms of the relevant provisions of the statute. But in that case, the father retired from the partnership and all the shares were distributed among the minor sons who were inducted as partners. It was under such circumstances, that the Bench held that there was no consideration at all and hence the transaction virtually amounted to a "gift" in terms of section 2(xii) of the Gift-tax Act, to be taxed under section 4(1)(a) of the statute. The scope of the said verdict was in fact considered by a subsequent "two member" Bench of the apex court in Sree Narayana Chandrika Trust v. CGT [2003] 261 ITR 279 (SC) (equivalent citation is [2003] 11 SCC 350). The reliance sought to be placed by the Revenue on the verdict in CGT v. Chhotalal Mohanlal [1987] 166 ITR 124 (SC) was dealt with by the apex court and the circumstances under which the declaration was made as above was adverted to, which however was noted as quite different from the circumstances prevailing in Sree Narayana Chandrika Trust's case dealt with in [2003] 261 ITR 279 (SC). The factual position, when the father retired and all his rights to share the profits were transferred to the minor sons (who were in....