Ramanujam, J.:— The assessee in this case is a Hindu undivided family and it was one of the three partners of a firm called Messrs. K.P.S.V Rajarathna Nadar Sons & Co. Prior to August 29, 1957, the assessee was entitled to a half share in the firm and the other two partners were entitled to a one-fourth share each. By a supplementary deed of partnership dated November 15, 1957, all the partners agreed to a change in the profit-sharing ratio and from August 29, 1957, the assessee's share being fixed at one-third and the shares of the other two partners being fixed at one-third each. The Gift-tax Officer took the view that the relinquishment of one-sixth share by way of reduction of the assessee's share from one-half to one-third without any consideration amounted to a gift in favour of the other two partners of the firm, and called upon the assessee to file a gift-tax return for the assessment year 1959-60. The assessee claimed that no gift-tax was attracted, there being no element of gift when one partner gives up a portion of his interest in the partnership concern in favour of the other partners as a result of re-shuffling of the shares. The Gift-tax Officer did not accept the assessee's claim. He held that there was clearly a transfer by the assessee to the other two partners of its one-sixth interest in the partnership without consideration in money or money's worth, and that by that transfer the other partners had acquired a greater portion of the goodwill of the firm than they were entitled. On the basis of the profits of the preceding five years he worked out the two years' average at Rs. 2,16,796 as representing the value of the goodwill of the firm and levied a gift-tax of Rs. 1,045.28 on the one-sixth share therein.
2. The order of the Gift-tax Officer was challenged in appeal before the Appellate Assistant Commissioner, who disagreed with the view taken by the Gift-tax Officer and held that there was only a reallotment of shares as on August 29, 1957, by mutual agreement of the partners, that this agreement did not involve a transfer of property within the meaning of section 2(xxiv) of the Act and that there was no element of gift involved in the transaction within the meaning of section 2(xii) of the Act.
3. On the question of valuation of the one-sixth share in the goodwill, the Appellate Assistant Commissioner held that the Gift-tax Officer was not correct in evaluating the interest transferred by the assessee in terms of goodwill.
4. The revenue preferred an appeal to the Tribunal against the said order of the Appellate Assistant Commissioner. The Tribunal also took the view that the reallocation of shares between partners cannot be construed as a transfer by one partner in favour of others, that it was always open to the partners of the firm by mutual agreement to change the profit-sharing ratio amongst themselves and that unless such a change in the profit-sharing ratio was brought about by an express transfer of the share of one partner in favour of another, it is not possible to infer an implied transfer in the case of every change in the profit-sharing ratio. Ultimately, the Tribunal held that there was neither a transfer nor a surrender of any share of the assessee in favour of the other two partners so as to constitute a gift and that, therefore, the value of the one-sixth share could not be taxed in the hands of the assessee. At the instance of the revenue the Tribunal has referred to this court the following question:
“Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in law in holding that the assessee was not liable to pay gift-tax?”
5. The question whether re-distribution of the profit-sharing ratio between partners involves a transfer amounting to a gift came up for consideration by this court in Commissioner Of Gift-Tax, Madras v. V.A.M Ayya Nadar [1969] 73 I.T.R 761 Mad... In that case a partner had a one-third share in a firm. By way of re-distribution the said partner took a one-ninth share out of the one-third share, the balance two-ninths share being taken by the other two partners. The question was whether such a re-distribution of shares in the partnership involved a transfer of property amounting to gift chargeable to gift-tax. The court expressed the view that the right of a partner to a share in the profit of a firm is as much property as the right of a partner to share in the assets of the firm, that it is capable of transfer at least as between the partners by common consent, and that, therefore, a re-distribution of the share of profits involved a transfer of a right which has the effect of diminishing a partner's interest and correspondingly increasing the value or quantum of the shares held by the other partners. With respect, we entirely agree with the said decision and hold that the decision of the Tribunal that the re-distribution of the shares in a partnership between partners resulting in the diminution of a partner's interest and corresponding increase in the interest of the other partners without any consideration will not amount to a gift cannot be accepted as correct. We have to, therefore, hold that the distribution between the other partners by way of realignment of the one-sixth share of the assessee did amount to transfer of property amounting to a gift chargeable to tax.
6. However, in this case, the Gift-tax Officer has regarded the transaction as a gift of one-sixth share in the goodwill of the firm and has evaluated the said one-sixth share of the goodwill and brought the same to charge. But it is well established that goodwill is only one of the assets of the partnership. Sections 14 and 55(1) of the Partnership Act treat goodwill as an asset of the firm. Section 48 of the Act states that in settling the accounts of the firm after dissolution the net assets after repayment of the debts, advances and the capital, shall be divided among the partners in the proportions in which they were entitled to share profits. Section 29 of that Act also provides that a transferee of a partner's interest is entitled, during the continuance of the firm, to receive the share of profits of the transferring partner and, when the firm is dissolved, to receive the share of the assets of the firm to which the transferring partner will be entitled. Hence, when the assessee transfers his one-sixth interest in the partnership to the other partners, they have acquired that interest of the assessee which is his one-sixth share of the residue after the affairs of the firm are settled and the debts, advances and capital are repaid. Therefore, the value of the gift in this case should be taken to be the value of the one-sixth share in the entire firm's net assets including the goodwill. It will follow that the revenue will have to re-value the gift. But we refrain from expressing our view as to how it is to be valued.
7. The question referred to us is answered in the negative and in favour of the revenue. The revenue will have its costs from the assessee. Counsel's fee Rs. 250.
8. Question answered in the negative.
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