Case Law Details
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:-
This appeal is filed under Section 27A of the Gift Tax Act 1958 [in short ‘the Act’], at the instance of the Revenue. Challenge is against Annexure C order passed by the Income Tax Appellate Tribunal, whereby Annexure B order passed by the Commissioner of Income Tax [Appeal] has been affirmed, holding that the transaction involved does not involve any gift in terms of Section 4(1) (a) of the Act to attract any tax liability.
2. The facts are as given below :
The assessee herein was a partner of the firm run under the name and style as M/s Leo Rubbers, Kottayam. In the course of business as above, there was a reallocation of shares, whereby the share of the assessee in the firm came to be brought down from 19.5% to 11.25 % with simultaneous increase in the share of another partner by name Suman Vijoo, whose existing share of 3 % was enhanced to 11.25%. In other words, extent of shares held by the assessee was reduced by 8.25%, while that of the other partner by name Suman Vijoo got enhanced by 8.25%. This reallocation of shares was taken note of by the assessing authority, who issued a notice to the assessee pointing out that transaction was exigible to tax in terms of the Gift Tax Act and in turn, directing the assessee to file return accordingly. Return was filed by the assessee pointing out that the transaction would not attract tax liability under the Gift Tax Act. It was also pointed out that the ‘additional share capital’ was contributed by the other partner by name Suman Vijoo, and she had also undertaken to ‘discharge various duties’ for the firm, besides furnishing ‘collateral securities’ in respect of various financial transactions of the firm. The person by name Suman Vijoo had also offered ‘personal guarantee’ for various financial transactions and it was effected in the course of business, for the best interest of the firm, by virtue of which, no tax liability was to be attracted.
3. After hearing both the sides, the contentions put forth by the assessee were repelled and the assessing officer, as per Annexure A order dated 28.03.2002, held that the reduction in the shares of one partner, resulting in proportionate increase of shares of another partner would constitute a ‘gift’ in terms of Section 4 (1) (a) of the Act and that tax was liable to be paid for the resultant/differential amount treating the same as gift. Reliance was also sought to be placed on the verdict rendered by the Division Bench of this Court reported in [1988] 170 ITR 518 [K.K. Achuthan Vs. CGIT]. The assessee took up the matter in appeal before the Commissioner, challenging the course and events with specific reference to the facts and figures and also the relevant provisions of law/binding judicial precedents. Reliance was also sought to be placed on the verdict rendered by the Apex Court reported in [2001] 249 ITR 518 (S.C.) [CGT Vs. D.C. Shah and Others]. The subsequent decision rendered by the Apex Court as reported in [2003] 261 ITR 279 [Sree Narayan Chandrika Trust Vs. Commissioner of Gift Tax], which was passed placing reliance on D.C. Shah’s case [cited supra], was also brought to the notice of the appellate authority. After detailed deliberation, the appellate authority held, as per Annexure B order, that the transaction did not involve any gift. It was accordingly, that Annexure A order was set aside and Annexure B order was passed in favour of the assessee. Though the matter was taken up further [by the Revenue] before the Tribunal, it did not yield any positive result, but for dismissal as per Annexure C order dated 16.02.2007, which made the Revenue to approach this Court by way of this appeal, raising/suggesting two substantial question of law, in the following terms :
“1. Whether, on the facts and in the circumstances of the case and in the light of the proposition enunciated by the Honorable Apex Court” in 261 ITR 279 the Tribunal right in law and fact in holding that there was no gift involved ?
2. Whether, on the facts and in the circumstances of the case and in the light of the facts noted in the appeal memorandum and the grounds raised should not the Tribunal have held that there was a transfer of the assesee’s share in the profit of firm to Smt. Suman Vijoo and that such transfer was for inadequate consideration ?”
4. Heard the learned counsel appearing for the appellant and the learned counsel appearing for the assessee at length.
5. The first and foremost contention raised by the Revenue is that the decision rendered by the Apex Court in Sree Narayana Chandrika Trust’s case [cited supra] virtually stands in favour of the Revenue. The relevant portion of the said verdict has been extracted in paragraphs 4 and 5 of the appeal,which are reproduced below :
“4. The decision of the Tribunal ………………………….
It may be pointed out that the Supreme Court observed in Sree Narayana Chandrika Trust Vs. CIT (2003) 261 ITR 279 as under (page 285):
“Although it may be possible to say in the appellant’s case that relinquishment of the share of profit/ loss by a partner in favour of the inducted parter may amount to a transfer, we are unable to accept the contention that it was for inadequate consideration so as to amount to a taxable gift within the meaning of section 4 (1) (a) of the Gift Tax Act.”
5. In the case cited above,
At page 286, the Supreme Court observed as under :-
“In our view, the contribution of Rs. 25000/- towards the capital together with the obligations undertaken of sincerely and faithfully carrying on the business of the common advantage of the firm was adequate consideration for reallocating the share of profits and giving 12 per cent of the share in favour of the incoming partner, M.U. Indira.”
6. The learned counsel points out that the factual position in the present case stands on a different footing than the factual position dealt with by the Apex Court. The justification for granting the relief in favour of the assessee by the Supreme Court was with reference to the additional contribution of capital of Rs. 25,000/- and the obligation of the partner to sincerely and faithfully carry on the business of the firm, which was stated as adequate consideration for reallocating the shares of profit to the incoming partner. The person by name Suman Vijoo, in the instant case – in whose favour the shares were transferred by the assessee, was already a partner of the firm and as such, she was already having an obligation to sincerely and faithfully carry out the business of the firm. It was also pointed out that the additional capital contributed by Suman Vijoo was only Rs. 1,23,750/-; whereas the total profit of the firm for the assessment year 1997 – 98 was Rs. 1,45,31,960/-. By virtue of the reallocation of the shares, the profit which could have been earned by the assessee during 1997-’98 based on the shares existed prior to transfer was Rs. 28,33,732/- which came to be reduced to Rs. 16,34,845/-, by virtue of the reallocation of the shares. In effect, it contributed an increase of profit of the other partner by name Suman Vijoo to an extent of Rs. 11,98,887/-. Reference is also made to the total profit of the firm as well as reduction in the share of profit of the assessee as a result of transfer of her right to Smt. Suman Vijoo for the assessment years 1998- 99, 1999- 00, 2000- 01 showing reduction in the profit of assessee and increase in the profit of other partner by name Suman Vijoo to an extent of Rs. 20,57,572/-, Rs. 18,47,597/-, Rs. 19,30,032/- respectively. This being the position, the additional contribution of Rs. 1,23,750/- made by the partner Smt. Suman Vijoo, to have resulted in the reallocation of the shares, was totally an ‘inadequate consideration’ and hence it was nothing else, but a ‘gift’ to be mulcted with tax liability.
7. There is no much factual dispute as to the course and events. As mentioned already, it is also not a matter of dispute that both the assessee as well as partner by name Suman Vijoo were existing partners before and after the share allocation exercise. It also remains a fact that, apart from the additional capital contribution of Rs. 1,23,750/- and the undertaking of the partner by name Suman Vijoo, to sincerely and faithfully carry out the business of the firm, she had also provided ‘collateral security’ for various financial transactions/ loans availed by the firm from different corners. That apart, the partner by name Suman Vijoo had also offered ‘personal guarantee’ for several financial transactions, which definitely was to have a bearing with regard to the running of the business of the firm. The observations as to the factual position in this regard by the Commissioner of Income Tax [Appeals] and the Tribunal in Annexures D/C orders is not rebutted by the Revenue anywhere in the appeal and as such, it has to be taken as uncontroverted/ undisputed. The extent of collateral security brought in and the personal guarantee offered by the partner by Suman Vijoo are also not disputed. But in so far as such liability has been undertaken by the partner Suman Vijoo, to have resulted in share allocation of the assesee, such an exercise has to be considered with reference to the quantum of consideration, which is the point of dispute at the instance of the Revenue. The verdicts passed by the Apex Court in D.C. Shah’s case [cited supra] and Sree Narayana Chandrika Trust’s case [cited supra] have to be analyzed and applied in the said facts and circumstances.
8. With regard to the law declared by the Division Bench of this Court in K.K. Achuthan’s case [cited supra], it was a case where the assessee and his three sons were doing business as partners in the firm M/s Greate Oriental Circus. The assessee had 40% of the shares till 31.03.1977 and on 11.04.1973, a new partnership was constituted; whereby the assessee’s share was brought down to 25% consciously and willingly surrendering 15% of his shares to the three sons. This was taken as a ‘gift’ and it was assessed by the assessing authority, which was set aside by the appellate authority, accepting the plea that the assessee was entitled for exemption under Section 5 (1) (xiv) of the Gift Tax Act. On further appeal by the Revenue, the Tribunal reversed the appeal and held that the assessee was not entitled to get exemption under Section 5 (1) (xiv) of the Act, which led to the reference at the instance of the assessee. In spite of the fact that the assessment was at the instance of the assessee, he had not turned up, despite completion of service of notice; under which circumstance, a lawyer of this Court was appointed as amicus curiae to assist the Court. The point considered was whether there was an instance of gift under the Gift Tax Act. The relevant portion as discussed in this regard in sub paragraphs of paragraph 3 is extracted below :
“As stated, by entering into a new deed of partnership, the assesee relinquished 15% of his right to share the profits in the firm. Even after the said surrender, the assessee continued to be a dominant partner with control over all major matters. The conduct of the business of the firm did not change in any way by the above adjustment of the profit and shares. The firm was carrying on the business of putting on circus shows. Even after surrender of 15% of his share of profit, the assessee continued to occupy a pivotal role in the conduct of the business. On these premises, the Appellate Tribunal held that this was a case where the assessee voluntarily relinquished 15% of his right to share of profits of the firm to his three sons and to that extent there was a gift. When a partnership firm reconstituted resulting in the reduction of the share of profits of some partners and the consequential increase in the share of profits of some partners and the consequential increase in the share of profits of others, it would result in a gift exigible to tax under the Gift Tax Act. It has been held so by the Madras High Court in CGT Vs. T.S. Shanmugham [1977] 110 ITR 237 [See also CGT Vs. Chhotalal Mohanlal [1987] 166 ITR 124 (SC)]. In view of the above decisions, we hold that there was gift exigible to gift-tax by the assessee in relinquishing 15% of his share in the profits of the firm.”
After holding that it was an instance exigible to tax, the Court proceeded further to consider whether the assessee was entitled to the exemption contemplated under Section 5 (1) (xiv) of the Act. Observing that it was purely a question of fact and that there was no material to hold the position in favour of the assessee, it was answered against the assessee, also placing reliance on the decision rendered by the Apex Court in CGT Vs. P. Gheevarghese [(1972) 83 ITR 403 (SC)]. It was also observed that, all the sons of the assessee [other partners] were majors and that no reliance could be placed on the decision rendered in CGT Vs. Chhotalal Mohanlal [(1974) 97 ITR 393], more so since it was reversed by the Apex Court as per the decision reported in [1987] 166 ITR 124 [CGT Vs. Chhotalal Mohanlal]. It was accordingly, that the reference was answered against the assessee and in favour of the Revenue. The reliance placed by the assessing authority on the said decision, to have passed Annexure A order in favour of the Revenue, is obviously with reference to the subsequent ruling rendered by the Apex Court in Sree Narayana Chandrika Trust’s case [cited supra] and that of the Apex Court rendered earlier in D.C. Shah’s case [cited supra].
9. Coming to the verdict passed by the Supreme Court in D.C. Shah’s case [cited supra], correctness of the verdict passed by the Karnataka High Court reported in [1982] 134 ITR 492 (Karn.). [Shan (D.C.) Vs. CGT] was the subject matter of consideration there. The main question which was referred to be answered by the Karnataka High Court, as extracted by the Apex Court in the said verdict reads as follows :
“Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that there was a taxable gift by the assessee when his share of profit in the firm was reduced from 19 paise to 14 paise and thus of his son Kiran D. Shah was increased from 9 paise to 14 paise ?”
After considering the facts and circumstances, the Apex Court observed as follows :
“It is not contended on behalf of the Revenue that there was any reduction in the capital contribution of the assessee and a consequential increase in the capital contribution of his son pursuant to the alteration in their shares of profit. What is submitted is that the mere fact that the share of the assessee in the profits of the firm was reduced from 19 to 14 pais and that of his son increased from 9 to 14 paise established that there had been a taxable gift of the 5 paise share of profits. The High Court was right in holding, having regard to the recital of the deed of partnership, that it was not possible to make out any transfer of property as such by any particular individual in favour of another individual so as to result in a gift. To find out whether there was a gift, the terms of the document were material as also any other evidence that might be brought on record and the burden of so doing was upon the Revenue. There being no material from which it could be inferred that there was a gift, the High Court concluded that the answer to the question must be in favour of the assessee and against the Revenue . The High Court noted that the son had brought into the firm a contribution of capital in the sum of Rs. 2.33 lakhs. He had been in the business for nearly four years and the High Court found it reasonable to assume that the increase in his share of profits was on account of his experience and capacity to shoulder more responsibilities. Merely because the share of the father had come to be reduced by five paise and there was a corresponding increase so far as the son was concerned did not lead to the inference that the five paise share of the father had been transferred to the son.
This was the position also in regard to the subsequent alterations in the profit sharing arrangements of the firm to which the other questions related.
That the share of one partner is decreased and that of another partner correspondingly increased does not lead to the inference that the former had gifted the difference to the latter. The profit sharing ratio in a firm can very for a number of reasons, among them the ability of the partners to devote time to the business of the firm. The gift of a part of a partner’s share to another partner has to be established by relevant evidence. The onus of doing so is on the Revenue. It has not been discharged in the present case”.
10. It was accordingly held by the Apex Court, that the fact that the share of one partner was decreased and that of another partner got correspondingly increased would not by itself lead to the inference that the former had gifted the difference to the latter. The Apex Court also observed that, the ‘profit sharing ratio’ in a firm can vary for a number of reasons, and among them, the ability of the partner to devote time to the business of the firm was also significant The Apex Court had further made it clear, that the gift of a part of a partner’s share to another partner has to be established by relevant evidence and that the ‘burden of proof’ in this regard was purely on the Revenue, which was held as not satisfied in the said case. It was accordingly, that interference was declined and the verdict passed by the Karnataka High Court was affirmed.
11. The Apex Court had a further occasion to consider similar circumstances involving reduction of share of one of the original partners pursuant to transfer of shares to another/new partner in Sree Narayana Chandrika Trust’s case [cited supra], which was a case originated from this State. Pursuant to induction of a new partner by name Smt. M. U. Indira into the partnership firm, the shares of profit/loss of each parter were increased in the case of some partners and reduced in the case of some others. Treating the same as an instance of ‘gift’, the assessing officer passed assessment order fixing the tax liability under the Gift Tax Act. The appellant assessee challenged the same mainly contending that, in as much as the new partner had made capital contribution and since there was no dispute as to the usefulness of his service to the firm, there was no instance of any gift. The appeal however came to be dismissed, which made the assesee to pursue the matter before the Tribunal, where interference was made by the Tribunal holding the position against the Revenue and in favour of the assessee. This made the Revenue to obtain a reference under section 26 (1) of the Gift Tax Act raising following two questions :
“1. Whether, on the facts and in the circumstances of the case, the Tribunal is right in law and fact in holding that even though the reconstitution of the firm resulted in the reduction of the share of profit of the assessee- trust there was no gift exigible to tax in its hands ?
2. Whether, on the facts and in the circumstances of the case, the Tribunal is right in law and fact in holding that even though there was a transfer by the assessee in favour of the incoming partner and existing partners, the consideration for the transfer could not be evaluated during the subsistence of the partnership and so the question of adequacy or inadequacy of consideration could not be quantified and so there was no gift exigible to tax ?”
The above questions were answered by this Court ‘in the negative’, against the assessee, which made the assessee to approach the Apex Court in appeal, by way of SLP. The case law on the subject was discussed in detail, particularly, the verdict passed by the Apex Court earlier in Gheevarghese’s case [cited supra] and also the one rendered in D.C. Shah’s case [cited supra]. It was after a detailed discussion with reference to the factual and legal position, that a finding was rendered, that it was never an instance of transfer of share for inadequate consideration so as to amount taxable gift coming within the purview of section 4(1) of the Gift Tax Act 1958.
The Judgment rendered by this Court reported in [2001] 248 ITR 275 was intercepted and reversed, answering the position in favour of the assessee. The relevant portion of the said verdict is extracted below for convenience of reference :
“The facts found in the present case are that the incoming partner [M.U. Indira] had contributed Rs. 25,000/- towards her share of the capital. The value of her services of usefulness to the firm as partner has not been disputed by the Revenue Authorities. As pointed out by this Court in D.C. Shah’s case [2001] 249 ITR 518, the mere fact that upon reconstitution of the firm the share of one partner decreased and that of another increased cannot lead to the inference that the former had gifted the difference to the incoming partner. There is no other material placed on record by the Revenue to show that, in the facts and circumstances of the case, particularly taking into consideration the obligations of all the partners in the partnership deed dated October 1, 1982 there was inadequate consideration for the reallocation of 12 per cent of the share in favour of the incoming partner. In our view, the contribution of Rs. 25,000/- towards the capital together with the obligations undertaken of sincerely and faithfully carrying on the business for the common advantage of the firm was adequate consideration for reallocating the share of the profits and giving 12 per cent of the share in favour of the incoming partners, M.U. Indira. That C. K. Jinan was the managing partner and C.N. Purushothaman was the administrative head, did not take away the obligations of the other partners including those of M.U. Indira which arose generally under the Partnership Act, as well as under the partnership deed dated October 1, 1982.
We are of the view that even assuming that there was a transfer of 12 per cent of the share of profit/ loss in favour of the incoming partner, M.U. Indira by the appellant assessee, it was not a situation of transfer for inadequate consideration so as to amount to a taxable gift within the meaning of Section 4 (1) (a) of the Gift-Tax Act, 1958.”
12. From the above, 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’.
13. 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.
14. 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. As it stands so, we are of the view that the substantial questions raised are not liable to be answered in favour of the Revenue and they stand answered in favour of the assessee. Appeal fails and it is dismissed accordingly.
The Registry is directed to forward a copy of this judgment to the Income Tax Appellate Tribunal, in terms of the relevant provisions of law.
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