1971 (12) TMI 32 - HC - Income Tax

Gift Tax Act, 1958 - sole proprietor converts his business into partnership concern with the entire capital being contributed by the assessee - whether the shares given to partnership including goodwill amounts to gift - Whether, on the facts and in the circumstances of the case, the gift was exempt under section 5(1)(xiv) of the Gift-tax Act, 1958

Summary

Issues:
1. Interpretation of section 5(1)(xiv) of the Gift-tax Act, 1958.
2. Determination of whether the gift was exempt under section 5(1)(xiv) of the Gift-tax Act, 1958.

Analysis:
The judgment by the High Court of Andhra Pradesh involved a reference under section 26(3) of the Gift-tax Act, 1958, concerning the conversion of a proprietary business into a partnership business by the assessee. The primary issue was whether the gift resulting from this conversion was exempt under section 5(1)(xiv) of the Gift-tax Act, which provides an exemption for gifts made in the course of carrying on a business, profession, or vocation, and proven to be made bona fide for the purpose of such business. The Tribunal had initially held that the gift was exempt under this provision, but the Commissioner of Gift-tax challenged this decision.

The court analyzed the two conditions that must be satisfied for claiming the exemption under section 5(1)(xiv): the gift must be made in the course of carrying on a business and made bona fide for the purpose of such business. While the gift was found to be made bona fide for the purpose of the business, the crucial question was whether it was made "in the course of carrying on a business." The court interpreted this phrase to mean that the gift must be an incident of the business activity of the assessee and not independent of it. In this case, as the business changed hands due to the conversion from a proprietary business to a partnership, the court held that the gift was not made in the course of carrying on the business, thereby disqualifying it from the exemption.

The court distinguished a decision of the Kerala High Court and emphasized that for the exemption to apply, the business should continue to be that of the same person making the gift. Since the business ceased to belong exclusively to the assessee and became the property of a partnership, the court concluded that the gift did not meet the criteria of being in the course of carrying on the business. The court also rejected the relevance of a Supreme Court decision cited by the assessee, emphasizing that it was not applicable to the present case.

Ultimately, the court answered the question in favor of the department and against the assessee, ruling that the gift was not exempt under section 5(1)(xiv) of the Gift-tax Act. The assessee was directed to pay the costs of the reference fixed at Rs. 250.