TMI Blog1971 (9) TMI 63X X X X Extracts X X X X X X X X Extracts X X X X ..... ndicates that the partners could go out from the partnership in terms of clause 2 of the schedule in the deed of partnership. Moreover, the partnership was expressly stated to be at will. The real intention of the assessee apparently was to take his daughters into the firm with the object of conferring benefit on them for the natural reason that the father wanted to look to the advancement of his daughters. It was further provided in the deed that even the minor children would, in due course, be admitted to partnership. Clause 18 of the schedule already referred to laid down that the assessee could nominate either one or all of his minor children to be partner or partners on their attaining majority and such nomination or appointment could be made even by a will or codicil. The assessee retained complete control over the running of the partnership business and it can hardly be said that he needed any help from his daughters particularly when there is no evidence that he was in a weak state of health, his age being below 50 years. Moreover, there is nothing to show that the daughters had any specialised knowledge or business experience so as to be able to assist in the development o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d amount the assessee had gifted 1/3rd portion of the goodwill of his proprietary business to each of his daughters. On the basis of the profits of the earlier years the Gift-tax Officer determined the value of the goodwill at Rs. 1,61,865 and the value of the 2/3rd share of the goodwill gifted to the daughters at Rs. 1,07,910 which was added to the amount of Rs. 50,000 and the gift-tax was assessed accordingly. The assessee preferred an appeal to the Appellate Assistant Commissioner of Gift-tax which was dismissed. The Appellate Tribunal on appeal held : (i) the goodwill constituted an existing immovable property at the time of the admission of the assessee's daughters into the business ; (ii) the gift was exempt under section 5(1)(xiv) of the Act as the assessee was actually carrying on the business when he admitted his two daughters into it, the main intention of the assessee being to ensure continuity of the business and to prevent its extinction on his death. Such a purpose amounted to business expediency and, therefore, all the conditions of section 5(1)(xiv) were satisfied ; (iii) the goodwill was a capital asset and the assessee's daughters had only 1/8th share in the asset ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lar importance. According to clause 2(a) if the partners or partner who, for the first time, represented or possessed the major part in the value of the capital of the business desired to continue the business with additional partners they, he or she would be at liberty to do so on giving 6 months' previous notice to the other partner or partners paying to the partners or partner not desiring to continue the value of their, his or her shares or share and interest in the business, property and the goodwill and giving a bond of " indemnity " with regard to the mode of ascertaining such value and the payment thereof and the amount of the penalty of such bond and otherwise as if the partnership had under these presents been stipulated to continue after the 31st day of March, 1964, and such other partners or partner had happened to die immediately after the last mentioned day. It was further provided that if the 31st day of March, 1964, passed without the then partners or partner who possessed the major part in the value of the capital having given the aforesaid notice then the partners or partner who, for the first time, represented or possessed a minor part in value not being less tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uch deceased partner from out of the properties and assets of the partnership as also its profits. The partnership deed also contained what were called special provisions as to the share of the first partner. Clause 18 provided that the assessee who was the first partner could nominate either one or all of his minor children to be a partner or partners on their attaining majority. Such nomination or appointment could be made by a will or codicil. It is somewhat surprising that the Gift-tax Officer picked up only one of the assets of the business of the assessee, namely, the goodwill, for treating that as a gift, apart from the amount of Rs. 50,000 which had admittedly been gifted to the daughters. It was mentioned in the assessment order that, as the assessee had failed to disclose the gift relating to the same, action under section 17(1)(c) was being taken. Before the Appellate Assistant Commissioner it was contended, inter alia, that the value of the goodwill should not be included as a part of the gift. Alternatively, it was contended that the value had been calculated correctly. This was apart from the other contentions which were raised claiming exemption under section 5(1) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iness, namely, its goodwill, and regarded that as the subject of gift having been made to the daughters who were the other partners of the firm which came into existence by virtue of the deed of partnership. This approach is wholly incomprehensible and no attempt has been made before us to justify it. In our opinion the second question which was referred by the Tribunal should have been framed as follows : " Whether, on the facts and in the circumstances, any gift-tax was payable on the goodwill of the assessee's business. If the answer be in the affirmative how much share in the goodwill was liable to such tax ? " We reframe the question in the above terms. It is quite obvious that the answer to the first part of the question has to be in the negative and therefore there is no necessity of answering the second part of the question. Question No. 1 also does not arise and need not be answered. We may next deal with the third question. Section 5 of the Act gives the exemptions in respect of certain gifts. Sub-clause (xiv) of sub-section (1) is as follows : " 5. (1) Gift-tax shall not be charged under this Act in respect of gifts made by any person-- .... (xiv) in the c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. Some assistance may be derived from the language used in section 10(2)(xv) of the Income-tax Act, 1922. According to that provision any expenditure laid out or expended wholly and exclusively for the purpose of business, profession or vocation is a permissible deduction in the computation of profits. In B. W. Noble Ltd. v. Mitchell a sum had been paid to a retiring director in very peculiar circumstances. The object of making the payment was that of preserving the status and reputation of the company which the directors felt would be imperilled either by the other director remaining in the business or by a dismissal of him against his will involving proceedings by way of action in which the good name of the company might suffer. Sargant L.J. was of the view that preservation of the status and dividend earning power of the company was well within the ordinary purpose of the trade, profession or vocation of the company. Indeed, the English courts have refrained from ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tablished that the requirements of section 5(1)(xiv) of the Act were satisfied. The assessee was certainly carrying on his business at the point of time when he admitted his two daughters into the firm. But from that fact alone it did not follow that the gift had been made in the course of the assessee's business nor could it be held that the gift was made for the purpose of carrying on the assessee's business. The Tribunal came to the conclusion that the partnership did provide for the continuance of the partnership business in spite of the death of the partner and that the main intention of the assessee was to ensure the continuity of the business and to prevent its extinction on his death. A true and correct reading of the deed of partnership indicates that the partners could go out from the partnership in terms of clause 2 of the schedule in the deed of partnership. Moreover, the partnership was expressly stated to be at will. The real intention of the assessee apparently was to take his daughters into the firm with the object of conferring benefit on them for the natural reason that the father wanted to look to the advancement of his daughters. It was further provided in the d ..... X X X X Extracts X X X X X X X X Extracts X X X X
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