Commissioner of Gift Tax vs H. Subramanian, Bhima Jewellers

P. Shanmugam, J.—The following questions were referred for opinion :

"(1) Whether, on the facts and in the circumstances of the case, the Tribunal was right in law and in fact in holding that there was no gift liable to be taxed under the Gift-tax Act, 1958 ?

(2) Whether, on the facts and in the circumstances of the case, the capital brought in by the new partners and the time and labour contributed to the firm constituted sufficient and valid consideration for the diminution in the share of the assessee''s profits ?"

The assessee, Bhima Jewellers at Ernakulam, was a proprietary concern from September 4, 1978 to March 1, 1980. Thereafter, the proprietary concern was converted into a partnership of seven persons including the assessee. The capital contributed by all the partners is in equal shares of Rs. 50,000 each. The Gift-tax Officer initiated proceedings under the Gift-tax Act against the assessee, viz., Shri H. Subramanian, Bhima Jewellers, Ernakulam, for having transferred the capitalised value of the right to share the profit computed at Rs. 6,20,000. On appeal by the assessee, the Commissioner of Gift-tax (Appeals) allowed it and cancelled the assessment by the Gift-tax Officer. The Gift-tax Officer filed an appeal before the Tribunal and the assessee also filed a cross-appeal. The Tribunal dismissed the appeal as well as the cross-objections. Hence, the above reference.

By going through the orders, we find that the Gift-tax Officer found that as on February 29, 1980, the excess of assets over the liabilities amounting to Rs. 7,55,510 was treated in the books of the firm as the capital contribution by the assessee. The new partners six in number brought Rs. 50,000 each as their share capital. The Gift-tax Officer also found that on their admission into partnership, the incoming partners would get a right to share in the profits of the firm. They would also get a right to share in the assets. The right to share in the future profits was valued at Rs. 6,20,000 and a tax was imposed on it. The Gift-tax Officer did not include the capital contribution by the assessee as a partner for the purpose of assessing, but has only taken the right to share in the future profits as a gift whereas the Commissioner of Gift-tax proceeded on the basis that the Gift-tax Officer mentioned that the incoming partners have not brought in any consideration to get the right to share future profits. The Commissioner held that all the new partners brought in sufficient capital and, therefore, there was sufficient consideration. The Tribunal, on the other hand, proceeded on the basis that the Gift-tax Officer initiated proceedings for having transferred a part of the goodwill to the new partners. All the partners have contributed adequate capital in addition to time and labour and, therefore, there is no deemed gift.

From the partnership deed dated March 1, 1980, it is seen that the partners apart from the contribution, are not subscribing any time and labour as found by the Tribunal. There is no material available warranting such a conclusion. Besides, the goodwill of the erstwhile proprietary concern was not quantified. What was considered as transferred was only the right to share in the future profits and not the assets of the proprietary concern. If the total contribution, namely Rs. 7,55,510 and the right to share, namely Rs. 6,20,000 are taken together, it would be Rs. 15,75,510. In order to find out whether there is adequate consideration, the officers should have taken this figure for the relative comparison. On the contrary, the contribution of Rs. 50,000" amounting to Rs. 3,00,000 is compared with Rs. 6,20,000 which is taken as the share in the future profits for the purpose of deciding that there is adequate consideration. We find that the approach of the officers in reference to the actual amount of transfer involved is not clear. The Tribunal proceeded on the basis that the assessee could withdraw the profits at any time and that there has been a contribution of time and labour. There is absolutely no material before the authorities. Further, whether the transfer was of only capitalised value of the right to share the profit, or only the capital contribution for determination of the question of the adequacy for consideration is not clear. We are, therefore, of the view that the matter requires fresh consideration. Therefore, we decline to answer the questions, The matter is remanded back to the Tribunal for fresh consideration.

A copy of this judgment with the seal of this court and the signature of the Registrar shall be sent to the Income Tax Appellate Tribunal, Cochin Bench.

I. T. R. is disposed of as indicated above.