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PETITIONER: COMMISSIONER OF GIFT TAX GUJARAT

       Vs.

RESPONDENT: CHHOTALAL MOHANLAL

DATE OF JUDGMENT16/04/1987

BENCH: MISRA RANGNATH BENCH: MISRA RANGNATH PATHAK, R.S. (CJ) DUTT, M.M. (J)

CITATION:  1987 AIR 1412            1987 SCR  (2)1042  1987 SCC  (2) 612        JT 1987 (3)     8  1987 SCALE  (1)823

ACT:     Gift  Tax  Act, 1958---Section 2(xii) &  4--Goodwill  of partnership--  Whether  can  be  transferred--Whether   such transfer a ’gift’.

HEADNOTE:     Under a deed of partnership dated 12.11.1958, a firm  by the  name  M/s. Chhotalal Vedilal came into  existence  with Chhotalal Mohanlal (the assessee), Gunvantilal Chhotalal and Pravinchandra  Vedilal, as partners, each having 7 annas,  4 annas  and  5  annas share respectively in  the  firm.  This position  continued  until on 9.11.1961 when a  change  took place  in the constitution of the firm. Under the new  deed, Pravinchandra  Vedilal  retired.  One  Ramniklal   Chhotalal became a partner with 4 annas share. The share of the asses- see,  Chhotalal  Mohanlal was reduced. For the  remaining  4 annas,  two minor sons of the assessee were admitted to  the benefits only of the firm.     In  the  assessment year 1963-64, the Gift  Tax  Officer concluded  that  the assessee had deprived  himself  of  19% share  In the profits and had gifted away 19% share  in  the goodwill  of  the firm in favour of his two minor  sons.  He valued  the  .goodwill and treated 19%  thereof  as  taxable gift.     In the appeal before the Appellate Assistant Commission- er  the assessee took the stand that the gift was not  of  a share of the goodwill but in respect of the right to receive future  profits. He valued that right and since  the  amount was  higher than what the Income Tax Officer has  estimated, he enhanced the quantum.     In further appeal by the assessee the Tribunal held that in  the circumstances of the case there could be no gift  of goodwill and found that the right to receive future  profits could  not be subject matter of a gift as the  transfer  did not  relate to existing property and the situation  did  not give  rise  to any gift which could be made  liable  to  tax under the Act. In  the  Reference  the High Court upheld the  view  of  the Tribunal. 1043

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   In the appeal to this Court on behalf of the Revenue, it was  contended  that the order of the Gift Tax  Officer  was right and the Appellate Assistant Commissioner, the Tribunal and  the High Court had gone wrong in holding that  the  ar- rangement under the deed of 9.11.1961 did not give rise to a taxable event under the Act. Allowing the appeal, HELD: 1. Goodwill of a firm is an asset. [1045E]     Khushal  Khemgar  Shah & Ors. v.  Khorshed  Banu  Dadiba Boatwalla & Anr., [1970] 3 SCR 689, followed.     2.  Once goodwill is taken to be property and  with  the admission  of the 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  con- stitute a gift under the Gift Tax Act, 1958. [1046F]     3.  Since there has been no dispute about  valuation  of the  goodwill  as  made by the Gift Tax  Officer,  with  the conclusion  that there has been a gift in respect of a  part of the goodwill the transfer of the benefit of the  partner- ship constitutes a gift under the Act. [1046F-G]     Commissioner  of Gift Tax v. Nani Gopal Mondal, 150  ITR 469; M.K. Kuppuraj v. Commissioner of Gift-Tax, 153 ITR 481; Sirehmal Nawalkha v. Commissioner of Income-Tax, 156 ITR 714 and  Commissioner  of Gift Tax, Bombay  v.  Premji  Trikamji Jobanputra, 133 ITR 317, approved.

JUDGMENT:     CIVIL  APPELLATE JURISDICTION: Civil Appeal No. 2027  of 1974.     From  the  Judgment  and Order dated  8.10.1973  of  the Gujarat High Court in Gift Tax Reference No. 3 of 1971.     Wazir  Singh,  K.C. Dua and Ms. A.  Subhashini  for  the Appellants. The Judgment of the Court was delivered by     RANGANATH MISRA, J. This appeal is by certificate  under a  Deed of Partnership dated 12.11.1958, a Firm by name  M/s Chhotalal  Vedilal came into existence with three  partners, Chhotalal Mohanlal 1044 (the  assessee).  Gunvantilal  Chhotalal  and  Pravinchandra Vedilal.  These  three partners had 7 annas, 4 annas  and  5 annas share respectively in the firm. This position  contin- ued until on 9.11. 1961 relevant to assessment year  1963-64 with which this appeal is concerned, a change took place  in the  constitution of the firm. Under the new  deed,  Pravin- chandra Vedilal retired; no change took place in respect  of Gunvantilal  Chhotalal;  one Ramniklal  Chhotalal  became  a partner  with  4  annas share. The  share  of  the  assessee Chhotalal Mohanlal was reduced to 4 annas; for the remaining 4  annas  two minor sons of Chhotalal being  Kiritkumar  and Deepak  Kumar  were  admitted to the benefits  only  of  the firm--Kiritkumar  having 12 percent and Deepak Kumar  having 13 per cent. No alteration was, however, made regarding  the share capital standing in the name of the assessee.     The  Gift  Tax Officer came to the conclusion  that  the assessee  had deprived himself of 19 per cent share  in  the profits  and had gifted away 19 per cent share in the  good- will of the firm in favour of his two minor sons. He  valued the  goodwill  and treated 19 per cent  thereof  as  taxable gift.  The Appellate Assistant Commissioner before whom  the assessee  appealed adopted a different stand.  According  to him,  the  gift was not of a share of the  goodwill  but  in respect  of the right to receive future profits.  He  valued

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that  right  and since the amount Was higher than  what  the Income-tax Officer had estimated, following the requirements of  law  he enhanced the quantum. In further appeal  by  the assessee the Tribunal held that in the circumstances of  the case there could be no gift of goodwill. As appears from the statement  of the case, the Revenue did not seek to  support the order of the Incometax Officer but pleaded for  sustain- ing  the order of the Appellate Assistant Commissioner.  The Tribunal  further  found that the right  to  receive  future profits could not be subject-matter of a gift as the  trans- fer  did not relate to existing property. According  to  it, the  situation did not give rise to any gift which could  be made  liable  to tax under the Act. The  following  question relevant  for the purpose of the appeal was referred to  the High Court for its opinion at the instance of the Revenue:-               "Whether on the facts and in the circumstances               of the case, the benefit of partnership  given               to  minors  Kirit Kumar Chhotalal  and  Deepak               Kumar Chhotalal was a gift under the Gift  Tax               Act, 1958?" The High Court answered the question against the Revenue and up- 1045 held  the view of the Tribunal. This appeal has,  therefore, been carried by the Revenue.     In  spite of service of notice of appeal the  respondent has not appeared. Counsel appearing in support of the appeal has  contended  that the order of the Gift Tax  Officer  was right and the Appellate Assistant Commissioner, the Tribunal and  the High Court had gone wrong in holding that  the  ar- rangement under the deed of 9.11.1961 did not give rise to a taxable  event  under the Act, so far as  the  assessee  was concerned.               "Gift"  is  defined in section 2(xii)  of  the               Act:-               "’Gift’  means the transfer by one  person  to               another  of any existing movable or  immovable               property made voluntarily and without  consid-               eration  in  money or money’s worth,  and  in-               cludes the transfer of any property deemed  to               be a gift under section 4." In  support  of the appeal, learned counsel  further  relies upon  decisions of different High Courts to which  we  shall presently refer. Before doing so it would be appropriate  to indicate  that in Khushal Khemgar Shah & Ors.  v.  Khorsheed Banu  Dadiba Boatwalla & Anr., [1970] 3 SCR 689  this  Court has held that goodwill of a firm is an asset, In Commission- er  of  Gift  Tax v. Nani Gopal Mondal, 150  ITR  469  after referring  to  a  number of authorities of  this  Court  and different High Courts a Division Bench of the Calcutta  High Court concluded thus:-               "From  the cases cited above, it appears  that               goodwill  of  a  partnership  business  is   a               property  of  the firm in which a  partner  is               entitled to a share. Although the above  cases               are under the Estate Duty Act, yet the princi-               ple laid down in the said cases regarding  the               nature of goodwill of a firm and the right  of               a partner in respect thereof is applicable  to               the  instant case. In this connection, it  may               be  mentioned that according to section 14  of               the Indian Partnership Act, property of a firm               includes  goodwill of the  business.  Further,               according  to  section  29(2),  if  a  partner               transfers  his interest and  the  transferring

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             partner ceases to be a partner, the transferee               is entitled as against the remaining  partners               to receive the share of the assets of the firm               to which the transferring partner is  entitled               to.  It further appears that under proviso  to               section 53 of the Indian Partnership Act,               1046               in  case  of  dissolution, a  partner  or  his               representative  may  buy the goodwill  of  the               firm  and under section 55(1) of the  Act,  in               settling the accounts of a firm after dissolu-               tion, the goodwill shall, subject to  contract               between the parties, be included in the assets               and it may be sold either separately or along-               with  other  properties of  the  firm   ......               Upon  transfer, the share or interest  in  the               property  of  the  firm  of  the  transferring               partner  including  the goodwill  becomes  the               share  or interest of the transferee.  In  the               instant case, Nani Gopal Mondal by the deed of               gift transferred his share or interest in  the               firm  which  included his  share  of  goodwill               also.  Hence,  for the purpose of  payment  of               gift-tax, the value of one-third share of  the               assessee  in the goodwill shall also be  taken               in account." In  M.K. Kuppuraj v. Commissioner of Gift-Tax, 153  ITR  481 the Madras High Court was called upon to deal with a case of this  type  where minors were admitted to  the  benefits  of partnership  firm  and the assessee’s interest in  the  firm suffered the detriment by relinquishment of a portion of his interest. The High Court found that relinquishment of 8  per cent  profit was in favour of the minors who  were  admitted without  any  consideration. It held  that  the  transaction constituted a gift by the assessee in favour of the  minors. The  ratio in Sirehmal Nawalkha v. Commissioner  of  Income- Tax, 156 ITR 714 as also in Commissioner of Gift Tax, Bombay v.  Premji  Trikamji Jobanputra,’ 133 ITR 3 17  support  the stand of the Revenue that the transaction constitutes a ’gift’.     Once  goodwill  is  taken to be property  and  with  the admission  of the 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  con- stitute  a gift under the Act. Since there has been no  dis- pute about valuation of the goodwill as made by the Gift Tax Officer,  with the conclusion that there has been a gift  in respect  of a part of the goodwill, the answer to the  ques- tion  referred  has to be in the affirmative,  that  is,  it constitutes a gift under the Act. The appeal is allowed  and the  conclusion  of the High Court is  reversed.  Since  the respondent  has  not appeared, there will be  no  order  for costs. A.P.J.                                                Appeal allowed. 1047