T.V. RAJAGOPALA RAO, J.M. A. SATYANARAYANA, A.M. M.R. SIKKA, VICE PRESIDENT This is Departmental appeal directed against order of ACC, Ernakulam, dt. 18th May, 1983 and it relates to asst. yr. 1979-80. 2. facts leading to present appeal are as follows: Originally assessee along with four others were partners in firm called Mehta Agencies under partnership deed dt. 1st April, 1976. When that partnership was continuing and doing business as general merchants, commission agents, manufacturers representatives, distributors and dealers and stockists, one of partners, viz., Kantilal Raychand Mehta died on 23rd Dec., 1977. As per cl. 14 of deed dt. 1st April, 1976, remaining partners of firm decided to continue business in partnership and as per cl. 7 of very same deed they also decided not to close firm s accounts on date of death of Kantilal Raychand Mehta, but they wanted to determine profit of firm on time basis, in proportion to number of days he was partner in year to total number of days in year and to allocate profits up to date of demise of deceased partner. There was reconstitution of firm and said reconstituted firm came into force from 24th Dec., 1977 as per partnership deed of even date. Admittedly, assessee is one of partners both in original as well as in reconstituted firm and as per reconstitution she was having 30 per cent share both in profits and losses. There was change in said firm again as per deed dt. 1st April, 1978. Under this new partnership apart from four partners under reconstituted deed dt. 24th Dec., 1977, one Mrs. Surajben K. Mehta, wife of late Kantilal Raychand Mehta joined partnership in her capacity as trustee of Mehta Trust. This reconstituted firm took over business of old firm with all assets and liabilities as on 31st March, 1978 and determined to carry on business as going concern and main business was agreed to be that of general merchants, commission agents, etc. Clause 5 of partnership deed dt. 1st April, 1978 states that capital contribution of each partner shall bear interest at 15 per cent per annum. assessee was having share of 25 per cent in profits and losses. Thus, it can be seen that assessee reduced her share from 30 per cent to 25 per cent. It was agreed as per cl. 8 of deed that all partners shall have full and equal rights in conduct and management of business jointly and severally. GTO served notice under s. 16 of GT Act, 1958 ( Act ) calling upon assessee to file her gift-tax return. nil return was filed in pursuance thereof. According to representative of assessee there was no gift involved in surrender of 5 per cent right in favour of incoming partner. This contention was not accepted by GTO. He held that 5 per cent right was foregone by assessee without adequate consideration. In step to quantify gift, GTO took average of super profit earned by firm. For that purpose, assessed total income of firm for last five assessment years was taken and average profit derived by firm for one year was found at Rs. 1,71,012. From out of its interest on average capital at 12 per cent, which came to Rs. 49,335 and 15 per cent managerial remuneration of average profit which came to Rs. 25,651 totalling to Rs. 74,986 was deducted and balance of profit was arrived at Rs. 96,026. Three years purchase value was found out to be Rs. 2,88,078. Five per cent of this, which represents right to share from out of profits foregone by assessee was found out to be Rs. 14,404. Sec. 5(2) of Act exemption of Rs. 5,000 was deducted from out of it and value of taxable gift was found out to be Rs. 9,404. Thus, GTO completed his assessment order dt. 31st March, 1982. 3. appeal against said assessment was taken before AAC. AAC held that newly admitted partner is no other than mother-in-law of assessee and she was admitted as partner as representative of trust. He also held that there was no intention for assessee to provide any financial personal benefit to incoming partner. He further held that incoming partner brought capital of Rs. 10,000 as consideration for allotment of share to trust. Taking into consideration that share transferred by assessee is only 5 per cent, AAC held that there is no justification to sustain gift-tax imposed and hence, he cancelled assessment. 4. As against said order of AAC present appeal is filed by Revenue and matter stands for our consideration. It was contended by learned Departmental Representative that AAC erred in holding that capital contributed by incoming partner was adequate consideration for her admission into partnership. alleged consideration did not pass to assessee and, therefore, capital contribution cannot be taken to be consideration for reduction of share of assessee in firm. learned Departmental Representative invited our attention to Madras High Court decision in M. K. Kuppuraj vs. CGT (1984) 38 CTR (Mad) 314 : (1985) 153 ITR 481, in which on consideration of case-law, Madras High Court held that where partner relinquishes portion of his profit-sharing interest in partnership in favour of another, transaction will amount to gift falling within definition of s. 2(xii) r/w s. 2(xxiv) of Act and High Court have entirely agreed with view taken by Tribunal in case before them. learned Departmental Representative also brought to our notice recent decision rendered by Madras Bench B camping at Cochin passed in C. V. Jacob vs. GTO (GT Appeal No. 67 (Coch) of 1983 dt. 25th Nov., 1985). learned Departmental Representative furnished copy of our order in GT Appeal No. 67 (Coch) of 1983. One of us (Judicial Member) is party to said order. In that case, assessee who used to hold 30 per cent share in partnership firm reduced his share to 10 per cent and admitted his two daughters as partners, having 10 per cent share in profits as well as in losses. In that case, we have not given credence to argument that liability to share losses by assessee stood reduced and this would offset any amount of gift involved even if it is construed that foregoing of right to profits contained element of gift. We hold that there is element of gift on facts of case. facts that liability to share loss was also reduced will not completely offset profits foregone on ground that firm has been consistently deriving profits if results of previous five years are seen and, therefore, we hold that in all probability no immediate loss could be anticipated to occur. However, we took reduction in liability to loss as discounting factor. So also we made adjustments in managerial remuneration and we directed that gift should be valued at 10 per cent instead of at 20 per cent taken by GTO. assessee s learned counsel argued that incoming partner had introduced considerable amount of Rs. 10,000 as her share and that should be taken to be adequate consideration for assessee to forego 5 per cent of her interest in profit-sharing ratio. It is also argued that what is foregone is not only profit but also assessee s responsibility to share loss to same extent. We came across decision of Kerala High Court in CGT vs. V. M. Philip (1987) 61 CTR (Kar) 238 : (1985) 154 ITR 819. In that case, previously business was run as proprietary business. Subsequently erstwhile proprietor sought to convert his business into partnership business and he sought to give 50 per cent of his interest to his son. son who was introduced into partnership contributed Rs. 1 lakh. Tribunal found that sum of Rs. 1 lakh paid by son was towards consideration for assets transferred and Tribunal having accepted that amount of Rs. 1 lakh should be taken as consideration for assets transferred, held that there was no gift and set aside order of CIT. In that case, approving Tribunal Hon ble High Court held that consideration in sum of Rs. 1 lakh passed from son to father for benefits conferred on son by being admitted into partnership. They further held that balance amount of Rs. 44,787 can only be considered as amount on which tax was payable. Firstly, in our opinion, case decided by Kerala High Court is not on all fours with case before us. In that case, proprietary business was, for first time, converted into partnership business. In those circumstances, their Lordships held that amount of Rs. 1lakh brought by son can be considered as consideration paid to father for foregoing 50 per cent of interest by father in proprietary concern. However, that cannot be said with regard to partnership firm whose case we are concerned with. Even before reducing her share assessee was holding only 30 per cent share in firm. When new partner comes in and brings in capital towards his/her share into firm it cannot be said that capital brought in by one of partners is consideration paid by him towards reducing share of other partner in firm. In our considered opinion ratio laid down by Hon ble High Court should be confined only to particular facts of case dealt with by them. In view of Madras High Court decision, we have already quoted above, and also in view of our previous decision, we have to hold that there is gift involved in reducing assessee s share from 30 per cent to 25 per cent. However, in view of specific clause in partnership deed interest on average capital at 15 per cent should be deduced. So also as per cl. 8 of partnership deed dt. 1st April, 1978 all partners including newly admitted partner have full and equal right in conduct and management of business. Taking all facts and circumstances into consideration 20 per cent of average profit should be taken to be managerial remuneration instead of 15 per cent taken by GTO. We also direct that instead of 5 per cent, GTO has to compute 3 per cent in right to share profits foregone by assessee to be taxable gift. Thus to extent stated above Departmental appeal stands allowed. I have carefully gone through order of my learned brother Shri T. V. Rajagopala Rao, with respect I am unable to agree with his order. 2 . On account of change in constitution of firm as per partnership deed dt. 24th Dec., 1977 one Mrs. Surajben K. Mehta was taken in as new partner and she was given 15 per cent share. On account of this assessee s share was reduced from 30 per cent to 25 per cent. new partner Mrs. Surajben K. Mehta contributed capital of Rs. 10,000. In my view this contribution of capital by incoming partner is adequate consideration. There is no transfer of any asset involved by reducing assessee s share by 5 per cent. 3 . In partnership, when new partners are introduced in existing firm such new partners not only have share in profits of firm but subject to contract to contrary may be liable to share losses of firm. They may have to contribute capital or they may be taken as working partners. When they contribute capital or when they are taken as working partners there is adequate consideration. So question of transfer of right to share future profits by existing partners in favour of new partners does not arise. Merely because share in profits and losses allotted to one or other person is reduced, compared to position obtaining earlier, in reconstitution of firm because of allotment made to new partners, it cannot be assumed that allotment of shares to new partners is by reduction effected in shares of existing partners. During subsistence of partnership no partner can deal with any portion of property as his own. Nor can he assign his interest in any specific item of partnership property to any one. His right to obtain such profits, if any, which may fall to his share from time to time and upon dissolution of firm to share in assets of firm after satisfying liabilities set out in s. 48 of Indian Partnership Act, 1932. This is well settled by decision of Supreme Court in Addanki Narayanappa vs. Bhaskara Krishnappa AIR 1966 SC 1300. It is also well-settled by decision of Supreme Court in CGT vs. P. Gheevarghese Travancore Timbers & Products (1972) 83 ITR 403, that one of assets of firm, namely, goodwill, cannot be picked up and regarded as subject of gift. It was observed as under : "... Departmental authorities, in present case, never treated all assets and property of assessee which were transferred to partnership pertaining to his proprietary business as gift nor has any suggestion been made before us on behalf of Revenue that property and assets valued at Rs. 4,00,000 were subject-matter of gift. All that Departmental authorities did and that position continued throughout was that they picked up one of assets of assessee s proprietary business, namely, its goodwill, and regarded that as subject of gift having been made to daughters who were other partners of firm which came into existence by virtue of deed of partnership. This approach is wholly incomprehensible and no attempt has been made before us to justify it ...." (p. 409) 4. In V. M. Philip s case (supra) father decided to take son into partnership. son contributed Rs. 1 lakh towards capital. On above facts it was held that no gift is involved. High Court further approved action of Tribunal in reducing from quantum of gift computed amount of capital contributed and in holding that balance only was taxable as gift. In case on hand taxable gift was computed at Rs. 9,404. If we give set off for capital contributed by new partner of Rs. 10,000 there would be no taxable gift. In CGT vs. J. N. Marshall (1979) 1 20 ITR 613, Bombay High Court held that it cannot be said that when new partner is taken and given share in profits and losses of firm, there is gift as such. It was also held that there is no gift of goodwill. In D. C. Shah vs. CGT (1981) 21 CTR (Kar) 96 : (1982) 134 ITR 492, Karnataka High Court held that contribution of capital by new partners would be sufficient or adequate consideration for being inducted as partners and there was no taxable gift as result of reallocation of shares. In CGT vs. Chalasani Subbayya (1983) 37 CTR (AP) 303 : (1983) 144 of shares. In CGT vs. Chalasani Subbayya (1983) 37 CTR (AP) 303 : (1983) 144 ITR 295, Andhra Pradesh High Court held that on retirement of partner there is no gift of any property. It was further held that it is not open to Department to pick out one of assets of firm, namely, goodwill, and say that retiring partner had relinquished his share in goodwill and levy gift- tax thereon. This Bench of Tribunal by its orders in GT Appeal No. 11(Coch) of 1983 dt. 28th June, 1983 and GT Appeal No. 33 (Coch) of 1983 dt. 7th Aug., 1985 held that contribution of capital by new partner is adequate consideration and no gift is involved. order of Tribunal, Madras Bench B in C. V. Jacob s case (supra) is distinguishable. Firstly in that case contribution of capital of Rs. 6,000 was found to be inadequate for giving share of 20 per cent. Tribunal directed GTO to take value of gift at 10 per cent instead of 20 per cent taken by him. Even this order of these facts would go to show that contribution of capital by new partners in proportion with others is adequate consideration. I may also point out that decision of Kerala High Court in V. M. Philip s case (supra) was not considered by Madras Bench. Hence that order is distinguishable. Further case of M. K. Kuppuraj (supra) relied on by Revenue is also distinguishable. In that case new partners were minors. They were admitted to benefits of partnership only. minors were not sharing any losses. They did not contribute any capital. But in instant case new partner is sharing in losses also. She contributed Rs. 10,000 as capital as already stated. On other hand, Madras High Court in case of CGT vs. Ali Hussain M. Jeevaji (1980) 123 ITR 4 20 (Mad) held that contribution of capital, rendering of service, sharing in future liabilities and losses would all constitute consideration for admission of new partners into firm. 5. On careful consideration of all facts and circumstances of case and in view of decisions cited above I am of opinion that no gift is involved in reduction of assessee s share from 30 per cent to 25 per cent and appeal of Department has to be dismissed. THIRD MEMBER ORDER There being difference of opinion between learned Members of Tribunal, Cochin Bench, following question has been referred to me as Third Member : "Whether any gift was involved in act of assessee surrendering or foregoing 5 per cent of her interest in Mehta Agencies in favour of Mrs. Surajben K. Mehta, trustee of Mehta Trust, when firm was reconstituted as per deed dt. 1st April, 1978 ?" 2 . firm known as Mehta Agencies was originally constituted under partnership deed dt. 1st April, 1976. This firm consisted of (1) Mrs. Saralaben S. Mehta, (2) Mrs. Madhuben M. Mehta, (3) Mrs. Geetaben D. Mehta, (4) Shri Narotham M. Shanghvi, and (5) Shri Kantilal Raichand Mehta. On death of Shri Kantilal R. Mehta on 23rd Dec., 1977, remaining partners decided to continue firm under new partnership deed dt. 24th Dec., 1977. According t o this partnership deed, Mrs. Saralaben S. Mehta, Mrs. Madhuben M. Mehta, Mrs. Geetaben D. Mehta and Shri Narotham M. Shanghvi agreed to share profits and losses of business in ratio 30 : 30 : 30 : 10. Thereafter, there was change in constitution of this firm. By partnership deed dt. 1st April, 1978, Mrs. Surajben K. Mehta, widow of late Shri Kantilal R. Mehta, joined firm as partner in her capacity as trustee of Mehta Trust, by contributing Rs. 10,000 as her capital. partners agreed to share profits and losses of business as follows : 1. Mrs. Saralaben S. Mehta 25 per cent 2. Mrs. Madhuben M. Mehta 25 per cent 3. Mrs. Geetaben D. Mehta 25 per cent 4. Shri Narotham M. Shanghvi 10 per cent 5. Mrs. Surajben K. Mehta 15 per cent Under cl. 8 of partnership deed dt. 1st April, 1978, all partners agreed to conduct and manage business of firm jointly and severally. 3. GTO was of view that assessee, Mrs. Saralaben S. Mehta, had surrendered 5 per cent of her profit-sharing right in business of firm in favour of Mrs. Surajben K. Mehta without adequate consideration and so case involved liability to gift-tax under s. 4(1) (a) of Act. notice under s. 16 was, therefore, issued to assessee requiring her to file return of gift for asst. yr. 1979-80. assessee filed nil return contending that there was no gift in favour of Mrs. Surajben K. Mehta. GTO rejected contention of assessee and worked out value of taxable gift at Rs. 9,400 as detailed in his order. 4 . On appeal, AAC observed that new partner Mrs. Surajben K. Mehta had brought in capital of Rs. 10,000 and so there was adequate consideration for becoming partner of firm. He also observed that assessee had no intention to provide any financial personal benefit to incoming partner. He, therefore, held that assessee had not made gift of 5 per cent of her profit-sharing right in favour of Mrs. Surajben K. Mehta. He accordingly cancelled assessment made by GTO. 5. Aggrieved by order of AAC Department came up in appeal before Tribunal. 6.1 learned Judicial Member was of view that there was gift under s. 4 inasmuch as share of assessee had been reduced from 30 per cent to 25 per cent with admission of Mrs. Surajben K. Mehta as new partner in firm. In support of his view, he relied upon decision of Madras High Court in case of M. K. Kuppuraj (supra) and decision of Tribunal, Madras B Bench camping at Cochin in case of C. V. Jacob (supra). learned Judicial Member distinguished contrary view taken by Kerala High Court in V. M. Philip s case (supra). However, on merits, he granted some relief to assessee and directed GTO to recompute value of gift in light of certain guidelines furnished by him. 6 . 2 learned Accountant Member, however, did not agree with Judicial Member. He was of view that Mrs. Surajben K. Mehta had joined firm as partner by contributing capital of Rs. 10,000 and so reduction of assessee s share in firm from 30 per cent to 25 per cent did not tantamount to gift without adequate consideration. According to him, therefore, provisions of s. 4(1) did not apply to case. In support of his view, learned Accountant Member referred to decisions of Supreme Court in cases of Addanki Narayanappa (supra) and P. Gheevarghese Travancore Timbers & Products (supra). He also relied upon decisions of various High Courts in V. M. Philip s case (supra), J. N. Marshall s case (supra), D. C. Shah s case (supra) and Chalasani Subbayya s case (supra). He also referred to decisions of Cochin Bench of Tribunal in GT Appeal No. 11 (Coch) of 1983 and GT Appeal No. 33 (Coch) of 1983. 7. It is against this background that case has been referred to me for resolving point of difference between two Members of Cochin Bench. 8 . Before me, representative of Department reiterated arguments advanced by learned Judicial Member and strongly relied upon decisions of Madras High Court in CGT vs. V. A. M. Ayya Nadar (19 69 ) 73 ITR 761, CGT vs. K. P. S. V. Duraiswamy Nadar (1973) 91 ITR 473, CGT vs. A.M. Abdul Rahman Rowther (1973) 89 ITR 219, CGT vs. T. S. Shanmugham (1977) 110 ITR 237 and M. K. Kuppuraj s case (supra). He urged that assessee had surrendered her 5 per cent right in firm in favour of incoming partner without adequate consideration and so there was taxable gift within meaning of s. 4(1) (a). 9 . representative of assessee, on other hand, emphatically contended that reduction of assessee s share in firm on admission of Mrs. Surajben K. Mehta as partner did not tantamount to gift inasmuch as she had contributed Rs. 10,000 as capital apart from her agreement to share losses of business and obligation to work for firm. In support of his case, he relied upon decisions in V. M. Philip s case (supra), D. C. Shah s case (supra), J. N. Marshall s case (supra), CGT vs. Karnaji Lumbaji (19 69 ) 74 ITR 343 (Guj), CGT vs. Chhotalal Mohanlal (1974) 9 7 ITR 393 (Guj), CGT vs. Sardar Wazir Singh (1975) 99 ITR 104 (All), Ali Hussain M. Jeevaji s case (supra) and Addl. CGT vs. A. A. Annamalai Nadar (1978) 113 ITR 574 (Mad). 10. After going through record and hearing learned representatives of parties, I am inclined to agree with view taken by learned Accountant Member. It is not disputed that prior to 1st April, 1978, Mrs. Saralaben S. Mehta, Mrs. Madhuben M. Mehta, Mrs. Geetaben D. Mehta and Shri Narotham M. Sanghvi were partners of firm of Mehta Agencies having profit-sharing ratio of 30 : 30 : 30 : 10, that Mrs. Surajben K. Mehta contributed sum of Rs. 10,000 as her capital and became fifth partner of aforesaid firm under partnership deed dt. 1st April, 1978 with 15 per cent share in profits and losses and that her admission as partner resulted in reduction of share of assessee from 30 per cent to 25 per cent. It is also not in dispute that according to cl. 8 of partnership deed dt. 1st April, 1978 Mrs. Surajben K. Mehta agreed to conduct and manage business of firm along with other partners. Thus, crucial question for consideration is whether on facts of case reduction of assessee s share from 30 per cent to 25 per cent tantamounts to notional gift within meaning of s. 4(1) (a). 11. Now, there is divergence of opinion on point at issue. However, most of High Courts are in favour of assessee. In J. N. Marshall s case (supra) Bombay High Court has held that when new partner is added and given share in profits and losses of firm, there is no gift as such. It is so because, whenever new partner is introduced in existing firm, his share in firm would extend to such of assets as are specified under partnership agreement but he would also equally share in liabilities that may be incurred by firm. He would be subject to all obligations, contractual as well as statutory, which attach to partner of firm. To same effect is view taken by Gujarat High Court in Chhotalal Mohanlal s case (supra). In case of Karnaji Lumbaji (supra) ex-employees were taken as partners who agreed to work for partnership without any remuneration and to share in assets and liabilities of firm and also future losses. On these facts it was held by Gujarat High Court that there was no gift in transaction. Similar view has been taken by Karnataka High Court in D. C. Shah s case (supra). In that case, partnership was enlarged by admission of new partners, who contributed capital and agreed to work for partnership business. Karnataka High Court held that decrease in share of existing partners as result of rearrangement or reallocation of shares did not amount to transfer without adequate consideration and, consequently, there was no taxable gift. At this stage, I may also refer to view taken by Kerala High Court in case of V. M. Philip (supra). In that case, assessee had entered into agreement with his son for purpose of running plantation business. According to deed of partnership, each of two partners contributed Rs. 1 lakh to capital of firm. After formation of partnership, business held by assessee as sole proprietor was taken over by partnership. On these facts, Kerala High Court observed that transaction did not involve any gift (though High Court disposed of case on merits keeping in view fact that existence of gift had not been challenged by assessee). It would be evident from authorities referred to above that view taken by learned Accountant Member derives overwhelming support from decisions of various High Courts. 12. It is true that Madras High Court has taken contrary view in some cases. According to this High Court in V. A. M. Ayya Nadar s case (supra) and A.M. Abdul Rahman Rowther s case (supra) realignment of partners share on reconstitution of firm involves transfer of interest in property, namely, right to share profit and this amounts to taxable gift. To same effect is view taken by Madras High Court in K. P. S.V. Duraiswamy Nadar s case (supra), T. S. Shanmugham s case (supra) and M. K. Kuppuraj s case (supra). But, with due respect, I am unable to follow view taken by Madras High Court in aforesaid cases in preference to authorities of Bombay High Court, Gujarat High Court, Karnataka High Court and Kerala High Court referred to above, for simple reason that Madras High Court has itself taken contrary view in some other cases. In case of Ali Hussain M. Jeevaji (supra), firm consisting of two partners having equal shares was reconstituted by admitting their respective sons as partners and all four partners had equal share in profits of firm. new partners were to introduce capital in firm and were to attend to business of firm. It was held by Madras High Court that contribution of capital, rendering of service and sharing of liabilities and losses would all constitute consideration for admission of new partners into firm and hence, there was no question of any gift liable to tax. To same effect is view taken by Madras High Court in case of A. A. Annamalai Nadar (supra). Evidently Madras High Court is divided on point at issue. In such situation, it would be only desirable to follow view taken by majority of High Courts. 1 3 . In view of above discussion, I conclude that consensus of opinion on point at issue is in favour of assessee. I would, therefore, hold that since Mrs. Surajben K. Mehta contributed capital of Rs. 10,000 for becoming partner in firm and since she agreed to share losses of business and to render services to firm, consequent reduction of assessee s share in firm from 30 per cent to 25 per cent would not tantamount to gift within meaning of s. 4(1) (a). 1 4 . I, therefore, agree with view taken by learned Accountant Member and conclude that assessment made by GTO deserves to be cancelled. case will now go to Division Bench for disposal in accordance with majority opinion. *** GIFT-TAX OFFICER v. SMT. SARALABEN S. MEHTA