1972 (4) TMI 16 - HC - Income Tax

Gift Tax - Gift-tax Officer took the view that by converting his individual business into a partnership business and by admitting his son as a partner, Pukharaj had made a gift of not only the said sum of Rs. 61,311 but also the half share in the goodwill of the business - father s business belonged to the joint family consisting of himself and his son - therefore, there was no question of gift, when the joint family business was converted into a partnership one

Summary

Issues Involved:
1. Whether the business was a joint family business before being converted into a partnership business.
2. Whether the assessee was liable to gift-tax for the assessment year 1960-61 in respect of the creation of a partnership business under the partnership deed dated March 27, 1959.

Issue-wise Analysis:

1. Whether the business was a joint family business before being converted into a partnership business:

The Tribunal examined the nature of the business carried out by Pukharaj and his son, Mohanraj, and whether it was a joint family business. The Tribunal considered several facts, including the existence of a Hindu undivided family (HUF) consisting of Pukharaj and his son, the possession of joint family properties, and the active involvement of Mohanraj in the business. The Tribunal inferred that the business was started with the joint family nucleus, which was sufficient to start the business 30 years ago. The Tribunal also noted that the proximity of the partition of joint family properties and the formation of the partnership indicated that the partnership was part of the partition arrangement.

The Tribunal rejected the revenue's argument that the business was assessed in the hands of Pukharaj as an individual and that the partition deed did not mention the business, stating that these factors were not conclusive. The Tribunal concluded that the business was indeed a joint family business, and the conversion into a partnership did not constitute a gift.

2. Whether the assessee was liable to gift-tax for the assessment year 1960-61 in respect of the creation of a partnership business under the partnership deed dated March 27, 1959:

The Gift-tax Officer had determined that by converting the individual business into a partnership and admitting his son as a partner, Pukharaj made a gift of Rs. 61,311 and half the share in the goodwill of the business. However, the Tribunal found that the business was a joint family business, and hence, there was no gift involved in converting it into a partnership. The Tribunal also upheld the alternative contention that even if the business was exclusively owned by Pukharaj, its conversion into joint family property on March 27, 1959, could not be assessed as a gift for the assessment year 1960-61.

The Tribunal's decision was based on the sufficiency of the joint family nucleus and the active involvement of the son in the business. The Tribunal held that the conversion of the business into a partnership did not amount to a gift as defined under the Gift-tax Act.

Conclusion:

The High Court agreed with the Tribunal's findings and held that the business was a joint family business and that the conversion into a partnership did not constitute a gift. The court answered both questions against the revenue, concluding that the assessee was not liable to gift-tax for the assessment year 1960-61. The assessee was awarded costs in T.C. No. 312 of 1966.