N.K. Kuppuraj vs Commissioner of Income Tax

Ramanujam, J.—The assessee in this case is an individual and he was originally assessed to gift- tax on 22-6-1971. Later, while completing

the assessment in the case of one M.K. Krishna Chetti for the assessment year 1971-72, it was noticed that the assessee had relinquished his right

over future profits by 8 per cent by reducing his share of profit from 50 per cent to 42 per cent and conferring a benefit in favour of four minors,

who were admitted to the benefits of the partnership. The GTO held that by relinquishing his right to the extent of 8 per cent he should be taken to

have gifted that right to future profits, in favour of the four minors, who were admitted to the benefits of the partnership. He thereafter valued the

gift by taking 5 years profit of the firm from 1966-67 to 1970-71 as the basis and arrived at an average profit of Rs. 6,46,000. After deducting a

sum of Rs. 1,08,000, representing the management remuneration, and another sum of Rs. 12,000, being interest on capital employed, he arrived at

a net figure of Rs. 5,26,000. He then ascertained 8 per cent thereon and determined the two years purchase at Rs. 84,160. Thus, the value of the

relinquishment of right by the assessee was deemed to be a gift of the value of Rs. 84,160. Aggrieved by the order of the GTO, the assessee

appealed to the AAC. Before the AAC, the assessee contended that the admission of the minors to the benefits of the partnership could not have

constituted a gift or a deemed gift, since there was nothing in the partnership deed dated 14-4-1970 which had the effect of conferring on the

minors any interests in the assets of the firm; that all that the minors secured, were the rights to share the future profits; that the relinquishment of a

portion of the assessee''s right to future profits, cannot be taken as a gift at all; and that the GTO has erred in holding that the transfer of the rights

to share future profits was a gift and as such the transaction will fall within the definition of ''gift''. The AAC, however, agreed with the assessee''s

contention and held that the transfer of right to share future profits would not come within the definition of ''gift'' as contemplated under the Act. In

that view, he allowed the appeal of the assessee.

The revenue took the matter before the Tribunal. The Tribunal, however, found that the assessee, who had a 50 per cent share in the

partnership, on reconstitution, got a reduced share of 42 per cent after relinquishing 8 per cent in favour of the four minors who had been admitted

to the benefits of the partner ship, and that the realignment of profit-sharing ratio consequent on the admission of four minors to the benefits of the

partnership, resulted in a gift. In support of that conclusion, the Tribunal referred to the definition of ''gift'' in section 2(xii) and the term ''transfer of

property'' as defined in section 2(xxiv) of the Gift-tax Act, 1958 (''the Act''). The Tribunal also referred to section 30 of the Indian Partner ship

Act, 1932 a minor, who had been admitted to the benefits of the partnership, had a right to such share in the property and the profits of the firm as

may be agreed upon. But the deed in question only stipulated the share of profits. The Tribunal inferred from the terms of the partnership that since

the partnership deed is silent, it could be inferred that the minor partners were each entitled to a share of the firm''s property. The Tribunal also

referred to the decision of this Court in Commissioner of Gift-tax Vs. V.A.M. Ayya Nadar, in support of its conclusion that the admission of the

minors to the benefits of the partnership with a right to share in the profits of a firm, would amount to a gift.

Aggrieved by the decision of the Tribunal, the assessee had sought and obtained a reference to this Court on the following question :

Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in law in holding that the assessee was liable to gift-tax.

Before us the learned counsel for the assessee has raised the following three contentions : (i) On the facts of this case, it should be held that there is

no gift by the assessee and if at all there is any gift, it is a gift by the firm in favour of the minors, who had been admitted to the benefits of the

partnership. Even assuming there is a gift by the assessee, the ''gift'' should be taken to be in favour of the partnership and not in favour of the

minors direct and, therefore, the assessee, who is an individual, cannot be subjected to gift-tax as he has not made a gift in favour of the minors; (ii)

Even assuming that there has been a gift by the assessee in favour of the minors, that gift cannot be taken to have been made during the assessment

year; and (iii) Even assuming that there has been a gift by the assessee in favour of the minors, it is a gift of the future profits of the business and,

therefore, the estimated value of the gift as worked out by the GTO cannot be taken to be correct.

We are, however, of the view that it is not open to the assessee to raise contentions (ii) and (iii) set out above as the question referred to us is

not comprehensive enough to include them. The question referred only deals with the assessee''s liability to gift-tax, and the question is whether the

assessee was liable to any gift-tax at all having regard to the nature of the transaction. If the assessee is liable to pay gift-tax, whether the gift-tax is

payable in the assessment year or in any other assessment year, is not comprehended by the question referred. Similarly the quantum of the gift or

the extent of the assessee''s gift-tax liability is not comprehended in the question referred to. We do not, therefore, feel compelled to express our

opinion in this case on the contentions advanced by the learned counsel for the assessee.

Coming to the first contention which alone falls within the ambit of the question, referred to us, as already pointed out, the Tribunal, while

disagreeing with the view taken by the AAC, held that on the reconstitution of the partnership on 14-4-1970, the assessee had relinquished 8 per

cent from and out of his profit-sharing ratio to the minors who had been admitted to the benefits of the partnership and that that relinquishment in

favour of the minors will amount to a gift. The learned counsel for the assessee contends that since the minors got the benefits of the partnership as

a result of the reconstitution of the partnership under the partnership deed dated 14-4-1970, the assessee should not be taken to be the donor. We

have no hesitation in rejecting this contention for the reason that by agreeing to admit the minors to the benefits of the partnership neither the

partnership, nor the other partners apart from the assessee, had suffered any detriment. Only if they had suffered some detriment and as a result of

such detriment, if the minors had obtained a corresponding benefit, then one could say that there has been a transaction of a gift by the partnership

or by the partners to the minors, who have been admitted to the benefits of the partnership. It is no doubt that it is only with the consent of the

other partners, the assessee can bring in the minors for getting the benefits of the partnership. But the consent of the other partners had been

obtained by the assessee on his parting with 8 per cent of his profit sharing ratio in favour of the minors, who have been admitted to the benefits of

the partnership. Thus, the assessee alone suffered a detriment for the purpose of bringing in the minors into the partnership, though the consent of

the other partners enabled the assessee to bring in the minors to the partnership. The consent given by the partners has no bearing on the question

as to whether the transaction of the assessee was to the detriment of the firm or partners of the firm, because the assessee is admittedly the person

who actually relinquished a portion of his interest and not the firm or the partners of the firm. Therefore, we are not able to see how the partners or

the firm as such which has not suffered any detriment can be taken to be the donors as contended by the learned counsel for the assessee.

The learned counsel for the assessee then contends that the transfer of a right to future profits cannot be taken to be a gift at all because no

property in praesenti is transferred and that it is not possible to estimate the future profits for the purpose of valuation of the gift, if any. The learned

counsel refers to the decision of this Court in Addl. Commissioner of Gift-tax Vs. P. Krishnamoorthy and Others, in support of his submission that

the right to a future profit cannot be a property at all which could be the subject-matter of a gift. The question that arose in the said case was

whether there is any relinquishment of a right to share in the profits of the partnership on partner''s retirement in favour of the continuing and newly

admitted partners. The facts in that case were that some of the partners retired from the partnership after collecting from the firm whatever they

were entitled to get and the firm continued with the remaining partners. Thereafter the firm admitted new partners. The GTO took the view that

since the retiring partner, even after retirement, had a share in the profits of the partnership that right should be taken to have been relinquished in

favour of the newly admitted partners and that amounts to a gift. When the matter went before the Tribunal the Tribunal held that once the partners

retire, their rights to share profits had ceased and, therefore, they cannot be taken to have relinquished any rights in favour of the newly added

partners and, therefore, there is no gift element involved in the transaction. When the matter came before this Court, this Court took the view that

the moment a partner retires from a firm, he will have no right to receive any future profits in the said firm and hence there is no question of his

giving up any such right. The learned judges also pointed out in that case that unless there is an existing right, it cannot be taken to be a property

and there is no question of a retiring partner having a right to share the future profits and if so, such a non-existence right cannot be ''property'' as

contemplated by the statute. We do not see how this decision, will help the assessee in this case. There it was actually found that the right to

receive any future profits does not exist and such a non-existent right cannot be taken to be the subject-matter of a gift. In that decision, the

decision in A.M. Ayya Nadar''s case (supra) has been referred to and distinguished by holding that the said decision does not apply to the facts of

that case.

In the present case, it cannot be said that the right to share future profits does not exist. Admittedly, the assessee had the 50 per cent profit-

sharing ratio before the admission of the minors to the benefits of the partnership. For the purpose of bringing in the minors to the benefits of the

partnership, he has relinquished 8 per cent out of his share of profits from and out of the said 50 per cent. It is only because the assessee has

agreed to part with this 8 per cent profit-sharing ratio, the other partners consented to the minors being admitted to the benefits of the partnership.

This relinquishment of 8 per cent profit-sharing ratio is admittedly without consideration. Therefore, there is a relinquishment of a right by the

assessee in favour of the minors, who have been admitted to the benefits of the partnership.

The facts of this case squarely fall within the principle laid down by this Court in A.M. Ayya Nadar''s case (supra). In that case there was a

reconstitution of the partnership and there was a redistribution of the shares as and by way of mutual consent. A change was brought about by the

redistribution of shares by which the assessee, out of three-ninth share, retained one-ninth share and the balance of two-ninth share was taken by

the other two partners. This Court held that the redistribution by way of realignment of the share involves a transfer of property amounting to a gift

chargeable to gift-tax and that the right of a partner to share in the profits of a firm is as much property as a right of a partner to share in the assets

of the firm, and therefore, a redistribution of the share of the profits as between one partner and certain others, involves a transfer of the right,

which has effect to diminishing a partner''s interest and correspondingly increasing the value or quantum of the shares held by the other partners.

In this case, the minors had no interest in the partnership before the reconstitution of the firm on 14-4-1970. It is only by the new terms of the

partnership, the assessee relinquished a portion of the right to share his profits so that the minors can have the benefits of that share relinquished.

This will directly attract the principle laid down in the decision in A.M. Ayya Nadar''s case (supra).

As already stated, the learned counsel for the assessee has contended that the right to receive future profits of the firm is not an existing right.

Similar contention was put forward before this Court in the decision cited supra, based on the decision in Controller Commissioner of Gift-tax,

Madras Vs. N.S. Getti Chetttiar, ) and the Bench rejected the contention and held that the right to share the future profits is as much property as a

right of a partner to share in the assets of the firm. The decision in A.M. Ayya Nadar''s case (supra) has been accepted and followed in

Commissioner of Gift-tax Vs. A.M. Abdul Rahman Rowther, and Commissioner of Gift-tax Vs. K.P.S.V. Duraiswamy Nadar (Decd.) (By Legal

Representative), .

In A.M. Abdul Rahman Rowther''s case (supra), the assessee, who was carrying on business as also proprietor converted his business into a

partnership consisting of himself and his two daughters. While constituting that partner ship, the assessee transferred Rs. 25,000 each to his

daughter and son from his share capital account. The partnership deed provided that the gross assets and liabilities of the new firm and the capital

of the firm shall belong equally to the five persons, namely, the assessee, his three daughters and son and the profits and losses of the firm shall be

divided between and borne by the partners in equal proportions. The transfer of share capital of Rs. 25,000 each to his daughter and son was

taken as a gift. When the matter ultimately came before this Court, this Court held that there was a transfer of interest in the property when the

assessee took his daughter and son into the partnership, assigned them a portion of the share capital and realigned the shares in the partnership and

the profit-sharing ratio, which amounted to a gift chargeable to tax and that the redistribution of the profit-sharing ratio on the admission of the two

new partners amounted to a ''gift'' by the assessee of a portion of his share in the goodwill of the firm.

In K.P.S.V. Duraiswamy Nadar''s case (supra), this Court has again reiterated its view that redistribution of the shares in a partner ship

between partners resulting in diminution of a partner''s interest and corresponding in crease in the interest of the other partners with out any

consideration, amounted to a gift chargeable to gift-tax. In that case reference has been made to section 29 of the Indian Partnership Act, which

provides that a transferee of a partner''s interest is entitled, during the continuance of the firm, to receive the share of profits of the transferring

partner and on dissolution, to receive the share of the assets of the firm to which the transferring partner will be entitled. Having regard to the

preponderance of judicial opinion, where a partner relinquishes a portion of his profit-sharing interest in the partnership in favour of another, then

the transaction will amount to a ''gift'' falling within the decision of section 2(xii) read with section 2(xxiv), we are in entire agreement with the view

taken by the Tribunal in this case. The question is, therefore, answered in the affirmative and against the assessee. The assessee will pay the costs

to the revenue. Counsel''s fee Rs. 500. Reference answered in the affirmative.