Commissioner of Gift-tax vs Smt. K. Nagammal

V.V. Kamat, J.—Although two questions were brought by the Department for reference to this court for answer, the Tribunal has referred the following question :

" Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that there can be no liability to gift-tax on the retirement of a partner from a firm ?"

It is to bring out the real dispute between the parties.

The assessment year in question is 1977-78 and in regard thereto the previous year ended on March 31, 1977. The proceedings are under the provisions of the Gift-tax Act, 1958.

The assessee was originally assessed to tax with reference to certain gifts on the basis of a voluntary return of gift. The Gift-tax Officer thereafter felt escapement of assessment.

The assessee was a partner of the firm in the name and style of Radhas with a 15 per cent. share in the profits and assets of the firm. She retired on September 30, 1976. The Gift-tax Officer understood this as a gift involved in the process of surrender on retirement. He valued it at Rs. 60,610, on the basis of calculation adopting the super profits method. This was by the order dated August 18, 1982.

The Gift-tax Officer in his order dated August 18, 1982, stated that there was no (sic) gift involved in the retirement of the assessee from the firm and it was only a family arrangement. It was held that these are irrelevant considerations, since what was required to be decided was whether there was gift on the retirement of the partner without receiving any consideration in lieu of her forgoing the right to a share of 15 per cent. of the profits of the firm. The officer has observed that this is well-settled, that gift is involved in such circumstances.

The first appellate authority decided to view the matter in the proper perspective and in the backdrop of a totality of realignments. The appellate authority considered the situation that there was a large scale realignment of partners in the group of concerns. The assessee was originally a partner in Radhas, Radhas Soap Works and Radhas Soap Industries. The assessee retired from the first of the two partnership concerns and became a partner in two other firms, Nana and Kerala Sabdam, and as a result thereof she was not put in a worse position but on the other hand her loss in the share of profits of the firm in question was amply compensated by her gain in the other two firms. In this context, in a careful and cautious manner the first appellate authority has observed that the facts in regard thereto are verified. In conclusion, the first appellate authority held that there was adequate consideration for the assessee surrendering the valuable right she had in the firm, Radhas. Consequently, it is observed that no gift is exigible in the circumstances of the situation and ordered deletion of the amount of Rs. 60,610 which was arrived at in the reassessment proceedings.

The first appellate authority has also considered one more aspect. The authority has held that reassessment action u/s 16(1)(a) was bad as there was no escapement of gift from assessment, and, consequently annulled the action terming it as invalid.

Be that as it may, the Department took up the matter before the Tribunal. The Tribunal considered the only ground taken by the Department, and that is as to whether the Appellate Assistant Commissioner erred in annulling the assessment because the authority ought to have observed from the instrument of partnership in question that the retirement of the assessee from Radhas was not for any quid pro quo in the alleged family realignment and for inducting her in the other partnership concerns and that he ought to have appreciated that the findings were not supported by any evidence. The Tribunal further observed that the assessee was originally assessed to tax and subsequently the Gift-tax Officer felt that there was escapement of gift from assessment. The assessee was entitled to a 15 per cent. share in the partnership firm Radhas with effect from September 30, 1976, and the assessee retired from the said partnership. In the process of reasoning, the Tribunal has quoted ad verbatim the observations of the first appellate authority.

Thereafter, the Tribunal referred to the decision of the Madras High Court in Addl. Commissioner of Gift-tax Vs. P. Krishnamoorthy and Others, , taking the view that in the event of a retiring partner relinquishing his share in the future profits, there was no gift involved when a partner retired from a partnership. The Tribunal observed that the said decision has been followed and is being followed in the context of the factual matrix and finding''s recorded hereinbefore.

It would be seen as stated at the outset, that the Department in fact wanted to place reliance on the decision of this court in Commissioner of Gift-tax Vs. Ganapathy Moothan, , relating to the situation as to whether the goodwill of business, gifted to the sons by the assessee who was the sole proprietor of a business converting it into a partnership with sons, would amount to a gift. Since this decision was referred to in the questions framed in the original application for reference the decision was brought to our notice in regard to the proposition referred to hereinbefore. On the other hand, learned counsel for the assessee placed reliance on the decision of this court in Commissioner of Gift-tax Vs. T.M. Luiz Kannamally, , in support of his formidable submission that when a partner retires from a partnership there can only be re-adjustment of the rights between the retiring partner and the continuing partners in the assets of the partnership and in that situation there would be no element of transfer which could be understood as involved in the transaction, leading to a conclusive situation that the transaction would not amount to a gift and no gift-tax would be levied.

We have summarized the reasoning of the three authorities. The first appellate authority on the basis of verification of the facts, has recorded a finding that the retirement was as a result of the proposed family arrangement and as a result of realignment the assessee was amply compensated and, therefore, there was adequate consideration for the assessee surrendering the valuable right she had in the firm, Radhas. Hence, no gift-tax would be exigible in the situation.

On reading the order of the Tribunal as is already referred to earlier, the observations of the first appellate authority have been quoted adverbatim. Reading the order it cannot be understood and appreciated as an innocuous situation. We find and accordingly hold that there could not be any other purpose in reproducing the observations ad verbatim than the approval thereof. This conclusion is also supported intrinsically in view of the situation that the Tribunal immediately switches off to consider the decision of the Madras High Court in Addl. Commissioner of Gift-tax Vs. P. Krishnamoorthy and Others, , with an observation that in the present case the said decision would have to be followed to hold that there was no gift involved. Thus with regard to the factual position that the retirement was not simpliciter but was attended to by certain other circumstances of simultaneous and contemporaneous character as a result of the family arrangement and realignment resorted to and as a result thereof the assessee was sufficiently compensated, leading to the situation that this was with consideration.

Apart from this factual situation, Section 2(xii) of the Gift-tax Act tells us what is meant by "gift". According to the said definition a transaction to be understood as a gift has to be a transfer by one person to another of any existing movable or immovable property. Secondly, the transaction under consideration has necessarily to be without consideration, it is only then the situation could be understood as "gift".

In regard to this situation, Section 2(xxiv) tells us what is to be understood as "transfer of property". It would be more than appropriate to reproduce the said provision ad verbatim and we do so accordingly ;

" 2. (xxiv) ''transfer of property'' means any disposition, conveyance, assignment, settlement, delivery, payment or other alienation of property and, without limiting the generality of the foregoing, includes -

(a) the creation of a trust in property ;

(b) the grant or creation of any lease, mortgage, charge, easement, licence, power, partnership or interest in property ;

(c) the exercise of a power of appointment, whether general, special or subject to any restrictions as to the persons in whose favour the appointment may be made of property vested in any person, not the owner of the property, to determine its disposition in favour of any person other than the donee of the power ; and

(d) any transaction entered into by any person with intent thereby to diminish directly or indirectly the value of his own property and to increase the value of the property of any other person."

In other words, the factual matrix if it is to amount to a gift has to convey firstly that it is a transfer as defined in the above reproduced quotation. Secondly, the absence of consideration also has to be floating on the surface of the record.

In this context, it would not be out of place to see and consider as to whether such consideration has necessarily to be a monetary consideration. The term "consideration" has not been defined under the Gift-tax Act and naturally being the inevitable essence of an agreement or contract is to be found in Section 2(d) of the Indian Contract Act, 1872. In this connection, by the Full Bench, this court in COMMISSIONER OF GIFT-TAX Vs. SMT. C. K. NIRMALA., , has ruled that the word "consideration" as found in the definition of the term "gift" in the Gift-tax Act would carry the meaning assigned to it in Section 2(d) of the Indian Contract Act, 1872. This was following the decision of the Bombay High Court in Keshub Mahindra and Others Vs. Commissioner of Gift Tax, Bombay City I, .

It would be at once seen as a result of the above decision, by barely perusing the said definition in Section 2(d) that the understanding of the term "consideration" cannot get confined to money alone. The term "consideration" is that which creates a contractual relationship between the promisor and promisee in regard to the performance of promise and in regard to which the parties to the agreement or contract get related to each other. It is more than elementary that the law in regard to consideration tells us that consideration may be relating to a party other than the promisor and promisee illustratively for the benefit of a minor.

It is true that the Madras High Court in Addl. Commissioner of Gift-tax Vs. P. Krishnamoorthy and Others, , was concerned with the situation of relinquishment by the retiring partner in regard to the share in the future profits leading the court to the conclusion as a consequence of retirement that it would be in relation to a non-existing right which could not be the basis of a transfer in view of the clear position that the non-existing right could not be the subject-matter of property in any sense of the term. The decision of this court in Commissioner of Gift-tax Vs. Ganapathy Moothan, , related to the situation with regard to the contention as to whether the goodwill, the transaction relating to the transfer thereof could be understood as a gift as defined in Section 2(xii) of the Gift-tax Act. The court found that there was no consideration in the matter of transfer of the goodwill as the goodwill was an incident of the business formerly carried on by the assessee. Going through the said judgment it would have to be stated that although the court by reference to Section 2(xxiv) considered various aspects of the situations of transfer, concluding that there was no consideration in regard thereto would really be unnecessary in view of the clear factual findings recorded hereinbefore.

However, as stated at the outset, the definition of the term "gift" postulates two situations, namely, that it has to be a transfer by one person to another with regard to existing property and, secondly, there has to be absence of consideration money or money''s worth. On the accepted and proved facts, firstly, this requirement of absence of consideration in money or money''s worth does not get any kind of satisfaction. Secondly, the fact finding authorities have concurrently held that there was consideration in the context of retirement in the nature of family arrangement and realignment of the family business.

There is yet a third aspect of the matter and that is as to whether the situation of retirement could be considered as transfer as is statutorily required in the definition of the term "gift" to be found in Section 2(xii) of the Gift-tax Act, 1958. It is in this connection that learned counsel for the assessee brought to our notice the decision of this court in Commissioner of Gift-tax Vs. T.M. Luiz Kannamally, , which is directed and pinpointed by way of an answer to the question as to whether the retirement could be considered as having all the shades of "transfer of property". In fact, the question proposed for answer as was referred to u/s 26(1) of the Gift-tax Act, 1958, would make it abundantly clear. It is as follows (page 258) :

" 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 firms in which he had been a partner ?"

This court has considered the question as to whether any element of gift is involved when the assessee retires from the firm in which he had been a partner. In the process of reasoning, this court placed reliance with acceptance on the decision of the Supreme Court in Addl. CIT v. Mohanbhai Pamabhai, (1987) 165 ITR 166 (SC) , for a declaration of law by the apex court. In the said decision, it was held that even when a partner retired from the firm and received his share of an amount calculated on the value of the net partnership assets including goodwill of the firm, there was no transfer of interest of the partner in the goodwill. Relying on the decision, this court proceeded to consider the definition of "gift" and "transfer of property" to Rule that there must be a transfer by one person to another person and that transfer must be of an existing movable or immovable property made voluntarily without consideration in money or money''s worth.

It is ultimately laid down succinctly that when a partner retires from a partnership, there can only be a readjustment of the rights between the retiring partner and the continuing partners in the assets of partnership and there is no element pf transfer. Therefore, the situation for consideration before us cannot be understood as a gift, firstly, in view of the concurrent findings of fact, secondly, in view of the situation lacking to constitute necessary elements to understand it as a gift, namely, that it is not a transfer and that it is with consideration. In this situation, although by a different process of reasoning, the decision of the Tribunal requires endorsement.

For the above reasons, the question is answered in the affirmative, against the Revenue and in favour of the assessee.

A copy of the judgment under the seal of this court and the signature of the Registrar shall be sent to the Income Tax Appellate Tribunal, Cochin Bench, for passing consequential orders.