Mere reduction in Shares of Profit of a Partner resulting in increase Profit of Another will not Constitute a ‘Gift’: Kerala HC [Read Judgment]

A division bench of the Kerala High Court recently held that a mere reduction in the shares of one partner, resulting in proportionate increase of shares of another partner would constitute a ‘gift’ for the purpose of taxation under Section 4 (1) (a) of the Income Tax Act.

In the instant case, the assessees’ partner, Suman Vijoo who got more shares pursuant to the reduction of shares of the assessee, on reallocation, had provided collateral security to the financial transactions of the firm.

The Assessing Officer expressed a view that the reduction in the shares of one partner, resulting in proportionate increase of shares of another partner would constitute a ‘gift’ in terms of Section 4 (1) (a) of the Act and that tax was liable to be paid for the resultant/differential amount treating the same as gift.

However, both the first appellate authority and the ITAT had accepted the plea of the assessee and deleted the order.

While dismissing the Revenue’s appeal, the division bench comprising of Justice P.R Ramachandra Menon and Justice V. Shircy observed that the assessees’ partner had offered personal guarantee for various financial transactions of the firm and this being the position, it has to be taken together to assess the worth of the said person and the ‘consideration’ brought in for such reallocation of the shares.

“The mere arithmetical figures with reference to the total profit in the year in question, which came to be reduced and reduction in the probable portion of profit of the assessee as worked by the appellant/Revenue do not reflect the correct picture in this regard. The more important aspect with reference to the ‘collateral security’ furnished by the person concerned and the ‘personal guarantee’ offered by her have not been taken into consideration or dealt with by the Revenue.”

Relying on its past decisions, the bench ruled that a mere instance of reduction in the shares of profit of a partner resulting in increase in the share of profit of another by itself will not constitute a ‘gift’ coming within the purview of section 4 (1) (a) of the Act.