JUDGMENT
1. The Tribunal, Allahabad, has referred the following question of law under Section 26(1) of the GT Act, 1958, hereinafter referred to as the Act, for opinion of this Court :
"Whether, on the facts and in the circumstances of the case, the Tribunal was legally correct in holding that there was no deemed gift of the share, of the goodwill in favour of the new partners ?"
2. The present reference relates to the asst. yr. 1976-77.
3. M/s Chowdhary Sweet House was a firm consisting of the following four partners :
This firm was constituted under the partnership deed dt. 13th April, 1970. All the partners as per Clause 6 of the above deed were working partners and were also entitled to salary. Clause 10 of the above deed is relevant for our purpose. It reads as under:
"10. That, business assets, business premises and its goodwill, shall remain vested in partners Shri Shyam Lal, Shri Ram Chand and Shri Nand Lal in ratio of 28 per cent. 28 per cent and 44 per cent, respectively. Partner Shri Ashok shall have no right, title or interest therein."
There was a change in the constitution of the above firm w.e.f. 1st Oct., 1975. The firm was running its business in two adjoining premises, one being the old shop where sweets were sold and the other being annexe which was primarily run as restaurant. The area of both the shops is equal. As per the change in the constitution, Shri Nand Lal and Shri Ashok Kumar took over the main shop, while Shri Shyam Lal and Shri Ram Chand (Ram Lal) took over the business carried on in the annexe. There was also division of various other assets belonging to the old firm.
Since there was separation of the business between two groups, it became necessary for them to have their separate identities. With regard to the main shop, a new firm came into existence on 1st Oct., 1975 for which a partnership deed was also executed on the same date. Besides Shri Ashok Kumar and Shri Nand Lal, four new partners were taken into this business. The constitution of the new firm was as under:
Similarly, with regard to the business carried on in the annexe, another firm was constituted in which, besides Shri Shyam Lal and Shri Ram Chand (Ram Lal), three new other partners were admitted. The constitution of this firm vide partnership deed dt. 8th March, 1976 w.e.f. 1st Oct., 1975 was as under:
Name of partners Extent of shares 1. Shri Shyam Lal, S/o 28% Late Shri Verhomal Chowdhury, R/o Way Lane, Lucknow 2. Shri Ram Chand (Ram Lal) 28% S/o Late Shri Verhomal Chowdhury R/o Rana Pratap Marg, Lucknow 3. Smt. Kalpana, W/o Shri Ashok Kumar, R/o Rana 20% Pratap Marg, Lucknow 4. Smt. Anuradha, W/o Shri Raj Kumar, 14% R/o Rana Pratap Marg, Lucknow 5. Smt. Dropadi, W/o Shri Nand Lal, 10% R/o Rana Pratap Marg, Lucknow
The goodwill of the old firm consisting of four partners belonged to Shri Shyam Lal, Shri Ram Chand (Ram Lal) and Shri Hand Lal in the ratio of 28 per cent, 28 per cent and 44 per cent. Their shareholdings underwent a change. Shri Shyam Lal and Shri Ram Chand (Ram Lal) retired from the business carried on in the main shop. The GTO was of the view that with their retirement, they had given up their interest in the goodwill, which had vested in the new partners. According to the GTO, this amounted to a deemed gift. He similarly, held that with Shri Nand Lal leaving interest in the business of annexe could be deemed to have made a gift of his share in favour of the new partners as per the partnership deed dt. 8th March, 1976 relating to annexe business. Since his own shares in the main shop was reduced to 10 per cent from 44 per cent in the old shop, the GTO was further of the view that the balance of 34 per cent in the goodwill of the old firm falling to share of Shri Nand Lal could also be treated as a gift by him.
4. In pursuance of the above findings, the GTO levied gift-tax on Shri Shyam Lal, Shri Ram Lal and Shri Nand Lal, respectively. For this purpose, he computed the value of the goodwill of the old firm and then determined the taxable gift in the hands of the respective partners, i.e., the assessees before us. He rejected the claim of the assessee that the gifts were exempt from tax under Section 5(1)(xiv) of the GT Act.
5. All the assessees appealed to the AAC. The AAC, following certain decided authorities, held that there was no gift by any of the partners. She accordingly cancelled the assessments and allowed the appeals.
6. The Department came in appeal to the Tribunal in all the above three cases. It was submitted on its behalf that there were gifts by all the above three assessees inasmuch as they had either retired from the business and had left the goodwill in favour of the new partners or they had relinquished a part of their share in the goodwill. On behalf of the assessee, it was submitted that the retirement of a partner did not result in a gift either in the assets or in the goodwill. It was further submitted that since the new partners had contributed capitals and had also undertaken to work for the business, there were considerations for their admission and, therefore, also there was no gift.
7. The Tribunal upheld the order of the AAC by holding that there was adequate or sufficient consideration for relinquishing share in the goodwill in the shape of capital invested by the new partners and also the new partners had agreed to work for the business.
8. We have heard Shri Shambu Chopra, learned standing counsel for the Revenue. Nobody has appeared on behalf of respondent-assessee. Learned counsel for the applicant submitted that from the perusal of the partnership deed, it will be seen that the amount of investment which all the partners were to bring in, had not been specified and on the other hand, it has been provided that they shall get interest @ 15 per cent p.a. on the investment in the firm. It has, however, been provided that the partner shall draw salary as mutually decided from time to time. According to him, as a result of the change in the partnership deed, wherein new partners were inducted, the existing partners had relinquished some portion of the share in the goodwill of the two firms and therefore, it would be a deemed gift under the Act. He relied upon the decision of the Hon'ble Supreme Court in the case of CGT v. Chhotalal Mohanlal, (1987) 166 ITR 124 (SC) wherein the apex Court has held that goodwill is property and when minors are admitted to the benefits of partnership in a firm and the share of the existing partner is reduced thereby the right to the money value of the goodwill stands transferred and the transaction constitutes a gift under the Act. He further relied upon the decision of the Madras High Court in the case of M.K. Kuppuraj and Ors. v. CGT, (2002) 258 ITR 412 (Mad) wherein it has been held that even though there was capital contribution by the newly inducted partner, the extent of the contribution had been found to be not commensurate with the value of the benefit conferred on that newly inducted partner by reason of reduction in the shares of the continuing partners in their share of the profits. Such reduction resulted in a gift. While holding so, the Madras Court has followed the decision of the apex Court in the case of Chottalal Mohanlal (supra) in the present case. In the present case, the Tribunal, while holding that there was adequate consideration for the transfer/reduction in the goodwill by the existing partners in favour of the new partners, had relied upon the accounts which shows that the new partners have invested capital in the business and they were also working partners as they were paid salaries. The Tribunal also relied upon Clauses 5 and 8 of the partnership which had been already reproduced hereinbefore for arriving at the conclusion that there was adequate and sufficient consideration for their relinquishing the share in the goodwill. Merely because partners have invested capital in the business or they are being paid salaries is not determinative of the factor that consideration was adequate or sufficient for relinquishment of the share in the goodwill. The partnership deed did not provide any amount of investment as capital investment by the partners. Further any amount which is invested by the partners carried interest @ 15 per cent p.a. Thus, the investment made by the partners towards capital cannot be said to be adequate or sufficient consideration. Hon'ble Supreme Court in the case of Chhotalal Mohanlal (supra) had said that once goodwill is taken to be property and that the admission of the two minors to the benefit of partnership in respect of a fixed share, the money value of goodwill stands transferred and transaction itself constituted gift under the Act, As the consideration for transfer and relinquishment of the goodwill is not adequate, there would be deemed gift in the present case.
9. In view of the foregoing discussions, we answer the question of law referred to us in the negative, i.e., in favour of the Revenue and against the respondent-assessee. However, the parties shall bear their own costs.