COMMISSIONER OF GIFT TAX Vs. NARASIMHAN POTTI R

JUDGEMENT

(1.) This is a reference at the instance of the Commissioner of Gift Tax, Kerala under S.26(1) of the Gift Tax Act, 1958 by the Income Tax Appellate Tribunal, Cochin Branch. The question referred is:

(2.) The reference relates to the assessment year 1964-65 the accounting period being the year ending with 16-8-1963. The assessee was the sole proprietor of a boarding and lodging house at Alleppey by name Dhanalakshmi Vilas. With effect from 17-8-1962 the assessee converted his proprietary business into a partnership with N. Ramakrishnan Poti and N. Viswanathan Poti who were his employees. The partnership is evidenced by the deed dated 4-12-1962 a copy of which is produced as Annexure A. The Gift Tax Officer took the view that by taking the two partners in the business the assessee parted with 2/3rd of his goodwill in favour of the partners and held that this is a gift of 2/3rd share of the goodwill in the business by the assessee. The Gift Tax Officer valued the goodwill at 1 1/2 times the average of the last 5 years' profit and determined the sum at Rs.42,105/-. 2/3rd of this viz., Rs.30,000/- was brought to tax.

(3.) In the appeal before the Appellate Assistant Commissioner the assessee contended that there was no passing of property on account of the partnership deed and the gift was made in the course of carrying on the business and for the purpose of the business and therefore it was exempt under S.5(1)(xiv) of the Gift Tax Act. Though the Appellate Assistant Commissioner rejected these contentions he reduced the value of the goodwill by Rs.9,000/-. The Tribunal left open the question whether the goodwill of a business could form the subject matter of gift but held that the gift is exempted under S.5(1)(xiv) of the Gift tax Act.