COMMISSIONER OF GIFT TAX KERALA versus GHEEVARGHESE. TRAVANCORE TIMBERS & PRODUCTS, KOTTAYAM

Citation: [1972] 1 S.C.R. 817 · Decided: 20-09-1971 · Supreme Court of India · Bench: K.S. HEGDE · Disposal: Dismissed

Judgment (excerpt)

A 
B 
COMMISSIONER OF GIFf TAX· KERALA 
v. 
GHEEVARGHESE. TRAVANCORE TIMBERS & 
PRODUCTS, KOTTAYAM 
September 20, 1971 
[K. S. HEGDE AND A. N. GROVER, JJ.] 
817 
.Gift Tax Act 1958, s. 5(1) (xiv)-Proprietary business converted into 
partnership business-Proprietor's daughters taken as partners-AU assets 
of proprietary business transferred to partnership business-c-Daughters' con-
tribution of capital effected by transfer of money from father"s account to 
c 
daughters' accounts-Whether share of goodwill of proprietary firm also 
thereby gifted-Gifted amounts whether exempt under s. 5(1) (xiv)-Tests 
for exemption-"In the course of business and "for the purpose of the 
Cusiness', meaning of. 
The assessee wao the sole proprietor of a business in timber and timber 
products. He converted the proprietary business into a partnership busi-
ness by means of a deed of partnership dated August 1, 1963. The part-
D 
nership consisted of the assessee and his two daughters. The capital of 
the partnership was to be Rs. 4,00,000. The assessee contributed Rs. 
3,50,000 and each· of his two daughters, one married and the other un-
married contributed Rs. 25,000. The contribution of the capital by the 
daughters was effected by transfer of Rs. 25,000 from the assessee's ac-
count to the account of each of the daughters. 
All the assets of the 
proprietary business were t{ansferred to the partnership. 
In these assets, 
the assessee and bis daughters were entitled to shares in the proportion 
E 
of their share capital i.e. the assessee was entitled to a 7/8 share and each 
of his daughters to 1/16 share. The profits and losses Of the partnership 
business were to be divided in equal shafes between all the three partners. 
The assessee was the managing partner of the firm. 
The assessee filed a 
return of gift tax for the assessment year 1964-65 in respect of the gift 
Of Rs. 50,000 in favour of his daughters representing the share capital 
contributed by his daughters. The Gift Tax Officer however took the 
view that in addition to the gift of the aforesaid amount the assessee had 
F 
gifted 113r<l portion of the goodwill of his proprietary business to each 
of his daughters. 
Accordingly he added a sum equal to 2/3rd df the 
i'Jodwill as estimated by him to the gift of &.. 50,000 admitted by the 
assessee. 
The Appellate Assistant Commissioner dismissed the assessee's 
appeal. The Appellate Tribunal held that only 1/8 of the goodwill was 
gifted to each of the daughters but the gift was exempt under s. 5(1)(xiv) 
of the Gift Tax Act. The High Court in reference held in favour of the 
G 
wessee. 
In appeal by special leave, 
HELD : The goodwill was a part of the assets which had been trans-
ferred to the partnership. 
Under s. 14 of the Partnership Act, wbject 
to the contract between the partners the property of the firm includes all 
property and rights and interests in property originally brought into the 
stock of the firm or acquired by purchase or otherwise by or 'for the firm 
and includes also the goodwill of the business. 
The departmental autho-
rities in the present case never treated as all the assets and property of the 
H 
assessee which were transferred to the partnership pertaining to his pro-
prietary business as a gift nor was it suggested that the property and 
assets valued at Rs. 4,00,000 were the subject matter of the gift. 
The 
departrnentaf 11uthoritieo 'cmly picked up one of the assets of the assessee's 
l 8--L3Sup.C.I./72 
818 
SUPREME COURT REPORTS 
(1972) 1 S.C.R. 
proprietary business namely its goodwill and regarded that as the subject 
of giit having been made to the daughters. There was no justification for 
this approach. 
Accordingly no ~ft tax was payable by the assessee on 
the goodwill of the assessee's business. 
[823 A-DJ 
(ii) To be exempt under s. 5 ( 1) (xiv) a gift should be proved to 
have been made not only in the course of carrying on the business, pro--
fession or vocation but also 1for the purpose of such business, profession 
or vocation. 
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 cl. (xiv) of s. 5 ( 1) of the Act. It must further be established to 
bring the gift within that prMision, that there was some integral connec-
tion or relation 

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