Law:

Section:

Section 2(xii) of the Gift-tax Act, 1958 - Gift - Assessment year 1987-88 - Whether where assessee, who was a partner in a firm, retired from partnership firm and another partner was inducted in his place, transfer of his share of goodwill in favour of new partner did not amount to a gift liable to gift-tax - Held, yes - Whether it makes no difference in principal whether it is a case where a partner retires from a partnership and firm continues or a case where one partner retires and another partner is inducted - Held, yes FACTS The assessee was a partner in a firm having 11 per cent share in the profit of the business of the firm. During the accounting year relevant to the assessment year 1987-88, the assessee retired from the said partnership firm and a new partner was admitted in his place. The Assessing Officer took the view that on the retirement of the assessee from the partnership firm, the assessee had made a gift of 11 per cent interest in the goodwill of the firm in favour of the new partner and accordingly he brought to tax the surrender value of the goodwill. On appeal, the appellate authority relying on the decision of the High Court in CGT v. T.M. Luiz Kannamally [1989] 180 ITR 257/ 47 Taxman 17 , cancelled the assessment. On appeal by the revenue, the Tribunal followed the aforesaid decision of the High Court and dismissed the appeal. On reference : HELD It makes no difference in principal whether it is a case where a partner retires from a partnership firm and the firm continues or a case where one partner retires and another partner is inducted. In both cases there is a relinquishment of the share in the goodwill of the firm by the retiring partner either in favour of the remaining partners or in favour of the incoming partners. If there is no gift in the former case, there cannot be a gift in the latter case. Following the decisions of the Supreme Court in the case of CGT v. T.M. Luiz [2000] 245 ITR 831/ 112 Taxman 622 and in the case ofB.T. Patil & Sons v. CGT [2001] 247 ITR 588, in the instant case the Tribunal was right in holding that when a partner retires from a partnership firm, there is no element of gift involved. CASES REFERRED…

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