1972 (1) TMI 20 - HC - Income Tax

Conversion of proprietory concern into a partnership firm - Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in holding that the gift in question was exempt under section 5(1)(xiv) of the Gift-tax Act, 1958 Held, yes

Summary

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

Detailed Analysis:
The case involved a reference under section 26(1) of the Gift-tax Act, 1958, regarding the exemption of a gift made in the course of carrying on a business under section 5(1)(xiv) of the Act. The assessee, who was the sole proprietor of a motor corporation, converted the business into a partnership with his two sons as partners. The Gift-tax Officer assessed the value of the gift and denied the exemption claimed by the assessee under section 5(1)(xiv). The Appellate Assistant Commissioner and the Tribunal allowed the exemption, relying on previous court decisions. The key issue was whether the gift met the requirements of section 5(1)(xiv) of the Act.

The Supreme Court had reversed a previous decision relied upon by the Tribunal, leading to a debate on the applicability of section 5(1)(xiv) to the gift in question. The court highlighted that the exemption under section 5(1)(xiv) depended on two main requirements: the gift should be in the course of carrying on the business, and it should be made bona fide for the purpose of the business. The court emphasized that each case's facts determined the application of the provision, and there was no strict rule outlined by the Supreme Court.

The court examined the partnership deed and found that the gift was made to promote and strengthen the business, not solely for the benefit of the sons. The deed's terms indicated the intention to continue the business and expand to other locations. The court concluded that the gift met the requirements of section 5(1)(xiv) based on the partnership's objectives and circumstances. Therefore, the court upheld the Tribunal's decision to grant the exemption and ruled in favor of the assessee against the department.

In conclusion, the court interpreted and applied the provisions of section 5(1)(xiv) of the Gift-tax Act, 1958 to determine the exemption eligibility of a gift made in the course of carrying on a business. The court emphasized the importance of the gift being bona fide for the business's purpose and analyzed the partnership deed to establish the gift's intent to strengthen and expand the business. The court's decision favored the assessee, upholding the Tribunal's decision to grant the exemption under section 5(1)(xiv) and rejecting the department's contention.