Commissioner of Gift Tax vs Kamruddin M. Ravji

M.S. Shah, J.—In this reference at the instance of the Revenue, the following question of law is referred for our opinion in respect of asst. yr. 1977-78 :

"Whether, the Tribunal is right in law and the facts in holding that there was no taxable gift and thereby deleting the taxable gift of Rs. 61,954?"

We have heard Mr. M.R. Bhatt, learned standing counsel for the Revenue. Though served, none appears for the respondent-assessee.

The assessee made a gift of Rs. 5,000 in cash on 25th March, 1976 to Khurshid Trust. In the gift-tax return, the assessee disclosed the above gift and claimed exemption of Rs. 5,000 and, therefore, filed nil return. However, the assessee also filed a note alongwith the return disclosing that he had made a gift of half share on 50 per cent profit-sharing in M/s M. Ravji & Co. However, the gift of share in the partnership referred to above was not liable to gift-tax proceedings. The GTO in the course of assessment called upon the assessee to produce evidence in support of his submission. The assessee was also asked to file a valuation of goodwill, etc. The assessee submitted by letter dt. 27th March, 1982 that the assessment of 50 per cent of share of the assessee in the partnership firm was for consideration and, therefore, the transaction did not attract gift-tax; the firm had no goodwill; the goodwill of the firm was not in fact transferred and that the goodwill of the firm could not be valued separately, The assessee also produced a copy of the deed of assignment by which he had assigned 50 per cent of his share in the partnership firm of M/s M. Ravji & Co. in favour of Khurshid Trust. The GTO held that the transaction in question amounted to gift and valued the tax at Rs. 92,250. In appeal, the Dy. CWT(A) held that the transaction was a gift, but the gift was valued at Rs. 61,550. The assessee, therefore, went in appeal before the Tribunal which held that the transaction in question did not amount to gift because in the present case the assessee had introduced a new partner to assist the firm in carrying out of the business and the new partner had agreed to share the losses and liabilities of the firm. It constituted adequate consideration. The Tribunal further held that no gift-tax is leviable when share of interest in a firm is relinquished for commercial consideration.

It is necessary to note that the GTO held that gift-tax was leviable on the value of the gift on the basis of goodwill at Rs. 92,250. This Court has held in Commissioner of Gift Tax Vs. Punjabhai Kalabhai, that there is no doubt that goodwill is an asset of a firm and like any other asset of the firm is capable of being transferred, but at the same time, retirement of a person from a firm and taking accounts at the time does not involve any transfer of property as such. It is a matter of settling accounts while parting company. What consideration prevailed for determining a sum payable to the outgoing partner is a matter of settlement between them and a question of fact.

In the instant case, the assessee did not retire from the firm, but he merely assigned 50 per cent of his share in the partnership firm of M/s M. Ravji Co. in favour of Khurshid Trust. Hence, there was no question of transfer of goodwill of the firm. The donee, i.e., a new partner, was inducted to assist the firm in carrying out the business and the new partner has agreed to share the profits and losses of the firm. Hence, the GTO was not justified in treating the transaction as a gift on the basis of the value of the goodwill when the goodwill was not transferred in the first place.

We accordingly answer the question in the affirmative i.e., in favour of the assessee and against the Revenue.

The reference accordingly stands disposed of.