1972 (4) TMI 9 - HC - Income Tax

Gift Tax Act, 1958 - conversion of sole proprietary business into partnership by taking proprietor s sons as partners Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in law in holding that the gift in question was exempt under section 5(1)(xiv) of the Gift-tax Act - Tribunal was not right in holding that the gift was exempt from gift-tax 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 case where the assessee, a sole proprietor, admitted his three major sons as partners along with a minor son in the business. The question raised was whether the gift made in forming the partnership was exempt under section 5(1)(xiv) of the Gift-tax Act. The Gift-tax Officer assessed the gift value and levied tax, which was confirmed by the Appellate Assistant Commissioner. The Appellate Tribunal later held that the gift was exempt under section 5(1)(xiv) and canceled the tax assessment, leading to a reference by the Commissioner of Gift-tax.

The key provision in question, section 5(1)(xiv) of the Act, exempts gifts made in the course of carrying on a business if proven to be bona fide for the purpose of the business. The Supreme Court's interpretation in a previous case emphasized that the gift must have an integral connection to the business and be made with the intention of benefiting the business. The court analyzed the partnership deed and the circumstances surrounding the formation of the partnership to determine if the gift met the criteria for exemption under section 5(1)(xiv).

The court found that the partnership in this case was at will, and the inclusion of the minor son alongside the major sons did not demonstrate any specialized knowledge or business experience that would benefit the business. The court noted that the profitability of the business post-partnership was not solely attributable to the sons' management but also external factors. Additionally, the provision allowing for admission of other minor children as partners indicated a familial benefit rather than a business-oriented purpose. Drawing parallels with a previous Supreme Court decision, the court concluded that the gift did not meet the requirements for exemption under section 5(1)(xiv).

In light of the analysis, the court held that the Tribunal erred in granting exemption under section 5(1)(xiv) and ruled in favor of the revenue, answering the reference negatively with costs.