COMMISSIONER OF GIFT TAX Vs. JAGDISH MOHAN NAYAR

JUDGEMENT

(1.) In this reference made under S. 26(1) of the Gift Tax Act by the Tribunal to this Court, the following question has been referred for our opinion : "Whether on the facts and in the circumstances of the case, the Tribunal rightly held that no gift-tax was chargeable on the respondent ?"

(2.) This is a consolidated reference arising out of gift-tax assessments made in respect of eight respondent assessees. The common question arising in the case of each one of the respondents relates to the assessment year 1960-61. It appears that the eight respondents previously constituted a firm styled "Messrs. India Woollen Textile Mills, Amritsar." All the partners held equal share therein. With effect from 1-7-1959, the business of the firm was taken over by a private limited company named Indian Woollen Textile Mills Private Ltd., Bombay, whose shareholders were the partners of the erstwhile firm. In this limited company all the partners had equal share-holding. Under the agreement of sale dated 24-7-1959 the total consideration paid by the limited company was Rs. 15,03,496.13 np. which, inter alia, included a sum of Rs. 5 lakhs as the value of the goodwill. Clause 7 of this agreement which has a bearing on this aspect may be quoted :

(3.) The aforesaid assessments were challenged by the Respondents before the Appellate Assistant Commissioner. Several contentions were urged on behalf of the Respondent-assessees. Principally, it was contended that the partners who also constituted the shareholders of the limited company, could not make any profit by transferring the business to the company and as such no gift-tax was chargeable. In other words, the contention was that it was merely a readjustment of the affairs of the partnership when the respondents converted their partnership firm into a limited company and no transfer in the commercial sense was involved. Secondly, it was urged that the valuation of the goodwill at Rs. 13,51,981/- was in any case excessive. The A.A.C. did not accept the first legal contention that was urged by the assessees. He took the view that the firm and the limited company were two different entities and when the business was taken over from the firm by the limited company, there was a transfer between the two legal entities. He however, did not accept the method of valuation of the goodwill made by the Gift-tax Officer and all the assessments made by the Gift-tax Officer were set aside with directions as to how the taxable gifts should be computed.