1971 (9) TMI 63 - SC - Income Tax

No Gift Tax on Business Goodwill Transfer to Partnership

The Supreme Court found that no gift-tax was payable on the goodwill of the assessee's business as all assets of the proprietary business were transferred ... Whether, on the facts and in the circumstances, any gift-tax was payable on the goodwill of the assessee's business. If the answer be in the affirmative how much share in the goodwill was liable to such tax ? Held that:- In the present case 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 Tribunal came to the conclusion that the partnership did provide for the continuance of the partnership business in spite of the death of the partner and that the main intention of the assessee was to ensure the continuity of the business and to prevent its extinction on his death. A true and correct reading of the deed of partnership indicates that the partners could go out from the partnership in terms of clause 2 of the schedule in the deed of partnership. Moreover, the partnership was expressly stated to be at will. The real intention of the assessee apparently was to take his daughters into the firm with the object of conferring benefit on them for the natural reason that the father wanted to look to the advancement of his daughters. It was further provided in the deed that even the minor children would, in due course, be admitted to partnership. Clause 18 of the schedule already referred to laid down that the assessee could nominate either one or all of his minor children to be partner or partners on their attaining majority and such nomination or appointment could be made even by a will or codicil. The assessee retained complete control over the running of the partnership business and it can hardly be said that he needed any help from his daughters particularly when there is no evidence that he was in a weak state of health, his age being below 50 years. Moreover, there is nothing to show that the daughters had any specialised knowledge or business experience so as to be able to assist in the development or management of the business. Thus there was no cogent material to come to the conclusion that the gift of ₹ 25,000 to each of the daughters by the assessee was ' in the course of carrying on the business ' of the assessee and was ' for the purpose of the business '. The assessee had himself made a return in the matter of assessment of gift-tax payable under the Act in respect of the amount of ₹ 50,000 which had been gifted by him to his two daughters. The answer to question No. 3, consequently, would be in favour of the revenue and against the assessee so far as that amount is concerned. Issues Involved:1. Whether the goodwill of the assessee's business is an existing property within the meaning of section 2(xii) of the Gift-tax Act.2. Whether the assessee gifted only a 1/8th share in the goodwill of the business to his two daughters or whether he gifted a 2/3rd share.3. Whether the gift was exempt from assessment under section 5(1)(xiv) of the Gift-tax Act.Issue-wise Detailed Analysis:1. Goodwill as Existing Property:The first issue was whether the goodwill of the assessee's business constituted an existing property under section 2(xii) of the Gift-tax Act. The Tribunal initially held that goodwill was an existing immovable property at the time of the admission of the assessee's daughters into the business. However, the Supreme Court found it unnecessary to answer this question, as it did not arise from the facts of the case.2. Share of Goodwill Gifted:The second issue was whether the assessee gifted only a 1/8th share in the goodwill of the business to his two daughters or a 2/3rd share. The Gift-tax Officer had determined that the assessee had gifted 2/3rd of the goodwill to his daughters, valuing it at Rs. 1,07,910. The Tribunal, however, concluded that the goodwill was a capital asset and the daughters had only a 1/8th share in the assets of the business. The Supreme Court reframed the question to determine whether any gift-tax was payable on the goodwill of the assessee's business and, if so, how much share in the goodwill was liable to such tax. The Court found that the departmental authorities had erroneously picked only the goodwill as the subject of the gift, while all assets of the proprietary business were transferred to the partnership. The Supreme Court concluded that no gift-tax was payable on the goodwill, answering the first part of the reframed question in the negative, making the second part irrelevant.3. Exemption Under Section 5(1)(xiv):The third issue was whether the gift was exempt from assessment under section 5(1)(xiv) of the Gift-tax Act, which provides exemptions for gifts made in the course of carrying on a business, profession, or vocation, provided the gift is bona fide for the purpose of such business. The Tribunal had held that the gift was exempt as the assessee's main intention was to ensure the continuity of the business and prevent its extinction on his death. However, the Supreme Court disagreed, noting that the partnership was at will and the real intention of the assessee was to benefit his daughters, not to further the business. The Court emphasized that there was no evidence that the daughters had any specialized knowledge or business experience to contribute to the business. Consequently, the Supreme Court held that the requirements of section 5(1)(xiv) were not satisfied, and the gift of Rs. 50,000 to each daughter was not exempt from gift-tax.Conclusion:The Supreme Court discharged the answers returned by the High Court and answered the questions as follows:- Question No. 1: Does not arise.- Question No. 2 (as reframed): The first part is answered in the negative, and the second part does not arise.- Question No. 3: The answer is in favor of the revenue and against the assessee regarding the gift of Rs. 50,000.The appeal was disposed of accordingly, with no order as to costs.