Commissioner of Gift Tax vs P.K. Somarajan Pillai

At the instance of the Revenue the following question of law has been referred to this Court u/s 26(1) of the GT Act, 1958 for decision :

"Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that no element of gift was involved when the assessee retired from the firm in which he was a partner?"

The matter arises under the GT Act, 1958 (for short ''the Act''). The assessment year concerned is 1987-88. The respondent-assesses was a partner in a firm by name M/s R. Kesava Pillai, Merchants, Quilon. On 30th April, 1986, the assessee retired from the said partnership firm and in his place Sri. M.C. Thankappan Pillai was admitted as a new partner. The assessee was having 11 per cent share in the profits of the business of the firm. The AO took the view that on the retirement of the assessee from the partnership firm the assessee had made a gift of 11 per cent interest in the goodwill of the firm in favour of the new partner and accordingly he brought to tax Rs. 39,600 being the surrender value of the goodwill. The first appellate authority relying on the decision of this Court in Commissioner of Gift-tax Vs. T.M. Luiz Kannamally, , cancelled the assessment. In appeal by the Revenue the Tribunal also followed the decision of this Court in Luiz Kannamaly''s case mentioned supra and dismissed the appeal. It is against the appellate order of the Tribunal the Revenue has sought reference of the question extracted above.

Here it must be noted that the decision of this Court in Louiz Kannamaly''s case mentioned supra was affirmed by the Supreme Court in The Commissioner of Gift Tax, Trivandrum Vs. T.M. Louiz, .

Sri P.K.R. Menon, learned senior Central Government standing counsel appearing for the Revenue submits that TM. Louiz''s case was a case of retirement of a partner and the firm continued, whereas in the instant case on the retirement of the assessee from the partnership firm another person was inducted on the same day as a partner in whose favour the assessee''s share and goodwill has been transferred. The senior counsel accordingly submits that the decision in Louiz''s case has no application to the case on hand. The senior counsel has also relied on another decision of the Supreme Court in B.T. Patil & SODS V. CGT (2001) 247 ITR 588 rendered by the same Bench on the same date and submits that the matter requires a fresh look in the light of the said decision.

Sri C. Unnikrishnan, learned counsel appearing for the assessee, submits that the principles laid down in both the decisions of the Supreme Court is the same which squarely apply to the facts of the present case and the distinction sought to be made by the Supreme Court in the second decision turns on its own facts.

We have already stated the brief facts. The Tribunal has relied on the decision of this Court in T.M. Louiz''s case (supra) which held the view that when a partner retires from a partnership firm, the partnership continues; the assets and the goodwill of the firm continue to remain the assets and the goodwill of the firm and there is no question of any gift of goodwill in such a case. The Supreme Court also in Louiz''s case (supra) summarised the facts of the case thus: "To recapitulate, when the assessee retired from the two firms, he received the value of his shares therein and the argument was that what he had received was less than the market value of his shares since the goodwill of the firms had not been taken into account". The said question was answered by the Supreme Court as follows:

"When a partner retires from a partnership, the partnership continues. The assets and the goodwill of the firm continue to remain the assets and the goodwill of the firm. All that the retiring partner gets is the value of his share in the partnership assets less its liabilities. It cannot, in such circumstances, be held, assuming that the retiring partner received less than what was his due, that the difference was something that he had transferred to the continuing partners within the meaning of "transfer of property" for the purposes of the GT Act or that there was a gift liable to gift-tax."

We find that the Supreme Court in the said decision has referred to the judgment in Commissioner of Gift Tax, Gujarat Vs. Chhotalal Mohanlal, and explained the position. According to us it is unnecessary to discuss the facts of the case and this judgment can be of no assistance,

The Supreme Court in B.T. Patil''s case mentioned supra has referred to a passage from the decision in Sunil Siddharthbhai Vs. Commissioner of Income Tax, Ahmedabad, Gujarat, which reads as follows:

"That when a partner retires or the partnership is dissolved, what the partner receives is his share in the partnership. What is contemplated here is a share of the partner qua the net assets of the partnership firm. On evaluation, that share in a particular case may be realised by the receipt of only one of all the assets. What happens here is that a shared interest in all the assets of the firm is replaced by an exclusive interest in an asset of equal value. That is why it has been held that there is no transfer. It is the realisation of a pre-existing right. The position is different, it seems to us, when a partner brings his personal asset into the partnership firm as his contribution to its capital. An imperial asset is the sole subject of consideration. An exclusive interest in it before it enters the partnership is reduced on such entry into a shared interest".

Relying on the said passage the Supreme Court held as follows: "In our view, when there is a dissolution of partnership or a partner retires and obtains in lieu of his interest in the firm an asset of the firm, no transfer is involved for the reason set out in the passage quoted above". The aforesaid decision is consistent with the view taken by the Supreme Court in Louiz''s case (supra). However, according to the senior counsel for the Revenue, the Supreme Court had made a distinction with reference to the following observations :

"But the position is very different, when, during the subsistence of a partnership, an asset of the partnership becomes the asset of only one of the partners thereof; there is, in such a case, a transfer of that asset by the partnership to the individual partner. Where such transfer is for less than the value of that asset, there is a deemed gift to the extent of the difference under the provisions of Section 4(1)(a) of the GT Act, 1958."

We have perused the facts of the said decision. The assessee in that case was a partnership firm engaged in the activity of excavating tunnels; it had five partners; during the asst. yr. 1979-80 it transferred certain items of machinery to each of its five partners and debited their accounts with the consideration charged therefor; the aggregate of such consideration came to Rs. 1,26,035; which was the written down value of the machinery in the assessee''s books; about three months later, the five partners floated another partnership and brought in the said machinery as their capital contribution thereto, of the value of Rs. 9,48,100; the new partnership firm sold the machinery to another concern for the price of Rs. 10,76,220; on these facts, the GTO came to the conclusion that the assessee-firm had made a gift of the machinery to its five partners and the consideration therefore was much less than the market value as evidenced by the sale of the machinery to the third party for a sum of Rs. 10,76,220 and the assessing authority has taken the view that the value of the machinery at Rs. 9,48,100 which was taken to be the capital value thereof.

It is in that context the Supreme Court had made the observation extracted above. It is not clear as to how the observation made by the Supreme Court and extracted hereinabove in the context of the fact situation can apply to a simple case of a partner retiring from a partnership firm after receiving his dues on settlement of accounts. The general principle laid down in the said decision is in noway different from the principle laid down in T.M. Louiz''s case mentioned supra. We are also of the view that it makes no difference in principle whether it is a case of partner retiring from a partnership, firm and the firm continues or a case where one partner retires and another partner is inducted. In both cases there is a relinquishment of the share in the goodwill of the firm by the retiring partner either in favour of the remaining partners or in favour of the incoming partners. If there is no gift in the former case there cannot be a gift in the latter case also by applying the principle laid down by the Supreme Court in the two cases discussed above. Following the principles laid down in the two decisions of the Supreme Court discussed above, we are of the view that the Tribunal was perfectly justified in holding that when a partner retires from a partnership firm there is no element of gift involved. In the above circumstances, we answer the question referred to in the affirmative, i.e., in favour of the assessee and against the Revenue.