1971 (8) TMI 41 - HC - Income Tax

Gift Tax Act, 1958 - conversion of proprietary business into partnership - whether the Tribunal was justified in law in treating the transaction in question as exempt under section 5(1)(xiv)

Summary

Issues:
Interpretation of section 5(1)(xiv) of the Gift-tax Act, 1958 regarding exemption for gifts made in the course of carrying on a business.

Analysis:
The judgment pertains to a reference made by the Commissioner of Gift-tax, Kerala, regarding the treatment of a transaction as exempt under section 5(1)(xiv) of the Gift-tax Act, 1958. The case involved the conversion of a proprietary business into a partnership, leading to a dispute over the valuation of goodwill transferred to the partners. The Gift-tax Officer valued the goodwill and brought a portion of it to tax. The Appellate Assistant Commissioner reduced the value of goodwill, and the Tribunal held that the gift was exempt under section 5(1)(xiv) of the Act.

The court analyzed the provisions of section 5(1)(xiv) which require gifts to be made in the course of carrying on a business and bona fide for the purpose of the business. Referring to the case law of Commissioner of Gift-tax v. Dr. George Kuruvilla, the court highlighted the necessity of proving that the gift was made for commercial expediency to facilitate the business directly or indirectly. The Supreme Court, in the same case, clarified that the gift must be in the course of carrying on the business and for the purpose of the business, rejecting the notion of exemption based solely on commercial expediency.

The burden of proof lies on the assessee to establish eligibility for exemption under section 5(1)(xiv) of the Act. In this case, the court found that the partnership deed and recitals were insufficient to demonstrate that the gift was made in the course of carrying on the business and for the purpose of the business. The mere presence of partners assisting in the business and being remunerated did not suffice to qualify for the exemption. Consequently, the court ruled in favor of the revenue and against the assessee, denying the exemption claim.

In conclusion, the court held that the transaction did not meet the criteria specified in section 5(1)(xiv) for exemption from gift tax. The judgment emphasizes the importance of proving that gifts are made in the context of conducting business and for the genuine purpose of the business to qualify for exemption under the Gift-tax Act.