TaxTMI 
TaxTMI 
2003 (8) TMI 172
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....ulating goodwill, has wrongly confirmed that no salary is allowable to any partner. Business has actually been conducted by the partners. (b) That the Ld. CGT(A)(C) has wrongly not considered that the turnover of the partnership concern increased from 5 crores to 7 crores. 4. That the Ld. CGT(A)(C) has wrongly rejected the assessee's case that while working out capital employed in the firm for allowing interest on that capital, the amount of goodwill and appreciation of assets, is to be considered as part of capital. 5. That the Ld. CGT(A)(C) while confirming the addition on account of goodwill has wrongly not allowed deduction in respect of : (a) Interest on partners capital at market rate. (b) Salary to all the partners at market rate and commensurate with their experience and expertise. 6. That the Ld. CGT(A)(C) while quantifying the amount of goodwill, has wrongly confirmed 3 years purchases. 7. That in any case, the quantum of gift held to be chargeable to tax, is highly excessive. 8. That the Ld. CGT(A)(C) has wrongly held that copy of account of Shri Om Parkash Munjal, one of the partners was not filed. Actually, it was filed under letter dated 12-3-1....
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....haring ratio. Therefore, in view of this judgment, share in the assets of the firm relinquished in favour of the incoming partners was liable to gift tax. He further referred to the judgment of Supreme Court in the case of CGT v. Chhotalal Mohanlal [1987] 166 ITR 124, where the Supreme Court has held that goodwill is an asset of the firm and reduction in profit sharing ratio in favour of the minor sons of the partners admitted to the benefits of partnership amounts to gift by father to his two minor sons as per sub-section (xii) of section 2 of the Gift-tax Act. The Assessing Officer further examined the copies of accounts of new partners and found that they had not introduced any capital at the time of entry on 1-4-1992. However, subsequently in the months of July and August, these partners had introduced capital varying from Rs.2 lakhs to Rs.2.75 lakhs, out of which sufficient amounts were immediately withdrawn. He also observed that investment allowance reserve was distributed among the partners including the new partners. Besides, interest and share of profits were also credited. Considering the extent of share capital introduced, the Assessing Officer found that in the case of....
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....share of profit to the extent of 7% and 9% respectively. Like in the case of M/s.Munjal Castings, the Assessing Officer determined the value of reduced share in the assets and goodwill of M/s. Munjal Sales Corporation at Rs.24,25,594 and Rs.31,18,625 respectively. This was also included in the taxable gift of these assessees. The Assessing Officer further observed that M/s. Thakurdevi Investments Pvt. Ltd. and M/s. Hero International Pvt. Ltd. were also partners in the firm of M/s. Munjal Steels. There was also a change in the constitution of the firm resulting in reduction in share of profit of 10% each in the cases of M/s.Thakurdevi Investments Pvt. Ltd. and M/s.Hero International Pvt. Ltd. The Assessing Officer worked out the value of taxable gift at Rs.4,32,352 each and included the same in the taxable gift in the hands of the respective assessees. 5. Apart from the above cases, the Assessing Officer also observed that M/s.Hero International Pvt. Ltd., M/s.Munjal Investments Pvt. Ltd., M/s.Om Parkash & Sons (HUF) and Shri Sudhir Munjal were partners in the firm of M/s.Munjal Gases. There was also a change in the constitution of the firm introduced w.e.f. 1-4-1992 whereby sha....
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....lso a new partner introduced capital of Rs. 2 lakhs on 11-8-1992 and out of the same she withdrew a sum of Rs.73,854. Her capital account was credited by investment allowance reserve, interest and share of profit aggregating to Rs.2,33,724 and the balance carried forward was Rs.3,55,229. Similarly, Smt. Sobhna Munjal brought in capital of Rs.2 lakhs on 11-8-1992 out of which she withdrew a sum of Rs.73,853 on 31-3-1993. Her capital a/c was credited by way of interest, development rebate reserve and share of profit from the firm aggregating to Rs.2,29,083. The balance carried forward was Rs. 3,55,229. By analyzing these details, the Ld. CGT(A) observed that the submissions of the assessees that new partners had brought in additional capital was without any merit. There was also no evidence that new partners had put in labour also. He also noticed that old partners whose share of profit was reduced did not get any additional benefit on admission of the new partners. In fact, the investment allowance reserve in the books of account was also distributed among all the partners including the new partners. He further observed that the reduced share of goodwill in the partnership firms als....
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....on was not the criteria for fixing the profit sharing ratio. He observed that the opening credit balance in the account of M/s.Bahadur Chand Investments Pvt. Ltd. and M/s.Thakurdevi Investments Pvt. Ltd. as on 1-4-1992 was Rs.44.09 lakhs, Rs.39.92 lakhs respectively and the closing balance was at Rs.47.26 lakhs and Rs.37.52 lakhs respectively as on 31-3-1993. As against the same, opening debt balance in the account of Smt. Sudershan Kumari Munjal was Rs.1.81 lakhs and closing balance was Rs.5.56 lakhs as on 1-4-1992 and 31-3-1993 respectively and still she was given 16% share of profit in the firm. Similarly, M/s.Hero Investments Ltd., whose share was reduced in the firm, had also opening balance of Rs.33.80 lakhs and closing balance of Rs.49.80 lakhs respectively. Therefore, there was no justification for reducing her share of profit. He also observed that even in the account of other partners, the credit balance in their capital account was nominal and still they were given much higher share of profit in the firm. He, therefore, observed that reduction in the share of profit of the firm was not justified on this account and the incoming partners had not brought any substantial ca....
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....pages 9 to 14 of the impugned order of the CGT(A) in the case of M/s. Hero Investments (P.) Ltd. Assessees are aggrieved with the orders of the CGT(A) and hence these appeals before us. 11. The Ld. Counsel for the assessees, Shri Subhash Aggarwal, submitted that the issue, which requires to be considered by this Bench, is whether there is any gift when there is a change in the profit sharing ratio among the partners. He submitted that the incoming partners had contributed capital and, therefore, change in the profit sharing ratio did not result in gift. He relied on the following judgments: (i) Sree Narayana Chandrika Trust v. CGT [2003] 261 ITR 279(SC); (ii) CGT v. D.C. Shah [2001] 249 ITR 518 (SC); (iii) CGT v. T.M. Louiz [2000] 245 ITR 831 (SC); (iv) CGT v. P.K. Somarajan Pillai [2003] 127 Taxman 632 (Ker.); (v) CGT v. Maneklal Hargovandas Patel [2002] 124 Taxman 55 (Guj.); (vi) CGT v. T. Abdul Wahid [2000] 242 ITR 665 (Mad.). Apart from the above, the Ld. Counsel has given a gist of various High Court judgments in support of his contention that mere change in the profit sharing ratio or retirement of a partner and induction of new partners does not resul....
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....and without consideration in money or money's worth, and includes the transfer or conversion of any property referred to in section 4, deemed to be a gift under that section." Sub-section (xxii) of section 2 of the Gift-tax Act defines "property" as under: "(xxii) 'property' includes any interest in property, movable or immovable." Sub-section (xxiv) of section 2 of the Gift-tax Act defines "transfer of property" as under: "(xxiv) 'transfer of property' means any disposition, conveyance, assignment, settlement, delivery payment or other alienation of property and, without limiting the generality of the foregoing includes - (a) the creation of a trust in property; (b) the grant or creation of any lease, mortgage, charge, easement, licence, power, partnership or interest in property; (c) the exercise of a power of appointment whether general, special or subject to any restrictions as to the persons in whose favour the appointment may be made of property vested in any person, not the owner of the property, to determine its disposition in favour of any person other than the donee of the power; and (d) any transaction entered into by any person which intent there....
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....erest in property. It also includes transaction entered into by any person with intent thereby to diminish directly or indirectly the value of his own property and to increase the value of the property of any other person. Thus, it is obvious that the expression "transfer of property" in the Gift-tax Act is very wide and comprehensive and covers all transactions of property and rights thereof in favour of any other person. Section 4 of the Gift-tax Act further includes certain situations, which provide for treating the gift as deemed in a case where the property is transferred otherwise than for adequate consideration and sub-section (c) of section 4(1) also covers transaction if there is a release, discharge, surrender, forfeiture or abandonment of any debt, contract or other actionable claim or of any interest in property by any person to the extent such discharge has not been considered to be bona fide by the Assessing Officer. Thus, the issue whether, there is a transfer of property or rights therein are to be decided with reference to the facts and circumstances of each case. This proposition finds support from the following judgments: (i) CGT v. C.S. Patil [1989] 180 ITR 9....
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.... the cases the firm was found to suffer a loss. (ii) All the partnership firms had earned substantial amount of goodwill based on average profit of the last five years. Besides, all the firms owned movable and immovable assets in the form of shares, investment allowance reserve and other movable and immovable properties. The market value of these assets far exceeded the book value thereof. We have also noted that market value of these assets was taken as per value shown in the respective balance-sheets and as declared in the wealth tax returns for the assessment year 1992-93. The difference between the fair market value and book value of the assets owned by the firms and the goodwill is as under: --------------------------------------------------------------------- Firm Difference in Goodwill Market value and  ....
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....l accounts of the new partners were credited with share of profit, interest and investment allowance reserve almost equal to the capital brought in. In any case, looking to the considerable worth of the firms and goodwill, the capital introduced by the existing partners was nominal. (v) There was no stipulation in the new partnership deed to the effect that new partners shall not be entitled to withdraw from their capital accounts any amount up to certain period of time. Thus, the incoming partners were given full rights to withdraw their capital at any time as they wished. (vi) The assessees have not been able to justify their claim that new partners were inducted because the firm needed more capital. In fact, in none of the cases, the assessees have been able to justify such claim. The claim that there was a requirement of labour also remains unsubstantiated. Minors admitted to the benefits of partnership could have not contributed any labour. There is nothing to show that ladies inducted as new partners were more useful to the firms. Moreover, these are the cases of investment companies and in cases where assessees have been carrying on business, the transactions are with ....
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.... against the same, the other existing partners, namely, M/s.Thakurdevi Investments Pvt. Ltd., had opening credit balance of Rs.39.92 lakhs and closing balance of Rs.47.26 lakhs. While the share of profit of M/s.Thakurdevi Investments Pvt. Ltd. was reduced from 14% to 7%, no such reduction took place in the case of Smt. Sudtrshan Kumari Munjal. The GTO and CGT(A) have also highlighted the remaining cases in their respective orders. Thus, the issue whether there was a gift on account of reduction in profit sharing ratio of some of the partners in favour of the incoming partners or not is required to be decided in the light of these significant facts. 15. Their Lordships of Punjab & Haryana High Court in the case of Vipin Kumar have held that property owned by the firm actually belongs to the partners and use of the expression "firm" is only a compendious mode to designate persons who have agreed to a joint venture and what is called the property of the firm is really the property of the partners. The High Court has held as a partner can claim to have a specific interest in its assets exclusively apart from his interest as a partner in the firm and such interest is restricted to th....
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.... Gift-tax Act. While taking such view, the Hon'ble Supreme Court also approved the following judgments: (i) CGT v. Nani Gopal Mondal [1984] 150 ITR 469(Cal.); (ii) M.K. Kuppuraj's case; (iii) SurehmalNawalkha v. CIT [1985] 156 ITR 714 (Raj.); (iv) Premji Trikamji Jobanputra's case. It is not in dispute that goodwill computed by the assessee based on average profits of the earlier assessment years was not the goodwill of these firms. Therefore, the ratio of the judgment of Supreme Court in the above referred case is directly applicable to the facts of the present cases. 17. Besides, this issue was further considered by the Hon'ble Madras High Court in the case of M.K. Kuppuraj 258 ITR 412. The facts of that case were that old firm consisting of three partners was reconstituted by admitting a company as a fourth partner. The firm owned a running business as well as valuable fixed assets in the form of buildings. As a result of reconstitution, the shares of each one of the existing partners were reduced by 6% and the newly admitted partner i.e. the company, was given 18% share in the profit and loss of the firm. The new partner contributed a capital of Rs.1 lakh. On ....
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.... to be donors of any part of the gift. The relinquishment of the 8% profit sharing ratio in favour of the minors was admittedly without any consideration and hence would constitute a gift by the assessee in favour of the minors. The Tribunal was, therefore, right in its view that the transaction by which a partner-relinquished a portion of his profit sharing ratio in the partnership in favour of another will amount to a gift falling within the definition in section 2(xii) read with section 2(xxiv) of the Gift-tax Act, 1958." In the present cases also, it may be noted that the new partners inducted to the various firms belong to the same families of Hero group. By inducting the new partners, the existing partners have relinquished their rights in the assets belonging to the firm and goodwill to the extent of their reduced share of profit and such relinquishment is without any adequate consideration. Therefore, the same constitutes gift within the meaning of sections 2(xii) and 2(xxiv) read with sections 4(l)(a) and 4(l)(c) of the Gift-tax Act, 1958. 19. Our discussion on the issue would be incomplete without referring to the various judgments, which were specifically cited by ....
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....ing about two years before. Therefore, the capital contributed by the new partner was much higher vis-a-vis the capital introduced by the assessee. Thus, it could not be said that such transfer was for inadequate consideration. In the present cases, the incoming partners either contributed no capital or contributed very nominal capital which was far less than the market value of assets and goodwill of the firms. Besides, the capital of the existing partners far exceeded the amount of capital introduced by the incoming partners. Therefore, it could not be held that such transfer was for adequate consideration. Therefore, this judgment is not applicable to the facts of the present cases. (ii) D.C. Shah's case: In fact, this judgment was also referred to by the Supreme Court in the case of Sree Narayana Chandrika Trust. In that case also, the share of profit of the existing partner was reduced by 5% in favour of his son and the revenue had brought to tax reduced 5% share as a gift. However, it was noted that the new partner, was inducted into the firm on his contribution of capital in the firm of Rs.2.33 lakhs. Besides, he had been in the business for nearly four years and it was, ....
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....ended. The Assessing Officer treated the reduced share as gift in favour of the newly admitted partner and the minor. Minor had also contributed capital. There is no discussion as to whether the firm owned assets whose market value exceeded the book value and goodwill. On these facts, it was held that induction of new partner was for a consideration because of their capital contribution. These are not the facts of the present case. Here, the market value of the assets and goodwill far exceeded the capital brought in by the new partners vis-a-vis the capital contributed by the existing partners. Therefore, reduction in share of profit was without any adequate consideration. (v) P.K. Somrajan Pillai's case: In this case also, one partner retired from the firm and in his place a new partner was inducted. By relying on the judgment of Supreme Court in the case of T.M. Louiz the High Court held that when a partner retired and in his place a new partner was inducted, the partnership continued and the assets and goodwill of the firm continued to remain the assets of the firm. As discussed above, this case is distinguishable inasmuch as in the present cases, it is not the case of the re....
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....e firm. Here also it is a case of retirement of a partner from the firm and induction of new partner with sufficient capital (as against capital contribution of Rs.36,000 with 60% share, new partner brought capital of Rs.1,20,000 with 40% share). This decision is also not applicable to the facts of the present cases. 22. The assessee has further relied on the decision of Cochin Bench of the ITAT in the case of GTO v. Smt. Saralaben S. Mehta [l987] 20 ITD 69 (TM). There is no such case in Smt. Saralaben S. Mehta 's case on the issue of deemed gift. As regards other decisions mentioned in the list and reported in TTJ, the assessee has not furnished copies thereof. However, there also the finding is that if the incoming partner has brought sufficient capital, the reduction in share of profit would not be without a consideration and hence not liable to gift tax. These decisions are also not applicable to the facts of the present cases. Moreover, the judgment of the court takes its colour from the facts and the questions raised. It is not correct to read the judgment of the court in isolation of the facts and questions raised before the court. Reliance in this regard is placed on the....