Commissioner of Gift-tax vs Lal Chand Deomal

V.K. Singhal, J.—The Income Tax Appellate Tribunal has referred the following question of law arising out of its order dated September 9, 1980, in respect of the assessment year 1976-77 :

"Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that there was no deemed gift u/s 4(1)(c) of the Gift-tax Act, 1958 ?"

The brief facts of the case are that the assessee was a partner in the firm, Messrs. Kamal Industries, prior to the assessment year 1976-77. The assessee retired during the assessment year 1976-77 and his son, Shri Suraj Nankani, was taken up as a partner in his place. The Gift-tax Officer considered that it is a deemed gift by the father to his son and the same is taxable in the hands of the assessee.

In the appeal before the Appellate Assistant Commissioner of Income Tax, it was held that it was surrender of the interest of the assessee in the firm and, therefore, the said surrender of interest in the share of the firm was a deemed gift. In second appeal before the Income Tax Appellate Tribunal, the appeal was allowed on the ground that there was no future right in a retiring partner to receive share income and since there was no right to receive any future profits from the said firm there was no question of his giving up any such right to a share in the future profits. Relying upon the decision of the Madras High Court in Addl. Commissioner of Gift-tax Vs. P. Krishnamoorthy and Others, it was held that such non-existent right cannot be "property" as contemplated by the provisions of Section 4(1)(c) of the Gift-tax Act, 1958, which are not applicable.

Section 4(1)(c) of the Gift-tax Act is as under :

"Where 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, the value of the release, discharge, surrender, forfeiture or abandonment to the extent to which it has not been found to the satisfaction of the Gift-tax Officer to have been bona fide, shall be deemed to be a gift made by the person responsible for the release, discharge, surrender, forfeiture or abandonment."

A running concern has goodwill and goodwill is an asset. If there is an express or implied agreement that the remaining partners (other than the retiring one) are entitled to carry on the business and the right to a share in the asset of the retiring partner devolves upon them, the normal rule is that a retiring partner has a right to a share in the assets of that firm which will include the goodwill at the time of his retirement. In the present case, on the retirement of the father, his son was taken as a partner but what were the terms in the deed, it has not been discussed by the taxing authorities including the Tribunal. In accordance with the provisions of Section 4(1)(c) of the Act, the surrender of any interest in the property is deemed to be a gift. A partner may not have a right on retirement to share in future profits but at the time of retirement, he has a right in the goodwill of the firm. Whether there is any goodwill or not and whether the surrender of the interest in the goodwill was bona fide or not has to be determined on the basis of the facts available on record. The logic, on the basis of which the Income Tax Appellate Tribunal has proceeded is the future right of a person retiring from a firm in respect of future profits to be taken into consideration is not the correct approach. This is the right at the time of retirement and not in respect of future profits. If at the time of retirement there is a gift or deemed gift which includes surrender of interest in the property, it is a gift. The provisions of Section 4(1)(c) are not applicable in respect of some future release, discharge, surrender, forfeiture or abandonment of any debt contract or other actionable claim or any interest in the property by any person. The rights as they were existing on the date of retirement by way of interest in any property have to be taken into consideration for the purposes of gift and these rights were the shares of the retiring partner in the goodwill of a firm which has not been considered by the Income Tax Appellate Tribunal. There may be a case where there is a release, discharge, surrender, etc., of the existing interest in the property of any person coupled with future rights, and there may also be a case where some rights which may accrue in future are intended to be surrendered for the purpose of gift, the valuation as on the date of release, discharge or surrender has to be taken.

In Commissioner of Gift Tax, Gujarat Vs. Chhotalal Mohanlal, it was held by the apex court that reconstitution of a firm by reducing the share of a partner and admitting two minor sons of the assessee, amounts to gift.

On the basis of the above decision of the apex court, we are of the view that the Income Tax Appellate Tribunal was not justified in giving a decision in respect of non-existent rights of future profits and not considering the aspect of existing rights. The case of Addl. Commissioner of Gift-tax Vs. P. Krishnamoorthy and Others, refers only with regard to the right to receive future profits in the firm. The existing rights and the interest in a firm, if surrendered will be deemed to be a gift.

Since the facts have not been found by the Income Tax Appellate Tribunal, we, therefore, refer the matter back to the Income Tax Appellate Tribunal to decide the question in accordance with law after giving opportunity to both the parties. The Tribunal shall also take into consideration the definition as given u/s 4(1)(c) of the Gift-tax Act and shall also record a finding as to whether the said gift was bona fide or not to attract the provisions of Section 4(1)(c) of the Act.

The reference is returned unanswered.