Holding

The transfer of the goodwill interest to the minors constitutes a gift under the Gift Tax Act, 1958.

Summary

The assessee, a partner in M/s. Chhotalal Vedilal, reduced his share in the firm and admitted his two minor sons to the partnership benefits, thereby relinquishing 19% of the goodwill. The Gift Tax Officer treated this relinquishment as a taxable gift of goodwill. The Appellate Assistant Commissioner, the Tribunal, and the Gujarat High Court held that no gift arose because the right to future profits was not existing property. On appeal, the Supreme Court held that goodwill is property under the Gift Tax Act, 1958, and that the transfer of the monetary value of that goodwill to the minors constitutes a gift. Consequently, the revenue's appeal was allowed, reversing the High Court's decision.

Issues considered

Whether the admission of the minors to the partnership, resulting in the transfer of a portion of the firm's goodwill, amounts to a 'gift' under the Gift Tax Act, 1958.
Whether goodwill of a partnership is considered property for the purposes of the Gift Tax Act.

Legislation cited

Gift Tax Act, 1958s. 2(xii), s. 4
Partnership Acts. 14, s. 29(2), s. 53, s. 55(1)

Subjects

gift taxgoodwillpartnershiptransfer of interestminorspropertyvaluationGift Tax ActIndian Partnership Act

Judgment

COMMISSIONER OF GIFf TAX GUJARAT
v.
CHHOTALAL MOHANLAL

APRIL 16, 1987

B [R.S. PATHAK, CJ, RANGANATH MISRA AND
M.M. DUTT, JJ.]

Gift Tax 'Act, 1958-Section 2(xii) & 4-Goodwill of partner-
ship-Whether can be transfe"ed-Whether such transfer a 'gift'. ~

C Under a deed of partnership dated 12.11.1958, a firm by the name '4
M/s. Cbbotalal Vedilal came Into existence with Cbbotalal Mohanlal 1
(the assessee), Gunvantilal Cbbotalal and Pravincbandra Vedilal, as
partners, each having 7 annas, 4 annas and S annas share respectively ~
in the firm. This position continued until on 9.11.1961 when a change
took place in the constitution of the Orm. Under the new deed,
D Pravincbandra Vedilal retired. One Ramnlklal Chhotalal became a
partner with 4 · annas share. The share of the assessee, Cbbotalal
Mobanll'il 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
E that the asSeSsee bad deprived himself of 19% share In the profits and
had gifted away 19% share in the' goodwill of the firm in favour of bis
· tWo minor. sons. He valued the .goodwill and treated 19% thereof as
taxable gift;

In the appeal before the Appellate Assistant Commissioner the
F · 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 Tu Officer bas ~
·· ·estimated, be enhanced the quantum. >-<"

._ In further appeal by the assessee the Tribunal held that in the
G . circumstances of the case there could be no gift of goodwill and found
·, that the right to receive future prolits'Could not be subject matter of a
· gift as the transfer did not relate to existing property and the ~ituation ·
did.not give rise to any gift which could be made liable to tax under the
Act. '~
----.·
H In the Reference the High Court upheld the view of the Tribunal.
~

1042

l
COMMR. OF GIFT TAX v. CHHOTALAL !MISRA, J.] 1043

In the appeal to this Court on behalf of the Revenue, it was con· A
tended that the order of the Gift Tax Officer was right and the Appel·
late Assistant Commissioner, the Tribunal and the High Court had gone
wrong in holding that the arrangement under the deed of 9.11.1961 did
not give rise to a taxable event under the Act.

Allowing the appeal, B

HELD: 1. GoodwlllofafirmiS!IDaSset. [1045E]

Khushal Khemgar Shah & Ors. v. Khorshed Banu Dadiba
Boatwalla & Anr., [1970] 3 S(:R 689, followed,

2. Once goodwill is taken to be property aod with the admission
c
of the two minors· to the benefits of partnership in respect of a fixed
share, the right to the nmney vidue of the goodwill staods triwsferred, the
transactfon does c11nstitute a gift under the Gift Tax Act, 1958. [1046F]

3. Since there l!as been !1'1 dispute about viiluation of the goodwill D
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 traosfer of the benefit of the
partnership constitutes a gift under the Act. [1046F-G]

Commissioner of Gift Tax v. Nani Gopal Monda/, 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 Commis·
sioner of Gift Tax, Bombay v. Premji Trikamji Jobanputra, 133 ITR
E

317, approved.

CIVIL APPELLATE JURISDICTION: Civil Appeal No. 2027
of 1974. F

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 Appel·
!ants. G

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 H
1044 SUPREME COURT REPORTS [1987] 2 S.C.R.

A (the assessee), Gunvantilal Chhotalal and Pravinchandra ,Vedilal.
These three partners had 7 annas, 4 annas and 5 annas share respec-
tively in the firm. This position continued until on 9.11.1961 relevant
to assessment year 1963-64 with which this appeal is conceroed, a
change took place in the constitution of the firm. Under the new deed,
Pravinchandra Vedilal retired; no change took place in respect of
B
Gunvantilal Chhotalal; one Ramniklal Chhotalal became a partner
with 4 annas share. The share of the assessee Chbotalal Mohanlal was
reduced to 4 annas; for the remaining 4 annas two minor sons of
Cbhotalal being Kiritkumar and Deepak Kumar were admitted to the
benefits only of the firm-Kiritkllmar having 12 per cent and Deepak
Kumar having 13 per cent. No alteration was, however, made regard-
C ing the share capital standing in the name of the assess.ee.

The Gift Tax Officer came to the conclusion that· the assessee )..
bad deprived himself of 19 per cent share in the profits and had gifted
away 19 per cent share in the goodwill ofthe firm in favour of his twp
D 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 that right and since the amount was higher
than what the Income-tax Officer had estimated, following the .)._
E 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 Income-
-
'
tax Officer but pleaded for sustaining the order of the Appellate
~
Assistant Commissioner. The Tribunal further found that the right to
F 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:-.
G
"Whether on the facts and in the circumsta0 ces 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?"

H Th('. High Court answered the question against the Revenue and up-
COMMR. OF GIFT TAX v. CHHOTALAL (MISRA, J.I 1045

held the view of the Tribunal. This appeal has, therefore, been carried A
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 B
wrong in holding that the arrangement 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.
-1 "Gift" is defined.in section 2(xii) of the Act:-
c
" 'Gift' means the tr311sfer by one person. to another of any
existing movable or immovable property made voluntarily
and without consideration in money or money's worth, and
includes the transfer of any property deemed to be a gift
under section 4."
D
In support of the appeal, learned counsel further relies upon decisions
of different High Courts to which we shall pr~sently refer. Before doing
so it would be appropriate to indicate that in Kh~fial Khemgar Shah &
Ors. v. Khorshed Banu Dadiba Boatwa!la & Anr., [1970] 3 SCR 689
this Court has held that goodwill of a firm is an asset, In Commissioner
of Gift Tax v. Nani Gopal Monda/, 150 FR 469 after r~erring to a E
-- number of authorities of this Court and different High Courts a Divi-
sion Bench of the Calcutta f!igh 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 F
under. the Estate Duty Act, yet the principle 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 cpnµection, it may be mentioned that
accori:ling tp section 14 of the Indian Partnership Act, pro-
perty of a firm includes goodwill of the business. Further, G
according to section 29(2), if a partner transfers his interest
and the transferring 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, H
1046 SUPREME COURT REPORTS (1987] 2 S.C.R.

A 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 finn after dissolution, the
goodwill shall, subject to contract between the parties, be
included in the assets. and it may be sold either separ~tely
or alongwith other properties of the firm ...... Upon
B
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 Monda! hy the deed of gift transferred his share or
interest in the firm which included his share of goodwill -l-
also. Hence, for the purpose of payment of gift-tax, the
c 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
J
Madras High Court was called upon to deal:with a case of this type
D where minors were admitted. to the benefits of partnership finn 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. hy the assessee in favour of the minors. The ratio in Sirehmal -j._ '
E Nawalkha v. Commissioner of Income-Tax, 156 ITR 714 as also in
Commissioner of Gift Tax, Bombay v. Premji Trikamji Jobanputra,
133 ITR 317 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
F
share, the right to the money value of.the goodwill stands transferred,
the transaction does constitute a gift under the Act. 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 answer to the question referred has to be in
the affirmative, that is, it constitutes a gift under the Act. The appeal is.
G 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.