Dr. V. Mohandas vs Commissioner of Income Tax

S. Sankarasubban, J.—Question of law referred in this case is as follows :

"(1) Whether, on the facts and circumstances of the case, the Tribunal was right in holding that the conversion of the proprietary concern of the assessee into a partnership involved a gift which was not exempt u/s 5(1)(xiv) of the GT Act, 1958?"

The facts of the case are as follows :

Assessee, Dr. V. Mohandas, is a medical practitioner. From 1969 he has been running a nursing home at Attingal under the name "V.V. Clinic". On 1st April, 1984, he formed a partnership with his wife Dr. Molly M. Das and their son M. Vinod and daughter M. Veena to take over the hospital as partnership business. Till then Dr. Molly Das was working in the hospital as a salaried employee. The son Vinod was a final year MBBS student and the daughter Veena was studying for B.D.S. (Dentistry). Though the partnership deed was drawn on 12th Dec., 1984, it is stated in the deed that the partnership shall be deemed to have come into effect from 1st April, 1984. It is provided in the partnership deed that the capital of the first partner viz., Dr. Mohandas, shall be the balance in his account as on 1st April, 1984 as per the account books and the capital of the second partner Dr. Molly Das shall be the loans due from Dr. Mohandas as per the account books. There was no capital contribution by the other two partners. The partnership deed provides that in the profits and loss of the business, Dr. Mohandas will have 40 per cent shares, the remaining shares going to the other three partners in the ratio of 30 : 15 : 15.

The GTO was of the view that on the formation of the partnership there was a gift by Dr. Mohandas in favour of other partners and so he initiated proceedings under the GT Act on Dr. Mohandas for the asst. yr. 1985-86 by issuing a notice u/s 13 of the GT Act, In response to the above notice, the assessee filed the return showing a taxable gift of Rs. 4,88,000 with an endorsement on it.

The GTO did not agree with the assessee that there was no liability under the GT Act on account of the conversion of the business into a partnership business. The GTO made the assessment on the ground that in converting the proprietary business into a partnership, Dr. Mohandas had foregone his interest in immovable properties and the goodwill of the concern in favour of the incoming partners. On that view of the matter, the GTO computed the taxable gift by taking the value of the hospital buildings at Rs. 41,83,000 and the value of the gift in favour of the other partners at 60 per cent thereof, i.e., Rs. 25,09,800. Towards the share in the goodwill transferred by the assessee there was addition of Rs. 3,06,826 thereby assessing the total value of the gift at Rs. 32,11,626.

The assessee took up the matter in appeal and the CIT(A) accepted the assessee''s plea that there was no element of gift involved in converting the proprietary concern into a partnership as the arrangement was to provide continuity of the service that was being rendered to the patients, But the CIT(A) found it was not possible to delete the sum of Rs. 4,88,000 which the assessee had declared as taxable gift in the return filed by him. Accordingly, the appellate authority upheld the assessment to the extent of Rs. 4,88,000. Both the assessee and the Revenue filed appeals before the Tribunal. In disposing of the Revenue''s appeal, the Tribunal held that the CIT(A) was not justified in holding that the gift involved in the conversion of the proprietary concern was exempt u/s 5(1)(xiv) of the GT Act. As regards the quantification of the gift involved in the transaction, the Tribunal restored the matter to the file of then CIT(A) for fresh consideration. In the assessee''s appeal, the Tribunal held that the CIT(A) was not correct in confirming the assessment to the extent of Rs. 4,88,000 merely because the assessee had admitted in the return that the value of the gift was Rs. 4,88,000. The case was remitted back to the CIT(A) and the Tribunal held that the CIT(A) would consider the assessee''s objection against the assessment of Rs. 4,88,000 as the taxable gift inspite of the fact that in the return the assessee had shown that amount as taxable gift. It is in the above background that the assessee has approached this Court by making a reference under the WT Act.

Question for consideration is whether the gift is exempted u/s 5(1)(xiv) of the GT Act. Section 5(1)(xiv) reads as follows : "in the course of carrying on a business, profession or vocation, to the extent to which the gift is proved to the satisfaction of the GTO to have been made bona fide for the purpose of such business, profession or vocation". Section 5(1)(xiv) had come up for interpretation before this Court as well as before the Supreme Court. Commissioner of Gift Tax, Kerala Vs. George Kuruvilla, , the Supreme Court held as follows : "The donor" is exempt u/s 5(1)(xiv) from liability to pay tax only if the gift is in the course of carrying on a business, profession or vocation and is made bona fide for the purpose of such business, profession or vocation. The clause does not enact that a gift made by a person carrying on any business is exempt from tax, nor does it provide that a gift is exempt from tax merely because the property is used for the purpose for which it was used by the donor". In K.K. Achuthan Vs. Commissioner of Gift-tax, , a Division Bench of this Court held as follows : "When a partnership is reconstituted resulting in the reduction of the share of profits of some partners and the consequential .increase in the share of profits of others, it would result in a gift exigible to tax under the GT Act. In order to attract Section 5(1)(xiv) of the GT Act, 1958, the gift should have been made in the course of carrying on the business. There should be complete identity between the person who makes the gift and the person who carries on the business". In that case, the facts were as follows : The assessee and his three sons were partners in a firm which were putting on circus shows, the assessee having 40 per cent share in it till 31st March, 1973. On 1st April, 1973, a new deed of partnership was executed by the assessee and his three son, who were the existing partners in the firm and in that partnership, the assessee''s share was reduced to 25 per cent, having surrendered 15 per cent of his share to his three sons. The ITO held that the relinquishment by the assessee of his 15 per cent share in favour of his sons was a deemed gift liable to gift-tax. The AAC held that the assessee was entitled to exemption u/s 5(1)(xiv) of the GT Act, 1958, to the extent of the profits relating to the relinquishment. The Tribunal held that the assessee was not entitled to exemption u/s 5(1)(xiv). On these facts, the Division Bench held as follows : "the assessee, after relinquishment of his 15 per cent, share of profits in favour of his sons, who were all majors, continued to be a dominant partner with control over all major partners. The conduct of the business did not change in any way by the adjustment of the profit and the shares. Therefore, the relinquishment of 15 per cent share by the assessee amounts to a deemed gift which was exigible to gift-tax."

In Commissioner of Gift-tax Vs. Late M. Sankaran Nair (by legal heir P.V. Narayani Amma), , the facts of the case are as follows : On the date of the partnership, Sankaran Nair was 53 years old. The preamble in Annex. A shows that the partnership was formed on the ground that Sankaran Nair was old and for the continuity of the business. By the partnership deed, Sankaran Nair was constituted the managing partner of the business and his son, P.V. Harikrishnan, was named as junior partner. All the powers regarding the partnership were to be exercised by the managing partner. By Clauses 10 and 11 the minor children of Sankaran Nair were admitted to the benefits of the partnership. The Court, on these facts, held as follows ;

"The terms of the partnership deed show that Sankaran Nair was only 53 years old and he was continuing as the managing partner of the partnership and apart from making the adult son as a junior partner, all his other minor children were admitted to the benefits of the partnership. The mere statement that the partnership was formed to ensure continuing of the business is not sufficient for claiming the exemption. In the case before us the test of commercial expediency is also not satisfied. As we had indicated in ITR No. 14 of 1969, the burden to make out the grounds for claiming the exemption is on the assessee. Except producing the partnership deed the assessee did not adduce any evidence to prove the grounds for the formation of the partnership. To us, it appears that the real motive behind the partnership is to benefit the children of the assessee. Section 5(1)(xiv) has no application to such cases. The terms of Annex. "A" are almost identical with the document interpreted by their Lordships of the Supreme Court in Commissioner of Gift-Tax, Kerala Vs. P. Gheevarghese, Travancore Timbers and Products, ". This Court held that the assessee was not entitled to exemption.

In the present case, the partnership deed is produced as Annex. D. In the partnership deed it is stated that it consists of the assessee, his wife and son Vinod, aged 21 and daughter Veena, aged 19. The preamble of the partnership states as follows : "Whereas, the first party to this deed, viz., Dr. V. Mohandas has been carrying on medical profession in the running of a clinic in the name of V.V. Clinic, Attingal, Trivandrum District for the past 15 years. Whereas the second party who is an equally qualified doctor has been assisting the first party from the beginning and taking active part in the profession carried on by the first party on a monthly salary basis. Whereas the third and fourth parties are ''studying in the final year MBBS and II BDS, respectively in the medical college, Trivandrum and are in the line of medical profession and who have expressed their willingness to participate in the medical profession carried on by the first party, as partners". It further states that partner Nos. 1 to 4 whose names and address are given above, do hereby agree to bind themselves in partnership as partners to carry on the profession in a better and more efficient manner on modem methods of treatment. The capital of the first partner shall be the balance as on 1st April, 1984. The capital of the second partner shall be the outstanding loans due from the first party. There is no capital by the third and fourth partners. They will render service out of their medical qualifications to the partnership firm". The income or loss of the firm''s profession or business shall be shared or borne by the partners in the following proportion :

Dr. V. Mohandas (first partner) 40 per cent

Dr. Molly M. Das (second partner) 30 per cent

Dr, Vinod (third partner) 15 per cent

Dr. Veena (fourth partner) 15 per cent

Clause 12 says that any partner shall have the right to retire from the partnership and any partner can be retired by agreement by the majority of the partners after giving three months'' notice from either side. Clause 14 says that the death or retirement of any partner/partners shall not dissolve the firm. The profession/business shall be continued with the remaining or such additional partners as may be agreed upon. Clause 16 says that the partnership shall be one determinable at Will. Clause 17 gives power to the assessee as managing partner of the firm.

On analysing the above deed of partnership, it is not possible to come to the conclusion that the gift is one which comes u/s 5(1)(xiv) of the GT Act. As already stated in order to attract the benefit of Section 5(1)(xiv), two conditions have to be satisfied. First is that the gift has to be in the course of carrying on a business, profession or vocation. The second is that the gift should have been made bona fide for the purpose of such business, profession or vocation. The Tribunal at p. 19 of the order, stated as follows : "In the present case the assessee''s son was studying in the medical college and the daughter in the dental college, Even after completing their studies they would have to undergo house surgency before they could attend to patients or to help the assessee in his profession. Further, there was no evidence to show that they were actively assisting the assessee in running the hospital. Apart from that there is no mention in the partnership deed regarding the intention behind its formation. In the absence of any evidence to show that the transfer of the proprietary business into a partnership was in the course of the carrying on the business or for the purpose of the business, we are of the view that the CIT(A) is not justified in holding that the gift involved in the transfer is exempt u/s 5(1)(xiv) of the GT Act." We agree with the reasoning given by the Tribunal and hold that the gift is not exempted u/s 5(1)(xiv) of the GT Act.

In the above view of the matter, we answer the question of law in the affirmative and against the assessee.