The Supreme Court held last week that a decrease in the share of a partner following the reconstitution of the partnership would not amount to a gift to him, attracting the gift tax.
The Supreme Court thus set aside the Kerala High Court judgment which had held a contrary view in the Sree Narayana Chandrika Trust vs Commissioner of Gift Tax case.
In this case, the trust was a partner in a firm. The firm was reconstituted and new partner was inducted who brought a large amount to the trust. The share of the trust was reduced from 45 per cent to 30 per cent.
The gift tax officer, taking the view that the reduction of the share of the profit/loss of the trust from 45 per cent to 30 per cent and redistribution in favour of the other partners amounted to a gift, issued notice under the Gift Tax Act, calling upon the trust to file a return of gift. It filed a return showing the value of taxable gift at nil.
The assessing officer, however, held that the relinquishment of 15 per cent of the share of the profits of the firm by the trust amounted to a gift.
Challenging this, the trust said there was no goodwill of the firm, capable of being assessed in terms of money. There was no gift following the induction of the new partner.
Rejecting the arguments, the high court held that there was a gift because the reconstitution resulted in the reduction of the share of the trust.
The Supreme Court Bench comprising Justice Brijesh Kumar and Justice B N Srikrishna said:
