Law:

Section:

Section 4, read with section 2(xii), of the Gift-tax Act, 1958 - Deemed gift - Transfer for inadequate consideration - Assessment year 1964-65 - Assessee transferred his proprietary business to newly constituted partnership firm - Assessee retained 29 per cent share and rest was divided among other partners - Other partners contributed to capital of firm and they had been taken into partnership so that business could run better, which assessee could not because of advancing age and ill-health - Whether, on facts transfer in question was not without adequate consideration - Held, yes - Whether transaction in question was neither release, discharge, surrender, forfeiture or abandonment - Held, yes - Whether, therefore, transfer was not gift as defined in section 2(xii) and was not covered either by clause (a) or (c) of section 4(1) - Held, yes FACTS The assessee carried on business as sole proprietor, entered into partnership with his two brothers and one nephew and transferred his business to the new partnership. In this partnership he had 29 per cent share. The rest of the share was divided between the other persons. The GTO held that 71 per cent share of the goodwill of the sole proprietary business was gifted by the assessee to his brothers and nephew without consideration and this was taxable under section 4(1). He rejected the assessee's claim for exemption under clause (xiv) of section 5(1). This view was upheld by the AAC. The Tribunal held that the assessee's sole proprietary business did have a goodwill and the same was transferred to the other partners to the extent of 71 per cent of its value. It held that the transaction in question was covered by section 4(1)(c) and not by section 4(1)(a). It further held that the action of the assessee in admitting three persons as partners amounted to abandonment of his right in the goodwill but since the arrangement was bona fide, it was covered by the exempting clause (xiv) of section 5(1). On reference : HELD A perusal of the partnership deed showed that the capital of the partnership was fixed at Rs. 77,183 of which the assessee contributed Rs. 68,394 which was then the credit balance in his account books. The…

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