TaxTMI 
TaxTMI 
1980 (4) TMI 22
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....erein, and Jekisandas B. Mehta. The said two sons had a 25% share each in the said partnership. The said partnership was constituted under a partnership deed dated 12th Jan., 1960. It was a partnership at will. Clause 7 of the said partnership deed provided that the net profits and losses of the partnership business shall be divided as under : (a) Bhavanidas Harjivandas Mehta 50% (b) Vasantrai Bhavanidas Mehta 25% (c) Jekisandas Bhavanidas Mehta 25% ----- &nbs....
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.... partnership deed show that the said Bhavanidas, Vasantrai and Jekisandas desired to take up Navnitrai Bhavanidas as a partner in the business of M/s. Bhavanidas Gangadas & Co. and had also mutually agreed to take Rameshchandra, the minor son of the said Bhavanidas, as a partner " for the benefit of the profits of the said partnership" and that Navnitrai had agreed to become a partner in the said business. The relevant clauses of the said partnership deed are as follows : " 1. It has been expressly agreed between the parties hereto that the running business of M/s Bhavanidas Gangadas & Co. along with the assets and liabilities as per the books of account as on 30th June, 1964, along with goodwill, quota rights and all other benefits of the business are taken over by the new partnership, firm of M/s. Bhavanidas Gangadas & Co. as from 1st July, 1964. 7. The net profits of the partnership business shall be divided as under : (a) Bhavanidas Harjivandas Mehta 10% (b) Vasantrai Bhavanidas Mehta 25% (c) Jekis....
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.... from the date of demise of the said deceased. It must be noted that it is common ground that on the reconstitution of the said firm, the said four partners constituting the new firm as well as the minor, Rameshchandra, have brought in an equal amount of capital, namely, Rs. 10,000 each. The Assistant Controller of E.D. took the view that since the reduction of the deceased's share in the partnership business from 50% to 10% was not in consideration of any money or money's worth, it was a disposition in favour of a relative within the meaning of s. 27 of the said Act and since the disposition was within two years from the date of death of the deceased, which was 17th October, 1964, 40% of the goodwill of the said firm amounting to Rs. 27,600 could be treated as a gift under s. 9 of the said Act. On this basis the Asst. Controller brought to duty the said sum of Rs. 27,600 under s. 9 of the said Act by way of gift of goodwill by the deceased. On an appeal by the accountable person, the Appellate Controller confirmed the said addition. The accountable person then preferred an appeal to the Income-tax Appellate Tribunal. The Tribunal found as follows: "........ The deceased had ....
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....made by the deceased in favour of a relative of his shall be treated for the purposes of this Act as a gift unless (a) the disposition was made on the part of the deceased for full consideration in money or money's worth paid to him for his own use or benefit; or (b) the deceased was concerned in a fiduciary capacity imposed on him otherwise than by a disposition made by him and in such a capacity only; and references to a gift in this Act shall be construed accordingly: Provided that where the disposition was made on the part of the deceased for partial consideration in money or money's worth paid to him for his own use or benefit, the value of the consideration shall be allowed as a deduction from the value of the property for the purpose of estate duty." Sub-section (7) of s. 27 defines the term " relative ". It is sufficient to note that the said definition includes a son therein. Sub-section (15) of s. 2 runs thus: " 'Property' includes any interest in property, movable or immovable, the proceeds of sale thereof and any money or investment for the time being representing the proceeds of sale and also includes any property converted from one species into another ....
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....osed of on short point. Even assuming that the act of admitting the major son as partner in the reconstituted partnership and of admitting the minor son to the benefits of the reconstituted partnership amounted to a disposition made by the deceased in favour of his said sons, it is apparent, in view of the provisions of s. 27(1) of the said Act, that such a disposition would not amount to a gift if it was made on the part of the deceased for full consideration in money or in money's worth paid to him for his own use or benefit. The submission of Mr. Trivedi, the learned counsel for the accountable person, is that, in the present case, there was full consideration in money or money's worth paid by the said two sons to the deceased for his own use or benefit and, hence, even assuming that there was a disposition as aforesaid, it did not amount to a gift. In Raman Lal Nagji and Dhirajlal Nagji v. CED [1979] 118 ITR 785, a decision of a Division Bench of this court, N, who was carrying on his own business, converted it into partnership. By a partnership deed dated January 3, 1951, his son, R, was taken as a partner with a share of four annas in the profit or loss of the firm, the balan....
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....been relied on in the aforesaid decision. That was a case under the G.T. Act, 1958, and the dispute there primarily was whether there was a transfer of property or gift in respect of 40% of the goodwill of the sole proprietary concern of the assessee to his son. The said proprietary concern converted into a partnership in that case was that of chartered accountant. The Division Bench quoted with approval the passage in Lindley on Partnership, 13th Edn., at p. 113, which runs as follows : " Agreements to enter into partnership, like all other agreements, require to be founded on some consideration in order to be binding. Any contribution in the shape of capital or labour, or any act which may result in liability to third parties, is a sufficient consideration to support such an agreement. A bona fide contract of partnership is not invalidated by the unequal value of the contributions of its members, for they must be their own judges of the adequacy of the consideration for the agreement into which they enter." We may also refer to an unreported decision of the Division Bench of this court in CGT v. Premji Trikamji Jobanputra (Gift Tax Reference No. 1 of 1969 decided by Kant....
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....id partnership was reduced. Finally, Navnitrai brought in the same sum, viz., Rs. 10,000, as his contribution towards the capital of the reconstituted firm as was done by all other partners. It was submitted by Mr. Joshi that this consideration which moved from Navnitrai could not be said to be for the exclusive use and benefit of the deceased and, hence, it would not amount to full consideration under cl. (a) of sub-s. (1) of s. 27 of the said Act. In our view, this contention is totally unsustainable, as we shall point out. When a partner is to be taken in a firm the agreement to take such a person as a partner must necessarily be arrived at by the previous partners who continue to be partners. In these circumstances, it is but natural that the consideration should move from the incoming partner in favour of all the previous partners. Each one of the said previous partners will have some benefit from such consideration and merely because of that it cannot be said that there was no full consideration in money or money's worth given by the incoming partner as contemplated by sub-s. (1) of s. 27 of the said Act. In the present case, the deceased derived benefit from Navnitrai agreei....
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....ne where a major son was taken as a partner in the firm on reconstitution and a minor son admitted to the benefits of the said partnership on such reconstitution, it could never be said that there was any gift by the father in favour of the said sons. In support of this submission, Mr. Trivedi relied on a decision of a Division Bench of the Gujarat High. Court in CGT v. Chhotalal Mohanlal[1974] 97 ITR 393 (Guj). In that case, the respondent-assessee, and two others, Gunvantlal and Pravinchandra, were partners of a firm having seven annas, four annas and five annas share, respectively. Pravinchandra retired from the partnership and a new partnership deed was executed on 9th November, 1961, between the assessee, Gunvantlal, and the assessee's son, Ramniklal, each of them having 25% share. The assessee's two minor sons, Kiritkumar and Deepakkumar, were admitted to the benefits of the partnership, their shares being 12% and 13%, respectively, in the profits. The question was whether there was a gift by the assessee of a share in the goodwill of the firm. It was held that in the old partnership, the retiring, partner, Pravinchandra, had a five annas share. The benefits to which the mino....
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....tion, one must bear in mind the provisions of sub-s. (1) of s. 31 of the Indian Partnership Act which provides that, subject to contract between the partners and to the provisions of s. 30, which deals with the question of minors being admitted to the benefits of a partnership, no person shall be introduced as a partner into firm without the consent of all the existing partners. Sub-s. (1) of s. 29 of the Indian Partnership Act, inter alia, provides that a transfer by partner of his interest in the firm does not entitle the transferee, during the continuance of the firm, to interfere in the conduct of the business, or to require accounts, or to inspect the books of the firm, but entitles the transferee only to receive the share of profits of the transferring partner, and the transferee shall accept the account of profits agreed to by the partners. In the present case, it is common ground that there was no transfer of any interest by the deceased in favour of his sons as contemplated by sub-s. (1) of s. 29 of the Partnership Act. It view of this it appears that the submission of Mr. Trivedi that in the present case it could not be said that there was any disposition by the said dece....
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....ole proprietor of a business, converted it into a partnership by a deed dated 1st August, 1963. The partnership was to consist of the assessee and his two daughters. The capital of the partnership was Rs. 4 lakhs, of which his contribution was Rs. 3,50,000, and the contribution of, the capital of Rs. 25,000 each by the daughters was effected by transfer of Rs. 25,000 from the assessee's account to the account of each of the daughters, all the assets of the proprietary business were transferred to the partnership and in these assets the assessee and his daughters were entitled to a share in proportion to their share capital. The profits and losses of the partnership were, however, to be divided in equal shares between all the three partners. For the assessment year 1964-65, the assessee filed a return in respect of the gift of Rs. 50,000 in favour of his daughters representing the share capital contributed by them. The GTO held that, in addition, the assessee had gifted one-third share each in the goodwill of his business to his daughters. The Tribunal held that the gift was only of 1/8th share in the goodwill, but that the gift to the daughters was exempt under s. 5(1)(xiv) of the ....
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....and that the redistribution of the profit-sharing ratio on the admission of the two new partners amounted to a gift by the assessee of a portion of his share in the goodwill of the firm. Reliance was also placed by Mr. Joshi on the aforesaid decision of this court in Gift-tax Reference No. 1 of 1969 (C GT v. Premji Trikamji) [1982] 133 ITR 317 (Bom), where, as we have already pointed out earlier, the share of the assessee in the firm was reduced and his minor sons were given certain shares in the benefits of the partnership on reconstitution. It was held that the question whether there was a gift in respect of the goodwill of the business by the assessee to his minor sons would depend upon the determination of the two facts : (1) Whether the value of the assets and goodwill of the earlier business was in excess of the total liabilities of the earlier business, and (2) whether on behalf of the minors when they were admitted to the benefits of the partnership there was any capital contribution. This decision clearly proceeded on the footing that where on reconstitution of the firm the share of the assessee was reduced and a share was given to the minor sons it could be said that ther....