Gift-tax exemption denied where transfer of business to partnership was not incidental to carrying on the same business

Conversion of a proprietary business into a partnership, with transfer of part of the business assets to incoming partners, was held not to qualify for exemption under section 5(1)(xiv) of the Gift-tax Act, 1958. Although the induction of partners could be bona fide for business purposes and commercially expedient, the transfer was not made "in the course of carrying on a business" because that expression covers only a gift incidental to ongoing business activity, not a transfer of the business itself or part of it. Once the business became partnership property, it ceased to be the same assessee's business. The exemption was therefore denied.

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Issues: Whether the conversion of a proprietary business into a partnership, resulting in a transfer of part of the business assets to the incoming partners, was exempt under section 5(1)(xiv) of the Gift-tax Act, 1958.

Analysis: The exemption required the gift to be made both in the course of carrying on a business and bona fide for the purpose of such business. The latter condition could be satisfied on the facts, since the partners were inducted to facilitate the business and earn greater profits. But the former condition was not met, because the expression "in the course of carrying on a business" denotes a gift made as an incident of business activity, not the transfer of the business itself or a part of it, even if the transfer assists the business. The business also ceased to be exclusively that of the assessee and became the property of a partnership, so the business did not continue to be that of the same person who made the gift.

Conclusion: The gift was not exempt under section 5(1)(xiv) and the reference was answered against the assessee.

Ratio Decidendi: For exemption under section 5(1)(xiv) of the Gift-tax Act, 1958, the gift must be an incident of an on-going business of the same person and not a transfer of the business itself, even if the transfer is commercially expedient.

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