Judgment :- ISMAIL, J. The Tribunal, Madras Bench, under s. 26(1) of the Gift-tax Act, 1957, has referred the following question of law for the opinion of this Court :- "1. Whether there is material justifying the decision of the Tribunal that the assessee was not liable to pay gift tax for asst. yrs. 1963-64 and 1965-66. 2. Whether on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the assessee was not liable to pay gift tax for asst. yrs. 1963-64 and 1965-66. The assessee was a partner of a firm called S. M. Soundappa Chetti. The assessee had 67 per cent share in the partnership son of the assessee, was made a partner. The said Rajendran contributed Rs. 10, 001, as his capital. The shares after the introduction of Rajendran as a partner in the partnership firm were : |--------------------------------|-----------------| | 1. Soundappa Chetti (assessee) | 42 per cent | |--------------------------------|-----------------| | 2. Rajendran | 25 per cent and | |--------------------------------|-----------------| | 3. Chandrasekharan | 35 per cent | |--------------------------------|-----------------| Thus it will be seen that 33 per cent which belonged to Chandrasekharan remained the same even after the reconstitution. 2. There was change in the Constitution of the firm again on 13th April, 1964. Chandrasekharan retired and his sons Sankaran and Manoharan along with Subramaniam, another son of Soundappa Chetti (the assessee) were taken in as partners. Sankaran and Manoharan contributed a capital of Rs. 20, 000 each and Subramaniam contributed a sum of Rs. 10, 000 as his capital. After the reconstitution of the firm 13th April, 1964, the shares of the partners in the business were -|--------------------------------|-----------------| | 1. Soundappa Chetti (assessee) | 42 per cent | |--------------------------------|-----------------| | 2. Rajendran | 15 per cent | |--------------------------------|-----------------| | 3. Subramaniam | 15 per cent | |--------------------------------|-----------------| | 4. Sankaran | 25 per cent and | |--------------------------------|-----------------| | 5. Manoharan | 25 per cent | |--------------------------------|-----------------| Thus, it will be seen that Rajendran's share has been decreased from 25 per cent to 15 per cent and Soundappa Chetti's (assessee's) shares been decreased from 42 per cent to 20 per cent as against Chandrasekharan's share of 33 per cent, in whose place his two sons Sankaran and Manoharan came in, each of them having 25 per cent. If the partners are taken in two groups, namely, Soundappa Chetti and his two sons, and the sons of Chandrasekharan, it will follows that the group of Chandrasekharan had acquired a higher percentage of shares in the profits than what it was previously. When these changes in the constitution of the firm took place, the new partners had undertaken to share the losses also. On these facts, the GTO considered that the value of the goodwill of the firm was forgone by Soundappa Chetti to the extent of 25 per cent in favour of Chandrasekharan for the first year, and to the extent of 22 per cent for the second year. He accordingly evaluated the gifts in the sum of Rs. 30, 822 for the first year and Rs. 33, 172 for the second year. On appeal preferred by the assessee, the AAC held that no gift arose in respect of the goodwill on the admission of the assessee's sons to the firm for both the years. He also held that there was no element of gift, though the assessee has surrendered 25 per cent and 22 per cent of his shares in the partnership of Soundappa Chetti in favour of his two sons. In view of this, the AAC allowed the appeals of the assessee for both the years. Against the order of the AAC the Department preferred appeal to the Tribunal and the Tribunal dismissed the appeals preferred by the Department of the following reasons :-1. The admission of new partners is supported by adequate and full consideration in money or money's worth. 2. It is difficult to say who has gifted what share as far as the asst. yr. 1965-66 is concerned. 3. The Madras High Court decision CGT vs. V. A. M. Ayya Nadar has no application to the instant case. 4. The facts of the present case are similar to those in the case decided by the Gujarat High Court in CGT vs. Karanji Lambaji, and that decision is applicable to the facts of the case. 3. In the result, the Tribunal dismissed the appeal preferred by the Department. It is the correctness of this conclusion of the Tribunal that is challenged before us in the form of the questions, extracted already, referred to this Court. 4. We would like to make two things clear with regard to the facts. 3. In the result, the Tribunal dismissed the appeal preferred by the Department. It is the correctness of this conclusion of the Tribunal that is challenged before us in the form of the questions, extracted already, referred to this Court. 4. We would like to make two things clear with regard to the facts. As we have pointed out already, the assessee had originally 67 per cent shares as on 13th April, 1962. On 14th April, 1962 when he took his son Rajendran as one of the partners, the other partner's (Chandrasekharan's) share, namely, 33 per cent remained intact and only out of the assessee's 67 per cent, 25 per cent was allotted to Rajendran. Therefore, as the asst. yr. 1963-64 is concerned, there can be no difficulty in at least understanding that there was a reduction in the share of the assessee and that there was allotment of that share to his son Rajendran who had contributed his share capital and who had also agreed to share the loss. 5. As far as the second reconstitution is concerned, with regard to the year relevant to asst. yr. 1965-66, the position is not clear. Soundappa Chetti he assessee, who had 42 per cent share retained only 20 per cent giving up 22 per cent However, the other of the assessee, namely, Subramaniam, who came into the picture got only 15 per cent. At the same time Chandrasekharan's 33 per cent was not allotted in equal shares to his two sons Sankaran and Manoharan, but they were allotted 25 per cent each. Consequently, it is possible that 22 per cent of Soundappa Chetti (assessee) as well as 10 per cent of Rajendran went towards the shares of Subramanian, Sankaran and Manoharan. Thus, with reference to the asst. yr. 1965-66, as pointed out by the AAC, it is difficult to say who made a gift of his shears and in favour of whom. 6. It is against the background of these facts that we consider the general question as to whether there was any gift of the assessee's share of goodwill in the partnership so as to attract the liability to gift tax. It is not in dispute that what was assessed is the value of the goodwill said to be the subject-matter of the gift. It is not in dispute that what was assessed is the value of the goodwill said to be the subject-matter of the gift. There is nothing in the orders of the GTO to show that the entire assets of the partnership were valued, which included the goodwill, and that on the basis of the share of Soundappa Chetti in the entire assets being made a gift of, the assessment was levied, On the other hand, a perusal of the order of the GTO clearly shows that the proceeded on the basis of the goodwill alone being the subject-matter of the gift and that he evaluated the share of the goodwill of the assessee, which according to him, had been gifted to his two sons at the two sons at the two reconstitution respectively. This the GTO could not have done is made clear by a judgment of the Supreme Court in CGT vs. P. Gheevarghese Travancore Timbers & Products. In that case, the assessee, who was the sole proprietor of a business, converted it into a partnership by a deed dt. 1st August, 1963, under which he took two of his daughters into the partnership, who had contributed a capital of Rs. 25, 000 each. The capital of the partnership was Rs. Four lakhs, of which the assessee contributed Rs. 3 1/2 lakhs. All the assets of the proprietary business were transferred to the partnership and in these assets the assessee and his daughters were entitled to shares in proportion to their share capital. The profits and losses of the partnership were, however, to be divided in equal shares between all the three persons. For the asst. yr. 1964-65, the assessee filed a return in respect of the gift of Rs. 50, 000 in favour of his daughters representing the share capital contributed by them. The GTO held that, in addition, the assessee had gifted one-third share each in the goodwill of his business to his daughters. The Tribunal held that the gift was only of 1/8th shares in the goodwill, but that the gift to the daughters was exempt under s. 5(1)(xiv) of the GT Act, 1958, on the ground that the assessee was actually carrying on the business when the admitted his two daughters into it and the main intention of the assessee was to enure continuity of the business and to prevent its extinction on his death. On these facts, the Supreme Court held -" * Now it is quite clear that according to the deed of partnership and even otherwise on admitted facts goodwill was a part of the properties and assets of the business which the assessee was running under the style of Travancore Timber and Products at Kottayam. All these were valued at Rs. 4, 00, 000. The entire property of the assessee's proprietary business was transferred to the new partnership. According to cl. (7) in the schedule to the deed of partnership the parties were to be entitled to the capital and property of the partnership in the following shares : |---------------|------------| | Assessee | 7/8 share | |---------------|------------| | Each daughter | 1/66 share | |---------------|------------| There shares were proportionate to the capital with which the partnership was stated to have been started. Out of Rs. 4, 00, 000, the assessee was deemed to have contributed Rs. 3, 50, 000 and each of the daughters Rs. 25, 000. The goodwill, as stated earlier was a part of the assets which had been transferred to the partnership. Under s. 14 of the Indian Partnership Act, subject to contract between the partners, the property of the firm includes all properties and rights and interest in property originally brought into the stock of the firm or acquired by purchase or otherwise by or for the firm and includes also goodwill of the business. The Departmental authorities, in the present case, never treated all the assets and properties of the assessee which were transferred to the partnership pertaining to his proprietary business as a gift nor has any suggestion been made before us on behalf of the Revenue that the property and assets valued at Rs. 4, 00, 000 were the subject-matter of gift. All that the Departmental authorities did and that position continued throughout was that they picked up one of the assets of the assessee's proprietary business, namely, its goodwill and regarded that as the subject of gift having been made to the daughters, who were the other partners of the firm who came into existence by virtue of the deed of partnership. This approach is wholly incomprehensible and no attempt has been made before us to justify it." 7. This approach is wholly incomprehensible and no attempt has been made before us to justify it." 7. We are of the opinion that this decision of the Supreme Court directly applies to the acts of this case, because in this case also the entire assets of the partnership were not valued at the time of the two reconstitution and it is the alleged share of the assessee in the goodwill which he had foregone that was valued and brought to assessment to gift tax. Consequently following the above decision of the Supreme Court, we answer the question referred to us in the affirmative and in favour of the assessee. The assessee is entitled to his costs. Counsel's fee Rs. 500.