COMMISSIONER OF GIFT TAX Vs. GANAPATHY MOOTHAN

JUDGEMENT

(1.) THIS is a reference at the instance of the Commissioner of Gift-tax, under Section 26(1) of the Gift-tax Act, 1958 (hereinafter referred to as " the Act "). The questions of law referred are:

(2.) THE assessee was carrying on a business in rice and paddy in the name and style of K. Ganapathi Moothan. He owned two rice mills and had also taken on lease another rice mill. On April 14, 1962, he converted this proprietary concern into a partnership taking his three major sons, G. Kannan, G. Krishnankutty and G. Raghavan, as partners by a deed dated April 14, 1962. THE capital of the partnership was. Rs. 90,000, of which the assessee contributed Rs. 60,000 and the three sons Rs. 10,000 each. THE assessee made a gift of Rs. 20,000 to two of his sons, Krishnankutty and Raghavan, and it was this amount that was brought by them as capital in the partnership. In 1963-64 assessment year, the assessee showed Rs. 20,000 as gift in filing the voluntary return. THE Gift-tax Officer found that by taking the assessee's three sons as partners in the business the assessee has made a gift of a part of the goodwill of the business to his sons and held that the assessee was liable to be taxed on that gift also. THE Gift-tax Officer valued the goodwill on the basis of three years' purchase price of average 5 years' profits; and this amounted to Rs. 1,02,624; and three-fourths of this sum came to Rs. 76,968. This amount was brought to tax along with the cash gift of Rs. 20,000. THE assessee filed an appeal before the Appellate Assistant Commissioner and contended that the conversion of the proprietary business into partnership did not involve a gift of the goodwill to his three sons. THE contention was not accepted by the Appellate Assistant Commissioner. He held that by the admission of the sons into the business, there was a reduction in the value of the property owned by the assessee in the form of goodwill to the extent of the share in the business given to the three sons. He therefore found that the transaction in admitting the sons into the partnership amounted to a gift as defined in Section 2(xii) of the Act, read with Sections 2(xxiv)(b) and 2(xxivXd). THE Appellate Assistant Commissioner also negatived the contention of the assessee that the gift was exempt under Section 5(1)(xiv) since he found that in a case where a portion of the business itself was gifted it could not be said that the gift was made in the course of carrying on the business. However, he allowed a reduction in the valuation of the goodwill, which was determined at Rs. 28,830 as against Rs. 76,968 as estimated by the Gift-tax Officer. Against this order the assessee filed an appeal to the Appellate Tribunal; and the Tribunal held that there was no gift in view of the fact that the recitals in the partnership deed would show that the transfer of the goodwill was for consideration. According to the Appellate Tribunal the agreement to share the losses by all the three partners and the agreement to contribute skill, labour and experience constitute consideration in money's worth. THE Tribunal also held that the transaction would not fall within the definition of gift as contemplated in Section 2(xii) of the Act. THE Tribunal confirmed the finding as regards the valuation of the goodwill made by the Appellate Assistant Commissioner. It also held that the gift was immune from tax by virtue of Section 5(1)(xiv) of the Act.

(3.) THE assessee was carrying on the business in rice milling and paddy as also in grocery before he entered into the partnership. He had a goodwill in respect of that business when he entered into the partnership. That goodwill is not seen to have been transferred specifically by him to the partnership. But he could not have retained the goodwill with himself after having taken his sons as partners in the business, because goodwill was incidental to the business. THE goodwill was, therefore, transferred to the partnership. THE goodwill was property. Shah J. said in Rustom Cavasjee Cooper v. Union of India, [1970] 40 Comp. Cas. 325, 385 ; [1970] 3 S.C.R. 530, 602(S.C.) :