Law: Gift Tax Act, 1958

Section: 5

Gift TAX---Assessee proprietor of business-Partnership formed with daughters---­Daughters' contribution to capital made by transfer from assessee's account-Business assets of assessee including goodwill transferred to partnership-Whether goodwill can be treated separately for purposes of gift tax-Exemption-Gift "in the course of" and "for the purpose" of assessee's business-Whether gift to daughters exempt.-[Commis­sioner of Gift Tax v. P. Gheevarghese, Travancore Timbers & Products (1968) 68 1 T R 132 varied and partly reversed. The assessee, who was the sole proprietor of a business, converted it into a partnership by a deed dated August 1, 1963. The partnership was to consist of the assessee and his two daughters. The capital of the partner­ship was Rs. 4 lakhs of which his contribution was Rs. 3,50,000 and the contribution of the capital of Rs. 25,000 each by the daughters was effected by transfer of Rs. 25,000 from the assessee's account to the account of each of the daughters. All the assets of the proprietary business were transferred to the partnership and in these assets the assessee and his daughters were entitled to shares in proportion to their share capital. The profits and losses of the partnership were, however, to be divided in equal shares between all the three partners. For the assessment year 1964-65, the assessee filed a return in respect of the gift of Rs. 50,000 in favour of his daughters representing the share capita! contributed by them. Gift Tax Officer held that, in addition, the assessee had gifted one-third share each in the good­will of his business to the daughters. The Tribunal held that the gift was only of 118th share in the goodwill, but that gift to the daughters exempt under section 5(1) (xiv) of the Gift Tax Act, 1958, on the ground that the assessee was actually carrying on the business when he admitted his two daughters into it and the main intention of the assessee was to ensure continuity of the business and to prevent its extinction on his death: Held, (i) that though according to the deed of partnerships goodwill was a part of the properties and assets of the business which the assessee had trans­ferred to the…

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