Commissioner of Gift-tax vs Smt. R. Sarojini (Legal heir of late Rajagopalan)

K.S. Paripoornan, J.—At the instance of the Revenue, the Income Tax Appellate Tribunal has referred the following question of law for the decision of this court :

" Whether, on the facts and in the circumstances of the case, the Tribunal was justified in law in holding that there was no deemed gift u/s 4(1)) read with Section 2(xxiv) of the Gift-tax Act, 1958?"

The respondent is one of the legal heirs of one late Rajagopalan. Mr. Rajagopalan was a partner in a firm. On April 1, 1978, he retired from the firm and received the amounts due to him on settlement of accounts. The remaining partners carried on the business. The Gift-tax Officer took the view that when Mr. Rajagopalan retired from the firm and received the amount which stood to his credit, he relinquished his share in the goodwill and the right to share the future profits of the firm in favour of the continuing partners. It was held that there was a deemed gift u/s 4(1) read with Section 2(xxiv) of the Gift-tax Act, 1958- Gift-tax was levied thereon. In appeal, the Appellate Assistant Commissioner held that the retirement of a partner from the firm did not involve any assessable gift under the Gift-tax Act. The order passed by the Gift-tax Officer was cancelled. The order passed by the first appellate authority was affirmed by the Appellate Tribunal relying on the decision of the Madras High Court in Addl. Commissioner of Gift-tax Vs. P. Krishnamoorthy and Others, . It is thereafter at the instance of the Revenue that the Income Tax Appellate Tribunal has referred the question of law formulated hereinabove for the decision of this court.

We heard counsel. A Bench of this court in Commissioner of Gift-tax Vs. T.M. Luiz Kannamally, , had occasion to deal with a similar matter. In the said decision, it has been ruled that when a partner retires from a firm, there can only be readjustment of the rights between the retiring partner and the continuing partners in the assets of the partnership and no element of transfer is involved in the transaction. It was held that the transaction does not amount to a gift and no gift-tax is leviable.

In the light of the above Bench decision of this court, we are of the view that the Appellate Tribunal was justified in holding that there was no deemed gift u/s 4(1) read with Section 2(xxiv) of the Gift-tax Act, 1958. We answer the question referred to this court, in the affirmative, against the Revenue and in favour of the assessee.

The Registrar shall send a copy of this judgment, under his signature and seal of this court, to the Income Tax Appellate Tribunal, Cochin Bench.