TaxTMI 
TaxTMI 
2005 (6) TMI 212
X X X X Extracts X X X X
X X X X Extracts X X X X
....otal capital of the firm including the land brought in was decided to be at Rs. 23,30,015 and the third party being Shri P.K. Usman was expected to bring his contribution in cash. The partners enjoyed profit sharing ratio of 50 per cent : 25 per cent : 25 per cent respectively. 2.2 The firm was reconstituted with effect from 10-4-1984 vide partnership deed of even date. By this reconstitution the company M/s. Bhuvaneshwari Hotels (P.) Ltd., represented by Shri A.K. Ahmed, one of the directors and Smt. Khamarunnisa Ahmed, w/o Sri A.K. Ahmed were included as partners and the partnership continued along with the earlier partners Sri A.K. Ahmed, Sri Machingal Mohammed and Sri P.K. Usman. Smt. Khamarunnisa Ahmed had purchased property at No. 2729 measuring 7002 sq. ft. and this was brought in as capital by her with a valuation of Rs. 2 lakhs. It was decided that M/s. Bhuvaneshwari Hotels (P.) Ltd. was required to bring in capital of Rs. 10 lakhs and was also decided that in the extent of dissolution or appreciation in value of the property, the same will go to the company M/s. Bhuvaneshwari Hotels (P.) Ltd. only. Further, other partners will have no right or title or interest in the ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....The reason given in the deed for reconstitution is that the partner M/s. Bhuvaneshwari Hotels (P.) Ltd. was not able to contribute sufficient capital as agreed upon for the expansion of business and hence reconstitution. 2.5 The relinquishment of rights to the extent of 40 per cent by M/s. Bhuvaneshwari Hotels (P.) Ltd., in favour of the other three partners Sri A.K. Ahmed, Sri P.K. Usman and Sri Machingal Mohammed by way of reconstituted deed dated 1-10-1992 was the reason for initiation of gift tax proceedings in the case of the appellant. The following events documented in the returns of income filed by M/s. Mysore Hotel Complex substantiated initiation of gift tax proceedings for the assessment year 1993-94. (i) Along with the return of income for the assessment year 1992-93 there is a schedule of fixed assets wherein on 30-1-1993 the land and building which had book value of Rs. 20,90,305 and Rs. 18,78,964 respectively were revalued to Rs. 1,40,90,305 and Rs. 62,22,856. As such on that day the asset value was increased by Rs. 1,63,43,892. This appreciation was allocated amongst the partners in the profit sharing ratio of 45 per cent : 22.5 per cent : 22.5 per cent : 10 p....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ent year 1993-94. The notice was issued with prior approval of JCIT, Mysore Range, Mysore." 3. The Assessing Officer took into account the reduction in share of profit from 50 per cent to 10 per cent in the case of the appellant vide partnership deed dated 1-10-1992 and omission of exclusive right in appreciation available to appellant vide deeds dated 10-4-1984 and 12-10-1988 in the deed dated 1-10-1992. After exclusion of such exclusive rights in appreciation in the deed dated 1-10-1992, the assets of the firm i.e., land and building were revalued as on 31-1-1993 i.e., before three new partners were introduced. Due to revaluation, value of land and building was increased to Rs. 203.08 lakhs from 39.68 lakhs. Due to revaluation, the value of land and building has been increased to 500 per cent of the book value. Capital of the existing partners was increased due to revaluation as per the profit sharing mentioned in deed dated 1-10-1992. During the previous year relevant to assessment year 1994-95, the three partners, who got the increase in their capital due to revaluation withdrew an amount to the extent of Rs. 108.24 lakhs. Appreciation on account of revaluation resulting in ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ure in meeting with a contractual obligation and therefore no gift tax arises. B. The company M/s. Bhuvaneshwari Hotels (P.) Ltd. was required to bring in additional funds for expansion of the business and since such funds were not brought in, profit sharing ratio was reduced, right over appreciation in the value of the assets taken away. C. As per Partnership Act right of a partner in the assets of a firm crystallizes only on dissolution and during the subsistence of the partnership there is no way of any partner assigning either wholly or partly his interest in any individual asset to others. In view of this there cannot be any gift. D. If the rationale behind the decisions in the cases of D.C. Shah v. CGT (169 ITR 93), C.S. Patil v. CGT (188 ITR 97), Ghevergheese (83 ITR 403) and CGT v. Ali Hussain Jervaji (123 ITR 425) are considered in the present situation there cannot be any gift." 6. The Assessing Officer in his order has rejected the above contention by observing as under:- (i) The capital account of company in the firm shows balance as NIL but the company has maintained substantial amount in the current account. The position is as under:- 31-3-1988 ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....elinquishment of right in surplus as on 1-10-1992. The subsequent event of revaluation as on 31-1-1993 does not create a right on 1-10-1992. The learned CIT(A) observed that revaluation was done on 31-1-1993 and appreciated value has been apportioned as on 31-1-1993. Benefit of gift made on 1-10-1992 has actually been passed on to the beneficiaries consequent to revaluation on 31-1-1993. 9. The learned CIT(A) considered the following judgments quoted by the learned AR. CGT v. C.S. Patil [1989] 180 ITR 97 (Kar.) CGT v. P. Ghevergheese, Travancore Timbers & Products [1972] 83 ITR 403 (SC) D.C. Shah v. CGT 169 ITR 93 (SC) (sic) 10. The learned CIT(A) was of the opinion that in all the cases referred to above, there has been a transfer due to change in share of ratio of profits of partners but such change is for adequate consideration. However, in the instant case, the relinquishment is without any consideration. The learned CIT(A) quoted the following para from the judgment of the jurisdictional High Court in the case of D.C. Shah v. CGT[1982] 134 ITR 492 (Kar.). "...If the ratio of the decision in Ayyandar's case 73 ITR 761 (Mad.) is that a mere reallocation of shar....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ties below failed to appreciate that there was neither a dissolution nor determination of surplus on the revaluation of the assets on the date of alteration of the terms in the partnership deed to hold that, certain amount was due to the appellant which the appellant relinquished by reducing its share to warrant initiation and assessment of deemed gift. (5) Without prejudice to the above, the evaluation of the taxable gift is excessive and liable to be reduced substantially. (6) The appellant denies itself liable to be charged to interest under section 16B of the Income-tax Act, 1961 which requires to be cancelled under the facts and in the circumstances of the appellant's case. 14. During the course of proceedings before us, the learned AR has filed a paper book containing 59 pages. The learned AR submitted that Assessing Officer has given the facts in his order. The learned AR drew our attention to partnership deed dated 10-4-1984 available at pages 9 to 26 of the paper book. (1) As per clause 7 of the partnership deed, all the partners were required to contribute capital of Rs. 31 lakhs and further finances were required to be arranged by the appellant. The appellant....
X X X X Extracts X X X X
X X X X Extracts X X X X
....1988. As per this clause, the appreciation in the property owned by the firm shall belong to appellant firm. No other partner was having any right, title or interest in the future and further appreciation of the property. When fresh partnership deed was executed on 1-10-1992, no such clause giving the appellant an absolute right in appreciation of property was executed. It was argued that appellant has relinquished the right in, appreciation in favour of other partners without any consideration and this has resulted into a gift. It is not a simple case of change in the profit sharing ratio. 19. Identical applications were also filed by the following persons before the Bench: 1. Shri D. Machingal Mohammed 2. Shri P.K. Usman 3. Shri A.K. Ahmed 20. All the three above named persons were partners of the firm M/s. Mysore Hotels and retired from the firm in the previous year relating to the assessment year 1995-96 after withdrawing the sum of Rs. 1.08 crore from the firm. It will be relevant to mention that Shri A.K. Ahmed was a Director of the company at the time when he became partner in the M/s. Mysore Hotels. He was also a Director when the share of the company was red....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ugh the paper books submitted. Partnership firm was formed vide deed dated 24-8-1983 between the following partners: 1. Mr. A.K. Ahmed First Party 2. Mr. Machingal Mohammed, NRI Second Party 3. Mr. P.K. Usman Third Party 23. The firm was named as Mysore Hotel Complex and business stated in the deed was of construction of shopping complex, Hotels and lodging including commercial complex and also running the business of Hotels. First and second parties contributed land as capita, contribution and appreciation beyond Rs. 27,30,015 in case of revaluation, was to be adjusted in the accounts of first and second party. Vide deed dated 10-4-1984, Mrs. K. Ahmed wife of Mr. A.K. Ahmed and the appellant company were introduced as partners. Smt. K. Ahmed contributed a site as her capital contribution. The site was worth Rs. 2 lakhs. Vide this deed, it has been mentioned that all the future appreciation will belong to the appellant. The partnership deed dated 12-10-1988 is important as it also ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ion, the amount by which the value of property as on the date of transfer and determined in the manner laid down in Schedule II exceeds the value of consideration shall be deemed to be a gift made by the transferor. Rule 16 of Schedule III of Wealth-tax Act gives the basis for computation of net wealth of the firm amongst the partners. It recognizes that net wealth can be more than the capital of the partners. It may happen an account of appreciation in the value of assets or including the value of goodwill. 26. Clauses 22 and 23 of the partnership deed dated 12-10-1988 are- "22. The death or retirement, insolvency, winding up, liquidation or ceasing to be a partner for any reason whatsoever of any of the partners shall not cause the dissolution of the firm but the surviving partners shall carryon the business including the operations of the bank accounts of the firm. 23. The goodwill of the firm shall belong to M/s. Bhuvaneshwari Hotels Pvt. Ltd. only." 27. While executing partnership deed dated 1-10-1992, clause 22 was retained and mentioned as clause 19. However, clause 23 relating to goodwill was changed. Clause 20 relating to goodwill is as under:- "The goodw....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... 245 ITR 831 (SC) - "In this case, the assessee retired from the two firms. What was argued before the Supreme Court was that the assessee has received less than the market value of his shares since the goodwill of the firms had not been taken into account. The learned Supreme Court held that the retiring partner got the value of his share in the partnership assets less than 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 Gift-tax Act or that there was a gift liable to gift tax." N. Khadervali Saheb's case - "Disputes arose between the partners on dissolution of firm and such differences were referred to arbitrators. Arbitrators made an award by which the residue was distributed amongst partners by allocating the assets. The learned Supreme Court held that award did not require registration under section 17 of the Indian Registration Act, 1908, since the document did not transfer or assign any interest in any asset." K. Govindan's case - "....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ount to a taxable, gift within the meaning of section 4(1)(a) of the Gift-tax Act." 33. The learned Supreme Court in the case of CGT v. Chhotalal Mahanlal [1987] 166 ITR 124 held that relinquishment of share of an existing partner in favour of the minors, admitted to the benefit of partnership without any consideration amounted to gift by the said partner in favour of minors. The reason was that the goodwill of the firm is the property of the firm and upon admission of the two minors to the benefits of the partnership, the right to the money value of the capital stands transferred. Since this transfer is without consideration, insofar as the minors are concerned, the transaction would amount to a taxable gift under the Gift-tax Act. 34. Another decision of Supreme Court in the case of B.T. Patil & Sons is worth mentioning. In this case, the firm transferred certain machinery to each of five partners at the book value which was written down value. Within a short time, the partners floated another partnership and those machineries were brought as capital contribution at value which was three times the written down value. The newly floated firm sold those machineries to another ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ership firm has no substantial or real business or the record shows that there was no real need for the partnership firm for such capital contribution from the assessee. All these and other pertinent considerations may be taken into regard when the ITO enters upon a scrutiny of the transaction, for in the task of determining whether a transaction is a sham or an illusory transaction or a device or ruse, he is entitled to penetrate the veil covering it and ascertain the truth." 37. Now one has to consider the facts in the instant case in the light of above observation. New partnership deed is executed on 1-10-1992 vide which the appellant surrenders his right on appreciation on the value of assets and goodwill and reduces its share of profit from 50 per cent to 10 per cent. The firm in which appellant was a partner was having substantial real estates and business included the development of commercial estates also. Appreciation in the value was in-built. Fixed assets were revalued on 30-1-1993 to the extent of Rs. 1.63 crores and partner's accounts were credited. On 1-2-1993, some new partners are introduced. The three partners whose accounts were credited on account of revaluati....
X X X X Extracts X X X X
X X X X Extracts X X X X
....hip firm as a partner (exceeding 6 months 8,00,009 less than 6 months 3,00,000) - Rs. 11,00,000 39. Previous year figure shown is Rs. 6,50,000. Hence it is clear that appellant company has invested substantial amount from financial year 1985-86. In absence of figures of earlier years, it cannot be said as to how much amount was invested. The appellant has not shown any amount in the name of appellant company as on 31-3-1986 and 31-3-1987 in the chart furnished at page 48 of paper book while balance sheet of assessee-company shows such investment. 40. On credit side, the sum of Rs. 11,OO,OOO is shown as advance for share capital. Hence, share capital is not Rs. 200 as on 31-31986 or 31-3-1987. -------------------------------------------------------------- Year Advance to Advance reed ending firm as towards sub- partner scription of &....
X X X X Extracts X X X X
X X X X Extracts X X X X
....nbsp; reciation ----------------------------------------------------------- F.Y. 1987-88 (-) 15,19,889 15,56,999 (+) 37.1 10 F.Y. 1988-89 (-) 5,62,010 13,51,748 (+) 17,89,738 F.Y. 1989-90 (+) 1,28,219 11,06,410 12,34,629 F.Y. 1990-91 (+) 1,90,000 9,15,883 11,05,883 F.Y.1991-92 (+) 2,62,982 6,57,873 9,20,855 F.Y. 1992-93 (+) 8,62,567 5,21,159 13,83,726 ----------------------------------------------------------- From the above chart, it is clear that firm was in profit from the beginning in case depreciation is not considered. In financial year 1992-93, it was earning handsome profit. 43. No interest was being credited in capital account or....
X X X X Extracts X X X X
X X X X Extracts X X X X
....of the firm belong to the firm while in earlier deed goodwill of the firm belonged to the assessee. As per clause 19 of the partnership deed continuing partners were given a right to continue the business in case any of the partners leave the firm on account of death, retirement, insolvency etc. (e) Assets were revalued on 30-1-1993 and accordingly capital accounts of the partners were credited in the profit sharing ratio. The assessee-company got only 10 per cent of appreciation though as per deed dated October, 1988, the assessee-company was entitled to the entire appreciation. (f) Fresh partnership deed was executed vide deed dated 1-2-1993 and 4 new partners were introduced. The new partners were father, his two sons and his daughter in law. In the financial year 1993-94, the 3 partners i.e., Shri A.K. Ahmed, M.M., Shri P.K. Usman withdrew a sum of Rs. 1.08 crore from the firm. In the financial year 1994-95 all these 3 partners retired. Vide deed dated October, 1992 there were four partners i.e., Shri A.K. Ahmed, Shri Mohammed, Shri P.K. Usman and the assessee-company. In the financial year 1994-95, the management of the assessee-company was taken over by the persons who ....