1. The question that has been referred under Section 26(1) of the Gift-tax Act, 1958, is :
'Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in law in holding that the gift in question was exempt under Section 5(1)(xiv) of the Gift-tax Act (hereinafter called'the Act')?'
2. The assessee was carrying on business in paper, hardware, chemicals, cycles, etc., as a sole proprietor. He took his three major sons as partners and admitted a minor son to the benefits of the partnership and a partnership deed was executed on March 4, 1957. The assessee and his sons including the minor son were each entitled to 1/5th share in the profits of the business and the assessee and his three major sons were liable to share the losses of the business in equal shares. In response to a notice issued by the Gift-tax Officer, the assessee filed a nil return for the assessment year 1958-59. The assessee contended that since the partnership deed was dated March 4, 1957, which was prior to the coming into force of the Gift-tax Act, no taxable gift was involved in the forming of the partnership. The Gift-tax Officer, was of the view that though the document is dated March 4, 1957, it came into force on April 1, 1957, as specifically stated in the partnership deed and the assessee would be liable to be assessed to gift-tax. He accordingly determined the value of the gift at Rs. 31,387 and levied a gift-tax of Rs. 855.48. This order was confirmed in appeal by the Appellate Assistant Commissioner. In the appeal before the Tribunal, the assessee, in addition to the contention that the transfer or gift took place only on March 4, 1957, also contended that the gift was exempt from tax under Section 5(1)(xiv) of the Act. The Appellate Tribunal overruled the objection of the assessee that the transfer or gift took effect only on March 4, 1957, and held that the gift was on April 1, 1957. This point is not now the subject-matter of the reference. On the second point the Tribunal held that the gift was exempt under Section 5(1)(xiv) of the Act and, therefore, cancelled the gift-tax assessment. Hence this reference by the Commissioner of Gift-tax.
3. Section 5(1)(xiv) of the Act reads as follows :
'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-taxOfficer to have been made bona fide for the purpose of such business, profession or vocation.'
4. The scope of this provision came up for consideration by the Supreme Court in Commissioner of Gift-tax v. P. Gheevarghese, Travancore Timbers and Products. : 83ITR403(SC) It was held therein that in order to invoke the benefit of the provision it should be proved that the gift was made not only 'in the course of carrying on the business, profession or vocation', but also 'bona fide for the purpose of such business, profession or vocation.' The Supreme Court interpreted the expression 'gift in the course of carrying on business, profession or vocation' as meaning that the 'gift must not only be made while the donor was running the business but also there must be some intergal connection or relation between the making of the gift and the carrying on of the business'. Their Lordships further interpreted the expression 'made bona fide for the purpose of such business' as to mean that the object in making the gift or the design or intention behind it should be related to the business. That was also a case where the sole proprietor of a business converted it into a partnership by taking his two daughters. On the facts, it was held that the gift was not for the purpose of the business on the following grounds: The partnership was at will. It had not been proved that the daughters had any specialised knowledge relating to the business. The assessed retained complete control. There was no evidence that the assessee was in a weak state of health. A clause in the parnership permitted the assessee to admit the other minor children also as partners as and when they became majors. There is a provision for retirement of the partners also.
5. We have to apply the above principles to our case. The partnership in the present case also was one at will. That has been specifically stated so in Clause 4 of the partnership deed. The preamble to the partnership deed mentions that the assessee being aged enough and not keeping good health he is desirous of associating his sons also in his business. This statement was taken to mean that the assessee was not keeping good health and, therefore, could not engage in the business effectively. Even assuming so, the persons who were admitted as partners are not only the major sons but also the minor son of the assessee. There is no evidence that the major sons or any of them had any specialised knowledge or business experience so as to be able to assist the assessee in the development and management of the business. The fact that the business was running at a loss prior to the partnership and was earning profit subsequent to the partnership was relied on by the assessee in this connection. But making of profit or suffering loss not only depends on the persons who manage but also the market conditions and other factors.There is nothing to connect the earning of the profits with the efficiency of the management by the sons. In fact, the inclusion of the minor son also in the partnership clearly shows that the object of entering into the partnership was to benefit the sons and not for advancement or improvement of the business. This is further emphasised by the fact that the assessee had taken in all the sons including the minor and not only one or the other who is efficient in carrying on the business. We, therefore, find that there is no distinction between the case decided in Commissioner of Gift-tax v. P. Gheevargkese, Travancore Timbers and Products and the present case. The decision of the Kerala High Court in Commissioner of Gift-tax v. Dr. George Kuruvilla, : 77ITR749(Ker) (Appandix) (Ker.) was reversed by the Supreme Court in Commissioner of Gift-tax v. Dr. George Kuruvilla, : 77ITR746(SC)
6. In the foregoing circumstances, we are of, opinion that the Tribunal was not right in holding that the gift was exempt from gift-tax under Section 5(1)(xiv) of the Gift-tax Act and we answer the reference in the negative and in favour of the revenue with costs. Counsel fee Rs. 250.