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TMI Blog1971 (9) TMI 63X X X X Extracts X X X X X X X X Extracts X X X X ..... ccount to the account of each of the daughters. All the assets of the proprietary business were transferred to the partnership. In these assets the assessee and his daughters were entitled to shares in proportion to their share capital. In other words, the assessee was entitled to a 7/8 share and each of his daughters to 1/16 share. The profits and losses of the partnership business, however, were to be divided in equal shares between all the three partners. The assessee was the managing partner of the firm. The assessee filed a return of gift tax for the assessment year 1964-65 in respect of the gift of Rs. 50,000 in favour of his daughters representing the share capital contributed by his daughters. The Gift-tax Officer, however, took the view that in addition to the gift of the aforesaid amount the assessee had gifted 1/3rd portion of the goodwill of his proprietary business to each of his daughters. On the basis of the profits of the earlier years the Gift-tax Officer determined the value of the goodwill at Rs. 1,61,865 and the value of the 2/3rd share of the goodwill gifted to the daughters at Rs. 1,07,910 which was added to the amount of Rs. 50,000 and the gift-tax was assess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tures and machinery, book debts, benefits of existing contracts, etc., and stock-in-trade and other movable chattels and effects. The assessee as beneficial owner conveyed and assigned unto the partners including himself all these properties including the goodwill of the marks and all rights and privileges belonging thereto. Each of the partners covenanted that he or she will duly pay, discharge or perform all the debts and liabilities, contracts and engagements of the individual business of the assessee subsisting in the shares and proportions in which they respectively became entitled under the business. It was expressly stated in the first schedule which contained the terms, conditions and stipulations that the partnership was to be at will. Clause (2) in the schedule is of particular importance. According to clause 2(a) if the partners or partner who, for the first time, represented or possessed the major part in the value of the capital of the business desired to continue the business with additional partners they, he or she would be at liberty to do so on giving 6 months' previous notice to the other partner or partners paying to the partners or partner not desiring to contin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Under clause 10 the assessee was to be the managing partner of the firm. He alone had the power to sign the cheques on account of the partnership in the name of the firm. He had the power to borrow from banks and other private parties for the purpose of the business and to execute bonds, documents, agreements and other activities as might be necessary. There were other provisions also which showed that it was the assessee who retained substantially the control of the running of the business in his own hands. Clause 17 provided that whenever any of the partners died during the continuance of the partnership then the partnership would not be dissolved between the surviving partners and fairly elaborate provisions were made with regard to what would pass to the representatives of such deceased partner from out of the properties and assets of the partnership as also its profits. The partnership deed also contained what were called special provisions as to the share of the first partner. Clause 18 provided that the assessee who was the first partner could nominate either one or all of his minor children to be a partner or partners on their attaining majority. Such nomination or appoi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Act, subject to contract between the partners, the property of the firm includes all property and rights and interests in property originally brought into the stock of the firm or acquired by purchase or otherwise by or for the firm and includes also goodwill of the business. The departmental authorities, in the present case, never treated all the assets and property of the assessee which were transferred to the partnership pertaining to his proprietary business as a gift nor has any suggestion been made before us on behalf of the revenue that the property and assets valued at Rs. 4,00,000 were the subject-matter of gift. All that the departmental authorities did and that position continued throughout was that they picked up one of the assets of the assessee's proprietary business, namely, its goodwill, and regarded that as the subject of gift having been made to the daughters who were the other partners of the firm which came into existence by virtue of the deed of partnership. This approach is wholly incomprehensible and no attempt has been made before us to justify it. In our opinion the second question which was referred by the Tribunal should have been framed as follows : " ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ay not be sufficient to bring the gift within the first part of clause (xiv) of section 5(1) of the Act. It must further be established, to bring the gift within that provision, that there was some integral connection or relation between the making of the gift and the carrying on of the business. Under clause (xiv) of section 5(1) the second requirement is that the gift should have been made bona fide for the purpose of such business, etc. According to the meaning of the word " purpose " in Webster's New International Dictionary, it is that which one sets before himself as an object to be attained ; the end or aim to be kept in view in any plan, measure, exertion or operation ; design, intention. Therefore, on the plain meaning of the word " purpose ", as employed in clause (xiv), the object, plan or design must have connection or relationship with the business. To put it differently the object in making the gift or the design or intention behind it should be related to the business. Some assistance may be derived from the language used in section 10(2)(xv) of the Income-tax Act, 1922. According to that provision any expenditure laid out or expended wholly and exclusively for the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion was reversed by this court in Commissioner of Gift-tax v. Dr. George Kuruvilla. It has been observed that section 5(1)(xiv) of the Act does not indicate that a gift made by a person carrying on any business is exempt from tax nor does it provide that a gift is exempt from tax merely because the property is used for the purpose for which it was used by the donor. Without deciding whether the test of " commercial expediency " was strictly appropriate to the claim for exemption under the aforesaid provision this court held that there was no evidence to prove that the gift to the donee in that case was " in the course of carrying on the business " of the donor and " for the purpose of the business ". We are satisfied that in the present case also it has not been established that the requirements of section 5(1)(xiv) of the Act were satisfied. The assessee was certainly carrying on his business at the point of time when he admitted his two daughters into the firm. But from that fact alone it did not follow that the gift had been made in the course of the assessee's business nor could it be held that the gift was made for the purpose of carrying on the assessee's business. The Trib ..... X X X X Extracts X X X X X X X X Extracts X X X X
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