1967 (10) TMI 8 - HC - Income Tax

Gift Tax Act, 1958 - Whether the goodwill of the assessee s business is an existing property within the meaning of section 2(xii) - held, yes

Summary

Issues:
1. Whether the goodwill of the assessee's business is an existing property within the meaning of the Gift-tax Act?
2. Whether the assessee gifted a 1/8th share or a 2/3rd share in the goodwill of the business to his daughters?
3. Whether the gift was exempt from assessment under section 5(1)(xiv) of the Gift-tax Act?

Analysis:
Issue 1:
The case involved a reference by the Income-tax Appellate Tribunal regarding the goodwill of the assessee's business under the Gift-tax Act. The assessee converted his proprietary business into a partnership concern with his two daughters as partners. The Tribunal held that the goodwill was a capital asset and valued the daughters' share at 1/8th, not 2/3rd as assessed by the Gift-tax Officer. The court ruled in favor of the assessee on this issue.

Issue 2:
Regarding the share of the goodwill gifted to the daughters, the Gift-tax Officer had calculated it incorrectly at 2/3rd, while the Appellate Tribunal correctly valued it at 1/8th. The court upheld the Tribunal's decision, stating that the daughters were entitled to a 1/8th share in the goodwill, aligning with their share in the partnership assets.

Issue 3:
The most contentious issue was whether the gift was exempt from assessment under section 5(1)(xiv) of the Gift-tax Act. The provision exempts gifts made in the course of carrying on a business if proven to be bona fide for that purpose. The Appellate Tribunal found that the partnership was formed to ensure business continuity and prevent its extinction, qualifying for the exemption. The court agreed with the Tribunal's conclusion, stating that the gift of goodwill to the daughters was exempt under section 5(1)(xiv) as it was made to safeguard the business's continuity.

In conclusion, the court ruled in favor of the assessee on all three issues, emphasizing the correct valuation of the goodwill share and the bona fide nature of the gift for business continuity, leading to exemption under the Gift-tax Act.