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TMI Blog1990 (3) TMI 18X X X X Extracts X X X X X X X X Extracts X X X X ..... her, on the facts and in the circumstances of the case, the Tribunal was right in holding that a partnership firm is an assessable entity under the provisions of the Gift-tax Act, 1958 ? (3) Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the gift, if any, in the arrangement was not exempt under the provisions of section 5(1)(xiv) of the Act ?" The following question is referred by the Tribunal on a direction issued by this court in C. P. No. 17 of 1983. (In T. R. C. No. 26 of 1985): "Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in law in fixing the value of the gift at Rs. 41,92,082 as against Rs. 1,10,25,000 fixed by the Gift-tax Officer ?" These references arise out of a common order passed by the Tribunal on an appeal filed by the Revenue and cross-objections by the assessee. Treating the transfer of the business carried on by a partnership-firm, Messrs. Khoday Eswarsa and Sons, in favour of a private limited company, Messrs. Khoday Industries Pvt. Ltd., by agreement dated November 21, 1969, as a gift under the Gift-tax Act, 1958, the Gift-tax Officer, Central Circle-I, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... east six calendar months' notice in writing as provided in clause 3 of the agreement. As a consideration for the agreement and the licence and the permission granted by the licensor to the licensee, the licensee agreed to pay to the licensor, licence fee or compensation calculated at 2 1/2% of the gross sale price of all the products manufactured and sold by the licensee subject to a minimum fee or compensation of Rs. 50,000 per month and a maximum fee or compensation of Rs. 60,000 per month. The licensor reserved the right of inspecting all the premises, buildings, plant, etc., besides the other clauses which are unnecessary to be reproduced for purposes of this reference. The Gift-tax Officer treated the transfer of the business by the firm to the private limited company as a gift under the Gift-tax Act made for inadequate consideration and levied gift-tax on the value of the deemed gift which was computed at Rs. 1,10,25,000. The Gift-tax Officer held that there was a transfer of property within the meaning of section 2(xiv) of the Act under the agreement dated November 21,1969, by the firm in transferring the profit-making apparatus, lock, stock and barrel to Khoday Industries ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rity so far as it related to exemption under section 5(1)(xiv) and held that it was a case of a deemed gift under section 4(1)(a) of the Act and the transfer was for inadequate consideration. The Tribunal, however, recomputed the capitalised value of the transfer at Rs. 41,92,000 as against Rs. 1,10,25,000 as computed by the Gift-tax Officer. The Tribunal applied the provisions of section 6(2) read with rule 11 of the Gift-tax Rules. The method adopted by the Tribunal in arriving at the value aforementioned is discussed in paragraph 13 of its order. In the reference made at the instance of the assessee, the, three questions which arise for consideration are : " (i) Whether there was a deemed gift taxable under the Act ? (ii) Whether a partnership firm could be an assessable entity under the provisions of the Act ? and (iii) Whether the gift, if any, was exempt under section 5 (1) (xiv) of the Act ?" In the reference made at the instance of the Department, the question for consideration is: "Whether the reduction of the value of the gift as computed by the Gift-tax Officer is correct ?" Sri Sarangan, learned counsel for the assessee, challenged the findings recorded by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or five years from November 21, 1969. The consideration for the transfer was that the licensee should pay 2 1/2 per cent. of the gross sale price, less excise duty, etc., subject to a minimum of Rs. 50,000 and a maximum of Rs. 60,000 per month. Khoday Industries Private Limited, the company in whose favour the transfer was made, had been formed by four of the partners of the assessee-firm who went out of the firm. On a careful consideration of the various clauses of the agreement, one undisputed fact that emerges is that the entire business/businesses stood transferred to the transferee-company for a period of five years. The Appellate Tribunal, while upholding the Gift-tax Officer's order, has also taken into consideration the possibility of the renewal of the period of licence having regard to the other attendant circumstances. The entire income earning apparatus was transferred to the company and the transferee was free to carry on the business of manufacture of several products which had acquired goodwill and a reputation in the market. Though some powers of inspection as to the quality of the products and plant and machinery were reserved to the transferors, for all practica ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... definition deals with the transfer of property in various ways. The words "disposition", "conveyance", "assignment", "settlement", "delivery", etc., are used to describe various modes of transfer of property. The enumeration of the several words in the section seems to indicate that it is more appropriately associated with what property or interest therein is transferred. The transfer of property, as defined in the Gift-tax Act, may not otherwise fall within the ordinary meaning of transfer. It envisages the transfer of property only to the extent of the beneficial interest which ceases to belong to the settlor. The term "transaction" in section 2(xxiv)(d) of the Act has a special meaning and significance. It is used with reference to the situations in which there is something in the nature of a contract, agreement or arrangement between persons. In this sense, it has been used to convey the extended meaning beyond the normal and limited connotation for purposes of clause (xxiv) of section 2 of the Gift-tax Act. Therefore, on the facts of the present case and on a proper and careful consideration of all the relevant clauses of the agreement dated November 21, 1969, it can reason ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed value of the income shall be taken to be the product of the number of complete years included in the period for which the gift is not revocable and the average of the income received from the property during the three years or such lesser period of complete years in which such property was in existence, preceding the previous year for the year of assessment after discounting it at a rate of 4 per cent. per annum : Provided that where the property was in existence for less than on complete year preceding the previous year for the year of assessment or came into existence in the previous year for the year of assessment, the income from such property for one complete year shall be the income which would have been receivable, if the property were in existence for one complete year. (2) The income from such property for each of the years for which it is to be determined shall, for the purposes of this rule, be the amount of the total receipts received or receivable for each such year, reduced by the amount of expenditure which, in the opinion of the Gift-tax Officer, would reasonably be incurred for the purposes of making or earning the income : Provided that where there are no r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the Madras High Court in CIT v. Bharani Pictures [1981] 129 ITR 244). The other question raised in the reference relates to the exemption under section 5(1)(xiv) of the Act. The contention of the assessee is that it was a case of gift made bona fide for purposes of the business. This has to be rejected as this is a case of gift of the business itself and not a gift in the course of or for carrying on the business profitably. In CGT v. Dr. George Kuruvilla [1970] 77 ITR 746, the Supreme Court observed that there should be evidence on record to prove that the gift was "in the course of carrying on of business" of the donor. In CG T v. R. Narasimhan Potti [1972] 83 ITR 296, the High Court of Kerala held that the burden is on the assessee who claims exemption under section 5(1)(xiv) of the Act to prove that the gift was for the profitable carrying on of the business. The High Court further observed that section 5(1)(xiv) can be applied only if it is shown that the gift was made on the ground of commercial expediency or in order to directly or indirectly facilitate the carrying on of the business, profession or vocation. On the facts of the present case, the assessee has failed ..... X X X X Extracts X X X X X X X X Extracts X X X X
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