1971 (11) TMI 10 - HC - Income Tax

Gift Tax Act 1958 conversion of proprietor business into firm by taking children as partners control was retained on the business - since test of commercial expediency was not satisfied assessee is not entitled to claim exemption u/s 5(1)(xiv) by treating it as gift

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. Determination of whether the conversion of a proprietary business into a partnership concern qualifies for exemption under section 5(1)(xiv).

Analysis:
The judgment delivered by the High Court of Kerala involved a case where the Commissioner of Gift-tax raised a question regarding the exemption of a gift under section 5(1)(xiv) of the Gift-tax Act, 1958. The case revolved around the conversion of a proprietary business into a partnership concern by an assessee who transferred a sum of Rs. 50,000 to his children. The Gift-tax Officer contended that the goodwill of the business had been transferred to the children and was liable to tax. The Appellate Tribunal, however, held that the gift was exempt under section 5(1)(xiv) based on the grounds of commercial expediency and continuity of the business.

The court analyzed the provisions of section 5(1)(xiv) which state that the gift should be in the course of carrying on a business and made bona fide for the purpose of such business. Referring to previous judgments, the court highlighted the importance of establishing a direct connection between the gift and the business to qualify for exemption. The court noted that the mere conversion of a proprietary business into a partnership is not sufficient to claim exemption under section 5(1)(xiv) without establishing a clear link between the gift and the business.

The court discussed a previous case where the exemption was allowed for the transformation of a proprietary business into a partnership concern, emphasizing that the purpose of the gift should be for the better ordering of the business. However, the court distinguished this case from the current one, stating that the real motive behind the partnership was to benefit the children rather than for the continuity or betterment of the business. Therefore, the court held that the assessee was not entitled to the exemption under section 5(1)(xiv) and ruled in favor of the department.

In conclusion, the court emphasized the necessity of proving the grounds for claiming exemption under section 5(1)(xiv) and establishing a genuine connection between the gift and the business. The judgment serves as a reminder that the exemption is not automatic and requires a valid and bona fide purpose related to the business, profession, or vocation.