Mere instance of reduction in shares of profit of a partner resulting in increase in share of profit of another by itself will not constitute a ‘gift’

Commissioner Of Gift Tax Vs. Smt. Bindu Joseph (Kerala High Court)

it is quite clear that a mere instance of reduction in the shares of profit of a partner resulting in increase in the share of profit of another by itself will not constitute a ‘gift’ coming within the purview of section 4 (1) (a) of the Act. The Apex Court held that the contribution of Rs.25,000/- made by the newly inducted partner in Sree Narayana Chandrika Trust’s case [cited supra] and the undisputed usefulness of her service to the firm was considered as adequate consideration, to take it outside the purview of ‘gift’.

Coming to the undisputed factual position in the present case, over and above the additional capital contribution of Rs. 1,23,750/- the partner Suman Vijoo, who got more shares pursuant to the reduction of shares of the assessee, on reallocation, had admittedly provided collateral security to the financial transactions of the firm. It is also an undisputed fact that, the said partner by name Suman Vijoo had offered personal guarantee for various financial transactions of the firm and this being the position, it has to be taken together to assess the worth of the said person and the ‘consideration’ brought in for such reallocation of the shares. The mere arithmetical figures with reference to the total profit in the year in question, which came to be reduced and reduction in the probable portion of profit of the assessee as worked by the appellant/ Revenue do not reflect the correct picture in this regard. The more important aspect with reference to the ‘collateral security’ furnished by the person concerned and the ‘personal guarantee’ offered by her have not been taken into consideration or dealt with by the Revenue.

In the above circumstances, we are of the view that the first appellate authority as well as the Tribunal were perfectly justified in passing Annexures B and C orders; holding that there was no instance of ‘gift’ coming within the purview of section 4 (1) of the Act; in turn setting aside Annexure A order passed by the assessing authority.

Full Text of the High Court Judgment / Order is as follows:-

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