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Commissioner of Gift Tax Vs. K.J. Pothen (Legal Heir Smt. Ponnamma Pothen) - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtKerala High Court
Decided On
Case NumberIncome-tax Reference No. 7 of 1970
Judge
Reported in[1973]87ITR256(Ker)
ActsGift Tax Act, 1958 - Sections 5(1)
AppellantCommissioner of Gift Tax
RespondentK.J. Pothen (Legal Heir Smt. Ponnamma Pothen)
Appellant Advocate P.K. Krishnamurthy Menon, Adv.
Respondent Advocate K. Sukumaran and; K.K. Usha, Advs.
Excerpt:
direct taxation - exemption - section 5 (1) of gift tax act, 1958 - whether tribunal justified in holding that gift in question exempt under section 5 (1) (xiv) - bona fide gift for purposes of business - gift made in course of carrying on business - requirements of section 5 (1) (xiv) satisfied - section 5 (1) (xiv) attracted - question answered in affirmative. - - the appellate assistant commissioner as well as the tribunal have found that the gift is a bona fide one. we are satisfied, on a reading of annexure 'b' and examining the circumstances, that the view taken by the tribunal that section 5(1)(xiv) is attracted is correct and has only to be upheld......facts and in the circumstances of the case, the appellate tribunal was right in holding that the gift in question was exempt under section 5(1)(xiv) of the gift-tax act, 1958 ?'2. the reference relates to the assessment year 1961-62, the relevant account year being the financial year ending on march 31, 1961.3. the assessee was the sole proprietor of kulathungal motor corporation which was dealing in motor spare parts and was also having agency in tata-mercedes-benz trucks. on april 1, 1960, the proprietary concern was converted into a partnership, the assessee admitting his two sons also as partners giving to each of them 25% share in the partnership and the assessee retaining to himself 50% share therein. the deed of partnership is annexure 'b'. the gift-tax officer held that the.....
Judgment:

Krishnamoorthy Iyer, J.

1. In this reference under Section 26(1) of the Gift-tax Act, 1958, the question referred by the Income-tax Appellate Tribunal, Cochin Bench, at the instance of the Commissioner of Gift-tax. Kerala, is the following:

'Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in holding that the gift in question was exempt under Section 5(1)(xiv) of the Gift-tax Act, 1958 ?'

2. The reference relates to the assessment year 1961-62, the relevant account year being the financial year ending on March 31, 1961.

3. The assessee was the sole proprietor of Kulathungal Motor Corporation which was dealing in motor spare parts and was also having agency in Tata-Mercedes-Benz trucks. On April 1, 1960, the proprietary concern was converted into a partnership, the assessee admitting his two sons also as partners giving to each of them 25% share in the partnership and the assessee retaining to himself 50% share therein. The deed of partnership is annexure 'B'. The Gift-tax Officer held that the value of the right including the goodwill of the business gifted is Rs. 45,623 and assessed the same to tax. The plea of exemption by the assessee under Section 5(1)(xiv) of the Gift-tax Act was repelled by the Income-tax Officer. The Appellate Assistant Commissioner found that the gift is bona fide for the purposes of the business and allowed the exemption claimed by the assessee. The Tribunal agreed with the views of the Appellate Assistant Commissioner following the decision of this court in Income-tax Referred Case No. 26 of 1964, Commissioner of Gift-tax v. Dr. George Kuruvilla, [1970] 77 I.T.R. 749 (Appendix); [1965] K.L.T. 721 (Ker.) Section 5(1)(xiv) of the Gift-tax Act, 1958, reads thus :

'5. (1) Gift-tax shall not be charged under this Act in respect of gifts made by any person--......

(xiv) in the course of carrying on a business, profession or vocation, to the extent to which the gift is proved to the satisfaction of the Gift-tax Officer to have been made bona fide for the purpose of such business, profession or vocation.'

4. The question for consideration is whether annexure 'B' is comprehended by the above provision. Counsel for the revenue submitted that the decision of this court relied on by the Tribunal has been reversed by the Supreme Court in Commissioner of Gift-tax v. Dr. George Kuruvilla and therefore the gift in question will not attract Section 5(1)(xiv) of the Gift-tax Act. It is true that the decision in Commissioner of Gift-tax v. Dr. George Kuruvilla had been reversed in Commissioner of Gift-tax v. Dr. George Kuruvilla. But, in our view, that circumstance by itself is not sufficient to affect the conclusion reached by the Tribunal. The question of exemption claimed by the assessee has no doubt to be considered in the light of the decisions of the Supreme Court in Commissioner of Gift-tax v. Dr. George Kuruvilla and Commissioner of Gift-tax v. P. Gheevarghese, Travancore Timbers & Products, Kottayam, Civil Appeal No. 2293 of 1968-since reported in [1972] 83 I.T.R. 403 (S.C.) . The decisions of this court in Commissioner of Gift-tax v. Ganapathy Moothan, [1972] 84 I.T.R. 758 (Ker.), Commissioner of Gift-tax, v. R. Narasimhan Potti, Alleppey, [1972] 83 I.T.R. 296 (Ker.) and Commissioner of Gift-tax v. Late M. Sankaran Nair, [1972] 85 I.T.R. 395 (Ker.) relied on by the revenue only follow the principles stated in the decisions of the Supreme Court. The decisions of the Supreme Court do not lay down any dogmatic rule to decide whether in a given case Section 5(1)(xiv) of the Gift-tax Act will be attracted. The question must depend upon the facts of each case. As was pointed out by the Supreme Court it is necessary to satisfy two requirements to attract Section 5(1)(xiv) of the Gift-tax Act. The first requirement is that the gift should be in the course of carrying on the business, profession or vocation and the second requirement is that it should have been made bona fide for the purpose of such business, profession or vocation. Their Lordships of the Supreme Court pointed out in the Civil Appeal7 referred to:

'The expression 'in the course of carrying on of business, etc.' means that the gift should have some relationship with the carrying on of the business. If a donor makes a gift only while he is running the business that may not be sufficient to bring the gift within the first part of Clause (xiv) of Section 5(1) of the Act. It must further be established, to bring the gift within that provision, that there was some integral connection or relation between the making of the gift and the carrying on of the business.'

5. Their Lordships explained the meaning of the word 'purpose' in the second limb of the provision by observing that:

'......the plain meaning of the word 'purpose', as employed in clause (xiv), the object, plan or design must have connection or relationship with the business. To put it differently, the object in making the gift or the design or intention behind it should be related to the business.' Their Lordships further observed:'It covers not only the running of the business or its administration but also measures for the preservation of the business, protection of its assets and property. It may legitimately comprehend many other acts incidental to the carrying on of the business.'

6. The reason for reversing the decision of this C9urt in Commissioner of Gift-tax v. Dr. George Kuruvilla by the Supreme Court was that their Lordships construed the deed of partnership as indicating an intention of the assessee to take his daughters into the firm with the object of conferring benefit on them for their advancement. The question will, therefore, ultimately depend on the terms of the document. The preamble of annexure 'B' reads :

'WHEREAS the first party was carrying on the business in Motor Vehicles, as dealer, hirer and repairer for the last several years,

AND WHEREAS the parties of the second and third party who are the sons of the first party were assisting the first party in his above said business for the last few years,

AND WHEREAS the first party is getting old and feels that for the advancement of the business which he has founded, and built up with the help of the second and third parties, and to create more interest and incentive in the second and third parties, it is desirable to carry on the business in partnership with second and third parties.'

7. The deed of partnership has prohibited the partners from carrying on any other business similar to the one belonging to the partnership. It has been provided in the deed of partnership that the death or retirement of any partner shall not operate to dissolve the firm but the surviving or remaining parties shall have the option to continue the business on such terms and conditions as they deem fit. The Appellate Assistant Commissioner as well as the Tribunal have found that the gift is a bona fide one. The terms of the partnership also show that the purpose of the gift was not merely to benefit the sons, who were assisting the assessee in the carrying on of the business. The dominant intention behind the partnership was to promote the business and strengthen the same. Annexure 'B' also shows that the assessee at the time was contemplating opening of business in places other than Trivandrum and Ernakulam where the business was being conducted. It is not possible to construe the requirements in Clause (xiv) of Section 5(1) as completely independent of each other. They overlap each other to some extent. We are satisfied, on a reading of annexure 'B' and examining the circumstances, that the view taken by the Tribunal that Section 5(1)(xiv) is attracted is correct and has only to be upheld. We, therefore, answer the question in the affirmative, that is, in favour of the assessee and against the department. We make no order as to costs.

8. A copy of this judgment will be forwarded to the Income-tax Appellate Tribunal, Cochin Bench, under the seal of this court and the signature of the Registrar.


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