Commissioner of Gift Tax vs N. Palaniappa Mudaliar and Another

Sethuraman, J.—u/s 26(1) of the Gift-tax Act, 1958, the following questions of law have been referred to this court:

T.C. No. 427 of 1971

Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in holding that the assessee was not liable to pay gift-

tax when his share in the partnership-firm was reduced from 44 per cent. to 20 per cent. as a result of the reconstitution of the firm, by which the

four sons of the assessee became partners ?

T. C. No. 3 of 1972

Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in holding that the assessee was not liable to pay gift-

tax when his share in the partnership-firm was reduced from 56 per cent. to 25 per cent. as a result of the reconstitution of the firm by which the

brother and the two sons of the assessee became partners ?

The assessees in these two references were partners in a partnership engaged in plying lorries for hire and also in dealing in cotton, etc. The

share of the respective assessees was 7 annas and 9 annas in the rupee. The partnership was reconstituted on April 22, 1964, by which the four

sons of one and the brother and the two sons of the other were taken in as partners. As a result, of the reconstitution of the firm, the share of

Palani-appa Mudaliar concerned in T.C. No. 427 of 1971 was reduced from 44 per cent. to 20 per cent. Similarly, the share of Swaminatha

Mudaliar concerned in T.C. No. 3 of 1972 was reduced from 56 per cent. to 25 per cent. The Gift-tax Officer considered that the reduction in the

share of the respective assessees was liable to be taxed under the Gift-tax Act and, therefore, he estimated that a sum of Rs. 34,535 was the

taxable gift in one case and Rs. 46,067 was the taxable gift in the other. On appeal before the Appellate Assistant Commissioner, it was contended

that the reduction in the respective shares was a transfer for consideration and hence there was no gift attracting liability under the Gift-tax Act. The

Appellate Assistant Commissioner held that the admission of the new partners was to effectively supervise and control the business of the firm

which had a number of branches in various places and that considering the expansion of the business, the introduction of the new partners was

solely for the purpose of the business. He, therefore, allowed the appeals considering the respective transactions to be exempt u/s 5(1)(xiv) of the

Gift-tax Act. The department appealed to the Tribunal in each of these cases. The Tribunal held that there was no clement of gift involved in the

reduction of the respective assessee''s share as a result of the admission of the other persons. The Tribunal has recorded a finding which runs as

follows:

In the instant case (T.C. No. 427 of 1971), the five sons of the assessee have each made a capital contribution of Rs. 10,000 excepting one son,

Swaminathan, who has made a capital contribution of Rs. 5,000. This capital contribution by the sons of the assessee is evidenced by the recitals in

the partnership deed. The partnership deed further recites that the sons of the assessee have been taken as partners in the partnership-firm in order

to secure financial facilities and other facilities for administration of the various branches and to further expand and develop the business. The

partnership-firm was carrying on the business of plying lorries for hire with head office at Perundurai and with branches at various places. Before

the reconstitution of the partnership, there were only 11 branches. After the reconstitution, by admitting the assessee''s sons as partners, the

number of branches has increased from 11 to 35. The sons of the assessee, who were newly admitted to the partnership, attended to the business

of the firm and they shared in the liabilities of the firm and the future losses. In the circumstances, the relinquishment or transfer of the assessee''s

share of 24 np. in the partnership in favour of his sons is not without consideration in money or money''s worth. Since the transfer is for

consideration, there is no gift by the assessee to his sons and hence there is no liability to gift-tax.

In the appellate order of the Tribunal in T.C. No. 3 of 1972, this conclusion which we have extracted above has been followed. Against these

orders of the Tribunal, the Commissioner of Gift-tax has obtained reference of the questions set out already.

There is a clear finding of the Tribunal which we have already extracted that the transfer in each of these cases is for consideration.

Section 2(xii) of the Gift-tax Act defines ""gift"" as meaning, "" the transfer by one person to another of any existing movable or immovable

property made voluntarily and without consideration in money or money''s worth......

In view of the fact that there is a finding of the existence of consideration in money or money''s worth it would follow that there is no gift. We

have ourselves looked into the partnership deed in which it is clearly stated that the new partners were being taken for the purpose of expansion of

business and for the purpose of getting fresh financial resources. The finding of the Tribunal is, therefore, borne out by materials. In the

circumstances, the questions referred to us are answered in the affirmative and against the revenue. The assessees will be entitled to their costs.

Counsel fee Rs. 250 in each.