M/S. SREE NARAYANA CHANDRIKA TRUST versus COMMISSIONER OF GIFT TAX, KERALA

Citation: [2003] 3 S.C.R. 958 · Decided: 25-04-2003 · Supreme Court of India · Bench: BRIJESH KUMAR · Disposal: Appeal(s) allowed

Judgment (excerpt)

A 
MIS. SREE NARA Y ANA CHANDRIKA TRUST 
V. 
COMMISSIONER OF GIFT TAX, KERALA 
APRIL 25, 2003 
B 
[BRIJESH KUMAR AND B.N. SRIKRISHNA, JJ.] 
Gift Tax Act, 1958-Section 4(/)(a)-Gift Tax-Relinquishment of profit/ 
loss share by a partner in favour of newly inducted partner upon reconstitution 
C of the firm-Share of newly inducted partner not proved to be for inadequate 
consideration-Held: Such relinquishment does not amount to taxable gift. 
Appellant was a partner along with 8 other partners in a firm having 
45% profit/loss share in the firm. The partnership was reconstituted 
inducting a new partner in the firm who made her contribution towards 
D the capital and she was given 12% share. As a result of reconstitution, 
shares of all the partners were reshufned and the appellant's share was 
reduced from 45% to 30%. 
Assessing Officer held that relinquishment of 15% of the share of 
appellant-assessee amounted to gift attracting the provisions of Gift Tax 
E Act, 1958. Commissioner of Gift Tax (Appeals) dismissed the appeal of the 
appellant-assessee. Income Tax Appellate Tribunal held that there was no 
gift cxigible to tax as there was complete realignment of shares of all the 
partners consequent upon reconstitution of the firm and unless and until 
interest of the concerned partner was ascertained and quantified it could 
not be said that the consideration for transfer was inadequate and that even 
F ifthere was transfer by the assessee in favour of the incoming partner and 
the existing partners, inasmuch as the consideration for the transfer cannot 
be valued during the subsistence of the partnership, it was not possible to 
consider and quantify the question of adequacy or inadequacy for 
consideration. On reference, High Court answering the questions against 
G the assessee held that Tribunal's holding was not correct. Hence, the present 
appeal. 
Allowing the appeal, the Court 
HELD: I. Although the relinquishment of the share of a profit/loss 
H by a partner in favour of the inducted partner may amount to a transfer, 
958 
_, 
J -
SREE NARA YANA CHANDRIKA TRUST"· COM MR. OF GIFT TAX 
959 
it cannot be said that it ·was for inadequate consideration so as to amount A 
to a taxable gift within the meaning of section 4(1)(a) of the Gift Tax Act, 
1958. 
2. The value of the services or usefulness of the newly inducted 
partner to the firm as partner has not been disputed by the Revenue 
authorities. Mere fact that upon reconstitution of the firm the share of one B 
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 second partnership C 
deed, there was inadequate consideration for the reallocation of 12% of 
the share in favour of the incoming partner. The contribution towards the 
capital, together with the obligation undertaken of sincerely and faithfully 
carrying on the business for common advantage of the firm, was adequate 
consideration for reallocating the share of the profits and·giving 12% of 
the share in favour of the incoming partner. That one of the partners was D 
the managing partner and another partner was the administrative head, 
did not take away the obligations of the other partners including those of 
newly inducted partner which arose generally under the Partnership Act, 
as well as under the second partnership deed. 1965-D; 966-C-E] 
Commissioner of Gift Tax, Karnataka v. D.C. Shah. Civil Appeal Nos. E 
4551-56 of 1984 decided by Supreme Court on 25.9.1996, relied on. 
Sunil Siddharthbhai v. Commissioner of Income Tax, Ahmedabad, 156 
ITR 509; Commissioner of Gift Tax, Gujarat v. Chhota/al Mohan/a/, 166 ITR 
124; B. T. Patil and Sons v. Commissioner of Gift Tax, 247 ITR 589 and F 
Commissioner of Gift Tax, Kera/av. P. Gheeverghese Travancore Timbers and 
Products, (1972) ITR 83, 403, referred to. 
CIVIL APPELLATE JURISDICTION: Civil Appeal. No. 1427 of2001. 
From the Judgment and Order dated 24.8.2000 of the Kerala High G 
Court in l.T.R. No. 256 of 1997. 
T.L.V. Iyer, S. Prasad, R. Gopal Krishnan, Abhay Kumar and S.N. Jha 
for the Appellant. 
B.B. Ahuja, S. Rajappa and B.Y.B. Das for the Respondent. 
H 
960 
SUPREME COURT REPORTS 
12003 I 3 S.C.R. 
A 
The Judgment of the Court was delivered "by 

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