CGT vs Rameshchandra Ravjibhai

M.S. Shah, J.

All these references involve the following common question of law which has been referred to us for our opinion in respect of the assessment years

1979-80 and 1980-81 :

Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that on reconstitution of partnership firm, where

the existing partner surrendered a portion of his share and the incoming partner brought in capital, the transaction did not amount to gift?

We have heard Mr. Manish R. Bhatt, learned standing counsel for the revenue. Though served, none appears on behalf of the respondent

assessee.

The brief facts are that the firm M/s. Patel Brass Works. Rajkot was constituted with the following partners as per partnership deed dated 4-

11-1975:

Shri Ravjibhai Chhaganlal 45%

Shri Gandalal Bavalal 20%

Shri Rameshchandra Harjibhai 35%

There was a change, in the constitution when two trusts were taken into partnership as per partnership deed dated 25-11-1977 and the share of

partners in the reconstituted firm were as under :

Ravjibhai Chhaganlal 25%

Gandalal Bavalal 20%

Rameshchandra Ravjibhai 25%

Dalsukh Gandalal, trustee of Parul Trust 15%

Pragjibhai Gandalal, trustee of Naresh Trust 15%

It would thus be seen that Shri Ravjibhai surrendered 20 per cent share and Rameshchandra Ravjibhai Hurrendered 10 percent share in favour of

the two trusts taken into partnership on reconstitution. The firm was again reconstituted on 1-11-1978 where Maheshkumar Ravjibhai (minor) was

admitted to benefit of partnership and the shares of partners in the reconstituted firm were as under:

Shri Rayjibhai Chhaganlal 20%

Shri Gandalal Bavalal 10%

Shri Rameshbhai Ravjibhai 20%

Shri Dalsukhbhai Gandalal, trustee of Parul Trust 15%

Shri Pragjibhai Gandalal, trustee of Naresh Trust 15%

Shri Maheshkumar Ravjibhai (Minor) 20%

It would be seen from the above constitution that S/Shri Ravjibhai, Gandalal and Rameshchandra relinquished share to the extent of 5 per cent, 10

per cent and 5 per cent in favour of the new partners admitted to benefits of partnership, respectively. The assessing officer held that relinquishment

of right in share of profit is a deemed gift. On appeal it was claimed that the new partners brought capital to the partnership as under :

Rs.

Parul Trust 40,000

Naresh Trust 40,000

Maheshkumar Ravjibhai 1,25,000

It was also claimed that as per the terms of partnership Shri Gandalal Bavalal was not entitled to any benefit in the goodwill and the position being

so he could gift away anything to the third person. It was also claimed that the incoming partners, thus, either contributed capital or agreed to work

actively for the firm and that would constitute adequate, consideration for the benefits of partnership.

Ultimately in appeal, the Tribunal upheld the finding of the CGT and held that both the trusts and Shri Maheshkumar contributed capital in the firm

and they also agreed to share losses and this establishes the fact that the aforementioned three continuing partners relinquished light in share of

benefits of the firm in consideration of capital contribution by the incoming partners and, therefore, there was no gift.

Mr. Manish R. Bhatt, learned standing counsel for the revenue, has drawn out attention to the decision of the Supreme Court in the case of

Commissioner of Gift Tax, Gujarat Vs. Chhotalal Mohanlal, and contended that on introduction of minor, Mahesh Ravjibhai, son of existing

partner Ravjibhai, the latter relinquished a part of share in favour of this son and, therefore, there was relinquishment of share of Ravjibhai in the

partnership firm.

Apart from the aforesaid decision in Chhotalal Mohanlal case (supra), our attention is also drawn to the latest decision of the Apex Court in

Sree Narayana Chandrika Trust Vs. Commissioner of Gift Tax, Kerala, where in the Apex Court has referred to all its previous decisions on the

controversy and has held that when the incoming partner brings any contribution towards the capital of the firm, the said fact together with the

obligations under-taken by the incoming partners of sincerely and faithfully carrying on the business for the common advantage of the firm was

adequate consideration for reallocating the shasre of the profits. The Apex court has also held that even if there is a managing partner or

administrative partner, it is a matter or convenience. The Apex court has held in the aforesaid decision that obligations to sincerely and faithfully

carrying on business for the common advantage of the firm is an obligation arising out of the partnership and also ordinarily under the partnership

deed in almost every case. Hence, when the incoming partner makes contribution towards capital such capital together with such obligation of

sincerely and faithfully carrying on business for the common advantage of the firm is adequate consideration for reallocating of the shares of the

profits of the firm.

In view of the finding given by the Tribunal that incoming partners brought in capital to the partnership i.e., Parul Trust Rs. 40,000, Naresh Trust

Rs. 40,000 and Mahesh kumar Ravjibhai Rs. 1,25,000 and in view of the aforesaid obligations of the incoming partners of sincerely and faithfully

carrying on the business for the common advantage of the firm, there was adequate consideration and therefore, the Tribunal rightly held that there

was no gift.

As regards reliance placed on Chhotalal Mohanlals case (supra) that was a case of minors who were admitted to the benefit of partnership firm

without bringing in any capital and the share of the existing partner, who was the father of the newly admitted partners, was reduced and therefore,

the court held in the facts of that case that there was a deemed gift by the father in favour of his minor sons. In view of the finding recorded by the

Tribunal that incoming partners had brought in capital, the ratio in Chhotalal Mohanlal''s case (supra) cannot apply to the facts of the present case.

In view of the above discussion, we answer the common question in all the three references in the affirmative i.e., in favour of the assessee and

against the revenue.

The references stand disposed of accordingly.