Commissioner of Income Tax vs Jagatram Ahuja

B.P. Jeevan Reddy, J.—The Income Tax Appellate Tribunal, Hyderabad, has referred the following question u/s 26(1) of the Gift-tax Act, 1958, for the opinion of this court :

"Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the release by the assessee, who was one of the partners in the firm of 3-Aces, of his rights in the assets of the firm for a consideration of Rs. 3,00,000 when the market value of the assets of the firm in proportion to his share was in excess thereof, did not amount to a gift within the meaning of the Gift-tax Act ?"

The assessment year concerned in 1972-73. The original assessment under the Gift-tax Act was made on October 12, 1972, on a total gift of Rs. 70,000, but thereafter it was reopened u/s 26(1) of the Act.

A partnership firm under the name and style "3-Aces" was constituted on January 9, 1965, by two brothers, Jagatram Ahuja ("the assessee" herein) and Bishanlal Ahuja. The firm was carrying on the business of a restaurant in a building known as "Mohsin-ul-Mulk Kothi", situated at Abid Road, Hyderabad. The building constituted the property of the firm. It comprised of 11,600 sq. yards of site on which it stood. On April 15, 1971, an agreement was entered into between the assessee and his brother, Bishanlal, whereunder the assessee decided and agreed to retire from the partnership. The terms of the agreement, as set out in the assessment order, are to the following effect :

"(i) Sri Jagatram (assessee) is to retire before December 31, 1971.

(ii) Steps are to be taken to finalise accounts relating to the partnership and determination of the amount due to Sri Jagatram on retirement.

(iii) Sri Bishanlal agreed to pay a sum of Rs. 1,50,000 to Sri Jagatram towards the value of 50% share of the goodwill of the firm.

(iv) The above sum of Rs. 1,50,000 payable by Sri Bishanlal to Sri Jagatram shall be in addition to the sum due to Sri Jagatram from the partnership at the time of retirement.

(v) If the total sum including 50% share value of the goodwill, i.e., Rs. 1,50,000, payable to Sri Jagatram falls below Rs. 3,00,000, the amount in excess of the balance actually due to Sri Jagatram at the time of retirement shall be treated as the sale value of 50% share of the goodwill belonging to Sri Jagatram.

(vi) Sri Jagatram shall execute proper conveyance in favour of Sri Bishanlal conveying 50% share in the land and building in which the business of 3-Aces is carried on.

(vii) It is open to Sri Bishanlal to classify the sum payable to Sri Jagatram as between movable and immovable properties and get necessary documents executed by Sri Jagatram."

In pursuance of the agreement aforesaid, a deed of dissolution of the partnership was executed on November 22, 1971, dissolving the partnership with effect from that date. The important terms of the deed of dissolution, as set out in the order of assessment, are as follows :

"(i) All the assets and liabilities of the partnership including the land and building are taken by Sri Bishanlal from November 22, 1971.

(ii) Sri Jagatram renounced his interest, share and interest in the said assets and liabilities from November 22, 1971.

(iii) In full settlement and satisfaction of the share, right and interest of Sri Jagatram in the partnership including land and buildings, profits and goodwill and the amounts standing to the credit of Sri Jagatram in the partnership accounts as on November 21, 1971, Sri Jagatram has agreed to receive Rs. 3,00,000.

(iv) Out of the said Rs. 3,00,000, Rs. 1,00,000 has already been paid. The balance of Rs. 2,00,000 is payable by Sri Bishanlal against the sale consideration of the undivided 50% share in the land and building known as `Mohsin-ul-Mulk Kothi''.

(v) Sri Jagatram should immediately execute a sale deed and register the same in favour of Sri Bishanlal conveying his 50% share in the land and building for Rs. 2,00,000.

(vi) Sri Bishanlal is entitled to continue to carry on his separate business in the name and style of ''3-Aces''.

(vii) Sri Jagatram shall not carry on any business under the above name and style".

On March 10, 1972, a document styled as "Release deed" was executed by Sri Jagatram and Sri Bishanlal. The important terms of this release deed, as set out in the assessment order, are as follows :

"Sri Bishanlal agreed to release his half share in 3-Aces including the land and building for Rs. 3,00,000. Out of Rs. 3,00,000, Rs. 1,00,000 has already been paid towards the release of movable assets. The balance of Rs. 2,00,000 is to be paid towards half share and interest in the land and building. Out of this amount, a sum of Rs. 50,000 is paid at the time of registration of the deed and the balance of Rs. 1.5 lakhs is to be paid in two instalments, Rs. 75,000 before December 1, 1972, and Rs. 75,000 before December 1, 1973."

In reassessment proceedings u/s 26(1) of the Gift-tax Act, the Gift-tax Officer valued the share of the assessee (Sri Jagatram Ahuja) in the partnership assets at Rs. 12,67,015. From this, he deducted the amount of Rs. 3,00,000 paid by Sri Bishanlal to Sri Jagatram and arrived at the figure of Rs. 9,67,015 as the value of the property gifted by the assessee to his brother, Sri Bishanlal. After granting exemption of Rs. 5,000, he determined the taxable value of the gift at Rs. 9,62,015 and levied tax thereon. (There were two more cash gifts made by the assessee to some other persons which were also taken into account, but with which aspect we are not concerned herein.) The reassessment order is dated November 14, 1977.

On appeal, the Commissioner of Gift-tax (Appeals) confirmed the order of the Gift-tax Officer, but reduced the total value of the gift by Rs. 3.77 lakhs. On further appeal, the Tribunal held that the distribution of assets between partners on the dissolution of the firm, even though unequal, does not amount to "transfer of property", within the meaning of section 2(xxiv) and, therefore, does not amount to "gift" as defined in section 2(xii) of the Act. So far as the valuation of the property (land and building) is concerned, the Tribunal determined the same at Rs. 9,98,800. In so far as the value of goodwill is concerned, the Tribunal was of the opinion that the matter has to go back to the Gift-tax Officer for a proper determination of its value; but inasmuch as on the question of law it held that no gift was involved, it allowed the appeal and cancelled the reassessment. Thereupon, the Revenue asked the Tribunal to refer the following three questions to this court u/s 26(1) of the Gift-tax Act, viz. :

"(1) Whether, on the facts and in the circumstances of the case, the release by one of the partners of his rights in the assets of the firm for less than the market value amounts to a gift within the meaning of the Gift-tax Act ?

(2) Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was correct in law in holding that there is no transfer of right in property within the meaning of section 4(1) of the Gift-tax Act ?

(3) Whether, on the facts and in the circumstances of the case, the Appellate Tribunal is justified in fixing the value of the property at Rs. 9,98,000 ?"

The Tribunal refused to refer the third question, but synthesized the first two questions and referred the question set out at the inception of this judgment. As against the refusal of the Tribunal to refer the third question asked for by it, the Revenue filed a petition u/s 26(3) of the Gift-tax Act which was dismissed by this court.

The expression "gift" is defined by clause (xii) in section 2 of the Act in the following words :

"''gift'' means the transfer by one person to another of any existing movable or immovable property made voluntarily and without consideration in money or money''s worth, and includes the transfer or conversion of any property referred to in section 4, deemed to be a gift under that section."

The expression "property" is defined by clause (xxii). It is an inclusive definition. It reads :

"''Property'' includes any interest in property, movable or immovable."

The expression "transfer of property" is defined by clause (xxiv) in the following terms :

"''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."

Section 4 declares certain transfers to be gifted for the purpose of the Act. Clause (a) says that where property is transferred otherwise than for adequate consideration, the amount by which the market value of the property at the date of the transfer exceeds the value of the consideration shall be deemed to be a gift made by the transferor. It is not necessary for our purposes to refer to the other clauses in sub-section (1) of section 4, or for that matter to sub-section (2) thereof.

It is evident from the above provisions that Parliament has sought to give an extended meaning to the expression "transfer of property" and consequently to the expression "gift". Every transfer of existing movable or immovable property, made without consideration, constitutes "gift". Similarly, any transfer made otherwise than for adequate consideration also constitutes gift to the extent the market value of the property exceeds the consideration."Property" is defined to include "any interest in property, movable or immovable". More important, the definition of the expression "transfer of property" is couched in the widest possible terms. The definition first says that the expression "transfer of property" means any disposition, conveyance, assignment, settlement, delivery, payment or other alienation of property and then it proceeds to say that, without limiting the generality of the foregoing, the said expression includes four types of transactions mentioned in clause (a) to (d). The creation of a trust in property (clause (a)); grant or creation of any lease, mortgage, charge, easement, licence, power, partnership or interest in property (Clause(b)); exercise of a power of appointment of property vested in any person to determine its disposition in favour of another person other than the donee of the power (clause (c)), and "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" (clause (d)), constitute a transfer. A reading of section 4 also indicates the intention of Parliament to cast the net wide. Section 3 is the charging section.

Let us now look at the true nature and purport of the transaction which took place between the assessee and his brother, Sri Bishanlal, as found recorded in the three documents dated April 15, 1971 (agreement), November 22, 1971 (deed of dissolution), and March 10, 1972, (release deed). The partnership "3-Aces" comprised of only two partners, namely, the assessee and his brother, Sri Bishanlal. It was formed in 1955 (sic) and had been running a very prosperous business. In 1971, an arrangement or an understanding was arrived at between the two partners, whereunder one (assessee) was to retire from the partnership leaving the entire business to the other (Bishanlal). In consideration of the assessee''s leaving the business in its entirety to the other, the assessee was paid a sum of Rs. 3,00,000, whereas, properly valued, the assets of the partnership were worth Rs. 9,98,000, apart from, and in addition to, the value of the goodwill. The partners themselves had valued the goodwill at Rs. 3 lakhs and the assessee''s share therein at Rs. 1,50,000. (As mentioned hereinbefore, the question of valuation of goodwill was proposed to be remitted by the Tribunal to the Gift-tax Officer but which it did not actually do because of its opinion on the question of law. But for the sake of discussion, we may take the value of the goodwill at Rs. 3,00,000 as determined by the parties themselves in the agreement dated April 15, 1971). This would mean that the total worth of the assets of the partnership on the date of dissolution, i.e., November 22, 1971, was about Rs. 13 lakhs, the half share of the assessee wherein would be Rs. 6-1/2 lakhs. As against this Rs. 6-1/2 lakhs, the assessee merely took Rs. 3,00,000 and walked out. As a result of this transaction, the value of the "property" of the assessee in the partnership assets diminished from Rs. 6-1/2 lakhs to Rs. 3 lakhs, and the value of the share of Bishanlal correspondingly increased from Rs. 6-1/2 lakhs to Rs. 9-1/2 lakhs. The transaction is represented by an recorded in the three documents referred to above. Is it not a "transaction" then within the meaning of sub-clause (d) of clause (xxiv) ? Would it be reasonable to say it is not ? Since both of them are businessmen and must be presumed to have been aware of the true state of affairs including the true market value of the partnership assets, it must be presumed that they intended, by this transaction, to diminish the value of the property of one, and to increase the value of the property of another. Once it is such a transaction, it is "transfer of property" and applying the provision contained in clause (a) of sub-section (1) of section 4, the sum of Rs. 3-1/2 lakhs - which is "the amount by which market value of the property at the date of the transfer exceeds the value of consideration" - has to be deemed as a gift made by the assessee to his brother, Bishanlal.

Sri Y. Ratnakar, learned counsel for the assessee, however, contended that (i) a transaction contemplated by sub-clause (d) of clause (xxiv) in section 2 must also be a transfer, as held by the Supreme Court in The Commissioner of Gift Tax, Madras Vs. N.S. Getty Chettiar, , whereas distribution of assets amongst partners on the dissolution of a partnership does not and has been held not to amount to a transfer of property (vide Commissioner of Income Tax, Madhya Pradesh Vs. Dewas Cine Corporation, . Hence, it cannot be said that there is any transfer of property from the assessee to Bishanlal in this case; (ii) in principle, there is no distinction between the relationship obtaining between the members of a Hindu undivided family (dealt with in The Commissioner of Gift Tax, Madras Vs. N.S. Getty Chettiar, and the relationship obtaining between the members of a partnership firm; hence, the principle of the decision in The Commissioner of Gift Tax, Madras Vs. N.S. Getty Chettiar, squarely applied to a partnership as well. Even if there is an unequal distribution of assets between the partners on the dissolution of a firm, it cannot be said that there is a transfer or that there is a gift to the extent the market value exceeds the consideration; and (iii) that the interest of a partner in a partnership is not "interest in property" or "property" as defined and dealt with in the Gift-tax Act.

On the other hand, it is contended by Sri M. Suryanarayana Murthy, learned standing counsel for the Revenue, that as held by the Supreme Court in its several decisions, the interest of a partner in the assets of a partnership is "property", within the meaning of the Gift-tax Act and also as ordinarily understood, and that any and every transaction by which the value of the share of a person is reduced, and which results correspondingly in the increase in the value of the share of any other person or persons, necessarily amounts to a transfer and a gift for the purpose of the Gift-tax Act. Both counsel have referred to a good amount of case law on the subject in support of their respective contentions.

In Commissioner of Gift Tax, Gujarat Vs. Chhotalal Mohanlal, , the Supreme Court held, reversing the decision of the Gujarat High Court in Commissioner of Gift Tax, Gujarat I Vs. Chhotalal Mohanlal, , that, in the circumstances of that case, there was a gift for the purpose of the Gift-tax Act. The fact of the case are : Under a deed of partnership dated November 12, 1958, a firm by name M/s. Chhotalal Vedilal came into existence with three partners, namely, Chhotalal Mohanlal (assessee in that case), G. Chhotalal and P. Vedilal. Their shares were 7 annas, 4 annas, and 5 annas, respectively, in a rupee. On November 9, 1961, i.e., during the accounting year relevant to the assessment year 1963-64, a change took place in the constitution of the firm. Under the new deed, P. Vedilal retired. The share of G. Chhotalal remained as it was. One R. Chhotalal, s/o Chhotalal Mohanlal (assessee), became a partner with 4 annas share. The share of the assessee, Chhotalal Mohanlal, was reduced to 4 annas. For the remaining 4 annas share two minor sons of Chhotalal Mohanlal, namely, K.K. and D.K., were admitted to the benefits of the firm with 12% and 13% interest, respectively. There was no alteration in the share capital standing in the name of assessee. The Gift-tax Officer held, on the above facts, that the share of the assessee came down from 44% to 25%, which means that his 19% share in the profits and in the goodwill of the firm was gifted by the assessee in favour of his two minor sons. He valued the goodwill and treated 19% thereof as a taxable gift. On appeal, the Appellate Assistant Commissioner held that the gift was not of a share of goodwill but was in respect of the right to receive future profits. He valued the said right at a certain figure. On further appeal, the Tribunal held that the right to receive future profits not being existing property", cannot be the subject-matter of a gift, as defined in clause (xii) of section 2 and hence no Gift-tax is exigible. Thereupon, the question "whether, on the facts and in the circumstances of the case, the benefits of partnership given to minors, Kirit Kumar and Deepak Kumar, was gift under the Gift-tax Act, 1958," was referred for the opinion of the Gujarat High Court. The High Court agreed with the view taken by the Tribunal, whereupon the matter was carried to the Supreme Court by the Revenue. The Supreme Court affirmed the principle of an earlier decision in Khushal Khemgar Shah and Others Vs. Khorshed Banu Dadiba Boatwalla and Another, , that goodwill of a firm is an "asset". It also approved a decision of the Calcutta High Court taking the same view. It then referred approvingly to the decision of the Madras High Court in M.K. Kuppuraj Vs. Commissioner of Gift-tax, , where, in similar circumstances, the High Court had held that there was a gift. It also referred to two other decisions of the Rajasthan and Bombay High Courts taking the same view on similar facts and then observed as follows (p. 127 of 166 ITR) :

"Once goodwill is taken to be property and with the admission of two minors to the benefits of partnership in respect of a fixed share, the right to the money value of the goodwill stands transferred, the transaction does constitute a gift under the Act."

In other words, the Supreme Court upheld the view taken by the Gift-tax Officer in that case.

In M.K. Kuppuraj Vs. Commissioner of Gift-tax, , the Madras High Court dealt with a case arising under the Gift-tax Act, the facts whereof are as follows : The assessee, Kuppuraj, had a 50% share in a partnership firm. During the accounting year relevant to the assessment year 1971-72, i.e., on April 14, 1970, there was a reconstitution of the firm. The assessee''s share was reduced to 42%. His minor children were admitted to the benefits of partnership with an 8% share in the profits. On the above facts, the Gift-tax Officer held that there was a relinquishment by the assessee to the extent of 8% in favour of his four minor children who were admitted to the benefits of the partnership, and that, accordingly, he should be taken to have gifted his right to share future profits to that extent in favour of his minor children. He valued the gift taking into account the five preceding years'' profits of the firm, and after making some deductions, arrived at a particular valuation of the said 8% interest. On appeal, the Appellate Assistant Commissioner held that the transfer of a right to share future profits does not come within the meaning of "gift" as defined by the Act and, accordingly, set aside the order of the Gift-tax Officer. The matter was then taken to the Tribunal, which reversed the order of the Appellate Assistant Commissioner and restored the order of the Gift-tax Officer. The Tribunal also referred to section 30 of the Partnership Act, and in particular to sub-section (2) thereof, and held on that basis that the four minors admitted to the benefits of partnership were also entitled to a share in the firm''s property. A question was then referred to the High Court u/s 26(1) of the Gift-tax Act, as to whether, in the circumstances of the case, the assessee was liable to Gift-tax ? Although the assessee''s counsel urged three contentions, the only contention considered and pronounced upon by the High Court was, whether, in the circumstances of the case, there was a gift in favour of the minor children who were admitted to the benefits of the partnership. The court rejected the contention of the assessee that the transfer of a right to share future profits cannot be taken to be a gift at all because no property in praesenti is transferred or that it is not also possible to estimate the value of such right to share future profits. It observed (p. 485) :

"In the present case, it cannot be said that the right to share future profits does not exist. Admittedly, the assessee had 50% 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% out of his share of profits from and out of the said 50%. It is only because the assessee has agreed to part with this 8% profit-sharing ratio, the other partners consented to the minors being admitted to the benefits of the partnership. The relinquishment of 8% 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..."

It also observed that the minors had no interest in the partnership before the reconstitution of the firm and that it is only by virtue of the terms of the deed of reconstitution that the assessee relinquished a portion of his right and the minors were admitted to benefits to that extent. The court referred to several earlier decisions of the same court holding in similar circumstances that there was a gift and held that in the case before it also, there was a "gift" within the meaning of section 2(xii) read with section 2(xxiv) of the Act.

In Commissioner of Gift-tax, Bombay City-II Vs. Premji Trikamji Jobanputra, , the Bombay High Court held that the expression "transfer of property" as defined in section 2(xxiv) of the Gift-tax Act is wide enough to include within its scope any assignment or alienation of property. It held that if upon proper scrutiny of a change in the constitution of a firm by admitting a minor to the benefits of a partnership, it appears that the share of an erstwhile major partner is reduced and the amount of share reduction has been given to his minor child who has been admitted to the benefits of the partnership, there may result an assignment or alienation of the property. In such a case, it held, a transfer of property has taken place. We do not think it necessary to mention the fact of the said case, except to emphasise the observations of the Bombay High Court that the question whether there has been a gift has to be examined in the particular circumstances of a given case. Inter alia, it is to be examined whether the incoming partner or the minor who has been admitted to the benefits of the partnership has brought any capital.

In CED v. Mrudula Nareshchandra [1983] 160 ITR 342, a case arising under the Estate Duty Act, the Supreme Court held that the goodwill of a firm is an asset in which a partner has a share. On his death his interest therein passes to the surviving partners and hence the value thereof has to be included in the estate of the deceased. It was observed that a partner has a marketable interest in all the assets of the firm, including the goodwill, even during the subsistence of the partnership, and that this interest is "property" within the meaning of section 2(15) of the Estate Duty Act, 1953. Indeed, the partnership deed in that case provided expressly that "the firm shall not stand dissolved on the death of any of the partners, and the partner dying shall have no right whatsoever in the goodwill of the firm". Notwithstanding the said clause, it was held by the Supreme Court that the share of the deceased partner in the goodwill of the firm did pass to the surviving partners and constituted "property" passing on the death of the deceased.

Ratan Lal Sharma Vs. Purshottam Harit, , was a case arising under the Registration Act. There were two partners, R.L.S. and P.H., carrying on business as a partnership firm. On difference arising between them, they referred their dispute to the arbitration of two persons, empowering them to decide the dispute between them. The arbitrators made an award whereunder, all the assets including immovable properties of the partnership were allotted to one partner, R.L.S., absolutely. The said partner, R.L.S., was directed to pay a sum of Rs. 17,000 to the other partner, P.H., in lieu of his share. The question arose whether the award created rights in immovable properties worth more than Rs. 100 and, therefore, required registration. It was held that the award did purport, expressly, to create rights in immovable property of the firm worth more than Rs. 100, and, therefore, required registration. It was held that the award did purport, expressly, to create rights in immovable property of the firm worth more than Rs. 100 and, therefore, the award is compulsorily registrable. Since it was unregistered, it was held, it cannot be looked into for the purpose, and cannot even be made a rule of the court. The contention of learned standing counsel for the Revenue is that the facts of this case are substantially similar to the facts of the case before us.

New Diwan Oil Mills Vs. Commissioner of Income Tax, was a case where the assessee-firm consisted of two partners, R and B. The assessee-firm owned certain properties. On February 9, 1968, a document of release was executed by both R and B, whereunder R released and relinquished all his rights in a particular property owned by the partnership and vested absolute ownership thereof in B. The property released was valued at Rs. 79,500. Necessary entries were made in the books of the firm. In proceedings under the Gift-tax Act, the Gift-tax Officer was of the opinion that inasmuch as the market value of the property was much more than the value placed upon it in the release deed, the difference between the market value and the consideration stated in the release deed constituted a "gift", exigible to Gift-tax under the Act. This was upheld by the High Court, holding that the firm was a body of individuals or persons, and as such was a "person" as defined in section 2(xviii) of the Act, and that there was a transfer by the firm to B which constituted a gift.

There are the cases mainly relied upon by learned standing counsel for the Revenue in support of his contention. They do establish, inter alia, that where, as a result of a transaction, the share of a partner is reduced, and to the extent of the reduction another partner is taken in, or a minor is admitted to the benefits of the partnership, and if such incoming partner/minor does not bring in appropriate capital with him, there is a gift to the extent of reduction of the share from the existing partner to the incoming partner/minor. It is also held that a partner has a marketable interest in all the assets of the firm including the goodwill even during the subsistence of the partnership, and that this interest is "property", as ordinarily understood. The contention of learned standing counsel for the Revenue, therefore, is that one must look to the true nature of the transaction represented by the three documents dated April 15, 1971, November 22, 1971, and March 10, 1972; that under the said transaction the assessee assigned and transferred assets worth at least Rs. 6-1/2 lakhs to the other partner in lieu of Rs. 3,00,000 only and, therefore, there is a gift to the extent of at least Rs. 3,50,000. He says, there is no distinction in principle between the transfer of a portion of his interest by one partner to another partner, and transfer of his whole interest by one partner to the sole surviving partner.

The reasoning of Sri Y. Ratnakar, learned counsel for the assessee, on the other hand, runs on entirely different lines. The first step in his reasoning is that distribution of assets on the dissolution of a firm does not amount to transfer of interest or asset. This is established by the decision of the Supreme Court in Commissioner of Income Tax, Madhya Pradesh Vs. Dewas Cine Corporation, . In this case, it was observed that the property which is brought in at the inception of the partnership, or which is acquired during the course of the business, becomes partnership property, and that a partner, subject to a special agreement, is entitled upon dissolution to a share in the money representing the value of the property. The distribution of the surplus on the dissolution of a partnership, it was held, is for the purpose of adjustment of the rights of the partners in the assets of the partnership, and that it does not amount to transfer of assets. It was held that such allotment of property towards the share of each partner does not amount to sale or transfer. Applying the principle of the decision of the Supreme Court in Addanki Narayanappa and Another Vs. Bhaskara Krishtappa and Others, , it was observed that a partner may, in an action for dissolution, insist that the assets of the partnership be realised by sale of its property; but where, in satisfaction of the claim of the partner to his share in the value of the residue determined on the footing of an actual or notional sale, property is allotted, the property so allotted to him, it was observed, cannot be deemed in law to be sold to him.

The next step in the reasoning of Mr. Ratnakar is to say that even an unequal distribution of assets amongst partners does not amount to a transfer or a gift of assets to the extent of the excess value. For this proposition, support is sought form the decision of the Supreme Court in The Commissioner of Gift Tax, Madras Vs. N.S. Getty Chettiar, . In this case, a partition took place between the members of a Hindu undivided family. The assessee who was the karta of the family, took towards his share properties worth Rs. 1,78,343 only, whereas he was entitled to a half share in all the joint family properties worth Rs. 8,51,440. The question then arose as to whether there was a gift to the extent of the difference, i.e., Rs. 2,47,377, exigible to Gift-tax. It was held by Hegde J., speaking for the Division Bench consisting of himself and Grover J., that the partition did not effect any transfer as generally understood in law and, therefore, did not fall within the definition of "gift" in section 2(xii) of the Act. It was held that the partition in the family cannot be considered to be a disposition, conveyance, assignment, settlement, delivery, payment or other alienation of property, within the meaning of those words in section 2(xxiv) of the Act, and further that partition was not also a "transaction" entered into by the assessee with interest thereby to diminish directly or indirectly the value of his own property and to increase the value of the property of the other parties to the partition. The learned judge observed that a transaction contemplated by sub-clause (d) in clause (xxiv) of section 2 must also be one in the nature of a transfer. A perusal of the judgment makes it clear that the factual aspect was not very clearly stated by the Tribunal, which is evident from the following observations (p. 603) :

"Coming to the facts of the case, there is no material before us to show that there was any division of status before the properties were actually divided. The Tribunal has not found that there was any division of status amongst the members of the family before they divided the properties...The argument that there was first a division of status and the same was followed up by a division by metes and bounds does not appear to have been urged before the Tribunal. Under these circumstances, it is not necessary for us to consider what would be the position in law if there was first a division of status in a Hindu undivided family and the same was followed up by division by metes and bounds in which division one of the coparceners takes properties less than what he is entitled to under law..."

The learned judge observed further that in a Hindu joint family, all coparceners are joint owners of the properties of the family, that so long as the family remains joint, no coparcener can predicate what his share in the joint family is, and that only when there is a division of status, or a division by metes and bounds, does his share get determined. In our opinion, the reservation made in the above extract makes all the difference and makes it clear that the case of a Hindu undivided family where there is no prior division of status, stands on a footing different from that of a partnership. In a partnership, the share of each partner is definite, though it is true that even in the case of partnership properties, no partner can predicate at a given point of time that a particular property belongs to him. He is entitled only to such assets as are allotted to him on dissolution after discharging all the liabilities and after taking accounts as contemplated by law. Learned standing counsel for the Revenue offers the following criticism with respect to the ratio of this judgment. It is difficult to appreciate the observation that the expression "transaction" referred to in clause (d) of section 2(xxiv) takes its colour from the main clause, viz., it must be a transfer of property in some way". It is clear from the language of clause (xxiv) that the intention of Parliament was to expand and widen the definition of "transfer of property". In other words, transactions which otherwise may not amount to "transfer of property" were also deemed to be transfer of property for the purpose of the Act. These are the transactions mentioned in clauses (a) to (d). Clause (d) contemplates a transaction whereunder one person diminishes directly or indirectly the value of his own property so as to increase the value of the property of the other party to the transaction. Such a transaction may or may not amount to a transfer in the ordinary sense; but it is certainly a transfer of property for the purpose of the Act. In such a situation, says counsel, to say that the transaction contemplated by sub-clause (d) must first be a transfer of property in the ordinary sense, may amount to nullifying the intent and object underlying the definition which is, as stated above, both interpretative, as well as inclusive. Indeed, section 4(1)(a) says that where a property is transferred otherwise than for adequate consideration, the amount by which the market value of the property exceeds the value of consideration shall be deemed to be a gift made by the transferor. Learned standing counsel further submits that the provisions contained in section 2(xii), 2(xxii) and 2(xxiv) should be read together and alongside section 4 to appreciate and ascertain the intention of Parliament in defining the expression "transfer of property" in such wide terms.

Be that as it may, it is not for us to express any opinion on the said criticism. By virtue of article 141 of the Constitution, the said decision and even the observations aforesaid are binding upon us. In our opinion, however, the ratio of the said decision has no application to the distribution of assets as between partners whose shares inter se are specific and determined at any given point of time. Moreover, this decision has to be read and understood in the light of the subsequent decision of the Supreme Court in Controller of Estate Duty, Gujarat Vs. Kantilal Trikamlal, , which is, no doubt, a case arising under the Estate Duty Act. Section 2(15) of the Estate Duty Act defines "property" in the following terms :

"''Property'' includes any interest in property, movable or immovable, the proceeds of sale thereof and any money or investment for the time being representing the proceeds of sale and also includes any property converted from one species into another by any method.

Explanation 1. - xx (omitted as unnecessary).

Explanation 2. - The extinguishment at the expense of the deceased of a debt or other right shall be deemed to have been a disposition made by the deceased in favour of the person for whose benefit the debt or right was extinguished, and in relation to such a disposition the expression ''property'' shall include the benefit conferred by the extinguishment of the debt or right."

It would be seen that the definition of "Property" is in pari materia with the definition of the said expression in section 2(xxii) of the Gift-tax Act, and Explanation 2 to the said definition in the Estate Duty Act corresponds to sub-clause (d) in clause (xxiv) of section 2 of the Gift-tax Act. The question considered by a Bench of three judges was, where on a partition of a Hindu undivided family property, a coparcener takes less than his share, whether there is a "disposition" within the meaning of Explanation 2 to section 2(15) of the Estate Duty Act by him of that part of his share which he relinquishes on partition within two years of his death and, therefore, would it be considered as property passing on his death ? This was also a case where a coparcener took property worth far less than what he was entitled to according to his share. This happened within two years of the death of the deceased. The question arose whether the difference in value is includible in the estate of the deceased on the ground that it is a disposition made within two years of his death. It was held that it is liable to be so included. Krishna Iyer J., speaking for the Bench, observed that the term "disposition" is not a term of art nor legalese but a plain English word of wide import and that, moreover, the word has been given an expanded meaning, over and above its normal ambit, on account of the special definition in section 2(15) with Explanation 2 superadded. It was observed that Explanation 2 is deliberately designed to take within its embrace what otherwise may not be a disposition or to conform to its traditional concept. When the decision in The Commissioner of Gift Tax, Madras Vs. N.S. Getty Chettiar, was cited before this Bench, it distinguished the same on the ground that that was a decision under the Gift-tax Act, whereas the case before this Bench was one arising under the Estate Duty Act, which has to be examined in particular in the light of Explanation 2 to section 2(15). On principle, however, it appears difficult to say that there is no incompatibility between the ratio of both the decisions.

For all the above reasons, we are of the opinion that the principle of The Commissioner of Gift Tax, Madras Vs. N.S. Getty Chettiar, cannot be applied or extended to an unequal distribution of assets between partners. We may illustrate this by taking a rather extreme example. Take a partnership firm with two partners. It is dissolved and on an account being taken, it is found that the net assets, i.e., the surplus available for distribution between the partners is Rs. 1,00,000. The shares of the two partners are equal. But one partner takes Rs. 95,000 and the other partner takes a mere Rs. 5,000. Would it be realistic to say that no gift is involved to the extent of Rs. 45,000 from the partner (taking a mere Rs. 5,000) to the other partner who is given cash/assets of value of Rs. 45,000 in excess of what he is entitled to according to his share ? In such a case, it would be unrealistic to say that it is a mere distribution of assets. Distribution of assets it is, no doubt, but where such distribution does not correspond or approximate to the respective shares of the partners and the transaction is one whereby one partner is diminishing the value of his share, correspondingly increasing the share of the other partner or partners, it amounts to a "transaction" within the meaning of sub-clause (d) of clause (xxiv) of section 2 of the Gift-tax Act. In other words, to the extent of the property allocated corresponding or approximate to the share of a partner, it is a mere distribution of assets not involving a transfer; but, to the extent of the excess assets allocated assets allocated to one partner at the expense of the other, it must be treated as a "transaction" within the meaning of sub-clause (d) of section 2(xxiv), and hence a transfer of property and a "gift" attracting Gift-tax.

Mr. Y. Ratnakar cited several other decisions, but none of them is a case involving unequal distribution of assets between the partners and the court still holding that no gift is involved for the purpose of the Gift-tax Act. We may briefly refer to these decisions. Malabar Fisheries Co. Vs. Commissioner of Income Tax, Kerala, is a decision of the Supreme Court, where the principle of Commissioner of Income Tax, Madhya Pradesh Vs. Dewas Cine Corporation, was reaffirmed. It was observed that in law, a partnership firm is not a distinct legal entity; that the firm as such has no separate rights of its own in the partnership assets, and that when one takes of the firm''s property or firm''s assets, all that is meant is property or assets in which all the partners have a joint and common interest. In such a case, it was observed, it is difficult to say that when a dissolution takes place and the assets are distributed between the partners, there is a extinguishment of the firm''s rights in the partnership assets amounting to a transfer of assets. This was a case arising under the Income Tax Act.

In Commissioner of Income Tax, U.P. Vs. Sh. Bankey Lal Vaidya (Dead) by Lawyers, , it was held that where in the course of dissolution, the assets of the firm are divided between the partners according to their respective shares, by allotting the individual assets or paying the money value equivalent thereof, no transfer is involved, and that it is merely a case of distribution of assets. This is again a reaffirmation of the principle in Commissioner of Income Tax, Madhya Pradesh Vs. Dewas Cine Corporation, .

In Addl. CIT v. Mohanbhai Pamabhai, (1987) 165 ITR 166 (SC) , it was reaffirmed that where a partner retires from a firm and receives his share of amount calculated on the valuation of the net partnership assets including goodwill of the firm, no transfer is involved. But, this again is a case where the retiring partner received only the assets corresponding to his share and not in excess of his share.

To the same effect is the decision of this court in Commissioner of Income Tax, Andhra Pradesh Vs. L. Raghu Kumar, . The other decision cited of this court in Comissioner of Income Tax, Andhra Pradesh Vs. A.V. Bhanoji Rao, has no relevance, because that was a case of a partner putting his separate property into a partnership firm and the question was whether a registered document is necessary for that purpose. It was held that it cannot be treated as a transfer. This decision has, no doubt, to be read subject to the recent decision of the Supreme Court in Sunil Siddharthbhai Vs. Commissioner of Income Tax, Ahmedabad, Gujarat, . Be that as it may, it is unnecessary to pursue the said aspect in the facts of this case.

Another decision cited is in The Commissioner of Income Tax, Gujarat II, Ahmedabad Vs. Shri R.M. Amin, L.R. of The Late Shri. Chunnibhai J. Amin, Baroda, . But, that is a case of an incorporated company going into liquidation and the liquidator paying a larger amount to the shareholders than the face value of the shares. The question was whether the excess amount constitutes a capital gain. We do not see the relevance of the principle of the said decision herein.

The above discussion yields the following principles :

(i) On dissolution of a partnership firm, the allocation of surplus (cash or assets) amongst the partners corresponding or approximate to their shares does not amount to a transfer of property, whether in ordinary law or for the purpose of the Gift-tax Act.

(ii) Where, however, the distribution of assets between the partners is unequal and it appears from the relevant facts that one partner has received cash/assets of value less than the value of assets to which he was entitled, and correspondingly the other partner or partners have received cash/assets of value more than the value to which they were entitled according to their share/shares, it must be held that it is a "transaction" within the meaning of sub-clause (d) of clause (xxiv) of section 2; it amounts to a "gift" for the purpose of the Gift-tax Act.

(iii) An unequal distribution of coparcenary property between the members of a Hindu undivided family, where there is no prior division of status, stands on a footing different from the case of an unequal distribution of assets amongst the partners upon dissolution of the firm.

(iv) Even in the case of an on-going firm, where the share of a partner is reduced and the reduced share is given to a new partner, or a minor is admitted to the benefits of the partnership to that extent, and if such partner or minor does not bring in capital of his own into the partnership corresponding to his share, there is a gift involved, as held in Commissioner of Gift Tax, Gujarat Vs. Chhotalal Mohanlal, , M.K. Kuppuraj Vs. Commissioner of Gift-tax, and Commissioner of Gift-tax, Bombay City-II Vs. Premji Trikamji Jobanputra, . The same principle has to be extended even to a case where on the dissolution of a firm, one partner takes cash/assets of value less than the value to which he is entitled as per his share and thereby increases the value of the assets/cash falling to the share of the other partner or partners, as the case may be.

In the light of the above principles, we must hold in this case that there is a gift by the assessee to the other partner (his brother), Sri Bishanlal Ahuja, to the extent the market value of his share of assets on the date of dissolution (November 22, 1971) exceeds Rs. 3,00,000, which is the consideration actually received by him. This finding makes it necessary to remit the matter back to the Gift-tax Officer to determine the value of the goodwill, as was proposed to be done by the Tribunal (vide paragraph 29 of its judgment), but which it did not actually do, inasmuch as it held that, in law, no transfer was involved. Since we have disagreed with the Tribunal, such a course has now become necessary.

For the above reasons, we answer the question referred to us in the negative i.e., in favour of the Revenue and against the assessee. There shall be no order as to costs, in the circumstances of the case.

Learned counsel for the assessee makes an oral request for grant of a certificate u/s 261 of the Income Tax Act. We are not, however, satisfied that this is a fit case to be certified thereunder. The oral request is accordingly refused.