COMMISSIONER OF INCOME-TAX VS T.M. PORINCHU
1991 P T D 146
[Kerala High Court (India)]
Before K.S. Paripoornan and K.A. Nayar, JJ
COMMISSIONER OF INCOME-TAX
Versus
T.M. PORINCHU
Income-tax Reference No. 279 of 1982, decided on 03/03/1989.
Income-tax---
----Gift---Assessee partner in firm having one-fourth share ---Assessee retiring from firm and in his place his wife and daughter-in-law admitted as partners taking one-eight share each---No material to show that as per original partnership agreement, assessee had right to nominate his successor in firm---Wife and daughter-in-law could be admitted as partners in firm only with the consent of the other partners--No relinquishment or transfer of any right of assessee to the other partners or to wife and daughter-in-law took place---Act of the assessee does not amount to gift.
The assessee was a partner in a firm having one-fourth share in the profits of the firm. The assessee retired from the firm and in his place, his wife and daughter-in-law were admitted as partners of the firm taking one-eighth share each. The Gift Tax Officer held that the act of the assessee amounted to relinquishment of one-fourth share in the right to share the profits of the firm to his wife and daughter-in-law which resulted in a gift. The Gift Tax Officer proceeded on the basis that the relinquishment was made by the assessee in favour of the other partners. The Tribunal held that there was no relinquishment by the assessee either to the other partners or to his wife and daughter-in-law attracting gift tax. On a reference:
Held, that the wife and daughter-in-law of the assessee were included in the partnership only after the retirement of the assessee from the firm and this could be done only with the consent of the other partners. There was no material to show that as per the original partnership agreement, the assessee had the right to nominate his successor in the firm. Since the Tribunal had found that the assessee had no right to relinquish his interest by induction of his wife and daughter-in-law in the firm as partners subsequent to the retirement of the assessee from the firm, no question of relinquishment or transfer of any right of the assessee either to the three partners or to the wife and daughter-in-law took place. Therefore, the Tribunal was right in holding that there was no gift by the assessee to his wife and daughter-in-law on his retirement from the firm.
P.K.R. Menon for the Commissioner.
T.M. Chandran for the Assessee.
JUDGMENT
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 right in holding that there was no gift by Shri T.M. Francis to his wife and daughter-in-law on his retirement from the firm?"
The respondent is an assessee to gift tax. The matter relates to the assessment year 1974-75. The respondent/assessee was a partner in the firm Standard Agencies. He had 1/4th share in the profits of the firm. By a resolution, dated March 25, 1974, it was resolved by the partners of the firm that the respondent would retire from the partnership and in his place his wife and daughter-in-law would be admitted as partners taking 1/8th share each. The respondent/assessee retired from the firm on March 31, 1974. The wife and daughter-in-law were taken as partners on April 1, 1974. The Gift Tax Officer held that the respondent relinquished his 1/4th share in the right to share the profits of the firm to his wife and daughter-in-law and this resulted in a gift. The plea of the assessee that there was no gift and even if there was that it was exempt under section 5(1)(xiv) of the Act was rejected. The goodwill of the firm was computed at three years' purchase of the average of five years' assessed income of the firm and the value of the gift was determined at Rs. 91,800. The Gift Tax Officer proceeded on the basis that the relinquishment was made by the respondent in favour of the other partners. In appeal, the Appellate Assistant Commissioner took the view that the gift was made in favour of the wife and daughter-in-law: On this basis, and by giving relief in the quantum, the value of the taxable gift was assessed at Rs. 44,278. In second appeal, the Appellate Tribunal held that there was no relinquishment by the respondent, either to the other three partners or to his wife and daughter-in-law, attracting tax under the Gift-tax Act. In this view the Appellate Tribunal held that the respondent incurred no liability to gift-tax on his retirement from the firm. The Revenue moved the Appellate Tribunal for referring certain questions of law which, according to it, arose out of the appellate order of the Tribunal, dated April 3, 1981. In pursuance of the said application, the Appellate Tribunal has referred the question of law, extracted hereinabove, for the decision of this Court.
We heard counsel for the Revenue, Mr. P.K.R. Menon, as also counsel for the respondent/assessee. The facts involved in this case are not in dispute. The respondent was a partner in a firm alongwith three others. By a resolution, dated March 25, 1974, it was resolved that the assessee would retire from the partnership and in his place his wife and daughter-in-law would be inducted as partners. The wife and daughter-in-law of the respondent were admitted as partners of the firm from April 1, 1974. This was done, and could be done, only with the consent of the other three partners. Neither the partnership agreement nor the resolution of the partners was included in the paper book for our perusal. The wife and daughter-in-law of the respondent were inducted into the partnership only after the retirement of the respondent from the firm. They were so inducted on April 1, 1974. For that, the consent of the other three partners was essential. There is no material to show that the respondent/assessee had the right to nominate his successor in the firm. There is no material to show that, as per the original partnership agreement, the respondent had such a right. If the consent of the other partners is necessary to induct the wife and daughter-in-law of the respondent as partners in the firm, it is proof positive that the respondent/assessee had no right to nominate or assign his right in the partnership to any other person. Only if the respondent had any right to assign his interest or nominate another in his place in the partnership, the question whether the respondent relinquished any right would arise. On this aspect, there is total paucity of material. The Appellate Tribunal held that it was not shown that the respondent has any right to relinquish his interest, by induction of his wife and daughter-in-law in the firm as partners, subsequent to the retirement of the respondent from the firm, and so no question of relinquishment or transfer of any right of the respondent either to the other three partners or to the wife and daughter-in-law arises in this case. In this view of the matter, it was held that there was no gift and no question of valuation of the goodwill arises. The Appellate Tribunal was justified in holding so.
On this basis, we are of the view that the Appellate Tribunal was right in holding that there was no gift by the assessee to his wife and daughter-in-law on his retirement from the firm.
Our answer to the question referred to this Court is in the affirmative, against the Revenue and in favour of the assessee.
A copy of this judgment, under the seal of this Court and the signature of the Registrar, will be forwarded to the Income-tax Appellate Tribunal, Cochin Bench, as required by law.
Z.S./802/TOrder accordingly.