1976 (9) TMI 13 - HC - Income Tax

Transfer of Goodwill to Sons Not a Gift under Gift-tax Act; Consideration in Partnership Key

The court held that the transfer of goodwill by the assessee to his sons did not constitute a gift under the Gift-tax Act. The Tribunal's decision, ... Gift Tax Issues:1. Whether the transfer of 75% of the goodwill by the assessee to his sons constitutes a gift under the Gift-tax ActRs.2. If there was a gift, should gift-tax be levied on 50% or 75% of the value of the goodwillRs.Analysis:The case involved a situation where the assessee, engaged in a commission business, converted his proprietary business into a partnership by including his major son and admitting his minor sons to the benefits of the partnership. The Gift-tax Officer assessed gift-tax on the transfer of 75% of the goodwill value to the sons. The Appellate Assistant Commissioner upheld the assessment, considering it as a gift due to the decrease in the assessee's right in the goodwill and an increase in the sons' share. However, the Appellate Tribunal disagreed, stating that the transfer was for consideration, relying on a precedent from the Gujarat High Court. The Tribunal also found that goodwill existed in the business, which had been operational for 14 years.Regarding the major son, the Tribunal noted adequate consideration for his inclusion in the partnership, as he contributed capital and provided services due to the assessee's inability to manage the business effectively. Therefore, the Tribunal concluded that there was no gift of goodwill to the major son. Concerning the minor sons, the Tribunal found no transfer of assets, thus no gift of goodwill to them. The Tribunal's decision aligned with a Supreme Court ruling that emphasized the incorrect approach of considering goodwill as a subject of gift without justification.The Court agreed with the Tribunal's view that the transfer of goodwill was not a gift due to adequate consideration for the major son and the absence of asset transfer to the minor sons. Consequently, the first issue was answered in favor of the assessee. The second question, related to the percentage of goodwill subject to gift-tax, was deemed unnecessary to address as it stemmed from an alternative contention. The assessee was awarded costs, including counsel fees.In conclusion, the judgment clarified the concept of gift under the Gift-tax Act concerning the transfer of goodwill in a partnership setup, emphasizing the importance of adequate consideration and the absence of asset transfer in determining gift liability.