JUDGMENT
Krishnamoorthy Iyer, J.
1. The question referred to this court under Section 26(1) of the Gift-tax Act, 1958, at the instance of the Commissioner of Gift-tax, Kerala, Ernakulam, is the following :
“Whether, on the facts and in the circumstances of the case, the Appellate Tribunal is right in holding that the gift is exempt under Section 5(i)(xiv) of the Gift tax Act, 1958 ?”
2. The assessee, M. Sankaran Nair, now deceased, was running a proprietary business in the purchase and sale of yarn. On July 1, 1964, he transferred a sum of Rs. 50,000 out of his capital account in the business to his five children, and converted his proprietary business into a partnership concern by taking his major son. P. V. Harikrishnan, as partner and by admitting the remaining four minor children to the benefits of partnership. The partnership deed is annexure “A”.
3. In the gift-tax return for the assessment year 1965-66, the assessee showed the total value of the gift at Rs. 50,000. The Gift-tax Officer took the view that by the conversion of the proprietary business into a partnership business the assessee had parted with 75% of the goodwill of the business in favour of his children and that the value of 75% of the goodwill was liable to tax. He rejected the contention of the assessee that the business did not possess any goodwill as also the contention that the entire gift was liable to be exempt under the provisions of Section 5(1)(xiv) of the Gift-tax Act, 1958, The Appellate Assistant Commissioner did not also agrea with the assessee that the gift was liable to be exempted under Section 5(1)(xiv) of the Gift-tax Act. In second appeal the Appellate Tribunal found that the gift is exempt under Section 5(1)(xiv) of the Gift-tax Act relying on the decision of this court in Commissioner of Gift-tax v. P. Gheevarghese, [1968] 68 I.T.R. 132 (Ker.).
4. It is seen from annexure “A” that on the date of the formation of the partnership, Sankaran Nair was only 53 years old. The preamble in annexure “A” shows that the partnership was formed on the ground that Sankaran Nair was old and for the continuity of the business. By the partnership deed, Sankaran Nair was constituted the managing partner of
the business and his son, P. V. Harikrishnan, was named as junior partner. All the powers regarding the partnership were to be exercised by the managing partner. By Clauses 10 and 11 the minor children of Sankaran Nair were admitted to the benefits of the partnership.
5. Section 5(1)(xiv) of the Gift-tax Act, 1958 reads:
“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.”
6. To attract the benefit of the exemption, two conditions have to be satisfied. The first is that the gift has to be in the course of carrying on a business, profession or vocation. The second is that the gift should have been made bona fide for the purpose of such business, profession or vocation. In Commissioner of Gift-tax v. Kurttvilla, [1965] K.L.T. 721; [1970] 77 I.T.R.
749, 750-51 (Appendix).
in interpreting Section 5(1)(xiv) of the Gift-tax Act, 1958, this court took the view that to apply Section 5(1)(xiv) of the Gift-tax Act, 1958, it would be enough that the gift is made on grounds of commercial expediency and in order to directly or indirectly facilitate the carrying on of the business, profession or vocation. The learned judges observed :
“We feel it difficult to resist the conclusion, that in the background and circumstances, the gift could well be regarded as having been made for the better ordering of the business of the assessee. It seems to us that it would be enough to show that the gift was made on grounds of commercial expediency and in order to directly or indirectly facilitate the carrying on of the business, profession or vocation.”
7. The above decision was reversed by their Lordships of the Supreme Court in Commissioner of Gift-tax v. Dr. George Kuruvilla, [1970] 77 I.T.R. 746. 749 (S.C.). and while disapproving the observations quoted above; their Lordships said thus :
“The donor is exempt under Section 5(1)(xiv) from liability to pay tax only if the gift is in the course of carrying on a business, profession or vocation and is made bona fide for the purpose of such business, profession or vocation. The clause does not enact that a gift made by a person carrying on any business is exempt from tax, nor does it provide that a gift is exempt from tax merely because the property is used for the purpose for which it was used by the donor. Without deciding whether the test of ‘commercial expediency’ is strictly appropriate to the claim for exemption under Section 5(1)(xiv), we are of the view that there is no evidence on the record to prove that the gift to Thomas was in the course
of carrying on the business’ of the donor, and ‘for the purpose of the business’.”
8. In Commissioner of Gift-tax v. P. Gheevarghese, followed by the Tribunal, the assessee who was the sole proprietor of a business converted the same into a partnership concern by inducting his two daughters as partners in the business. In upholding the claim for exemption the learned judges of this court observed :
“Section 5(1)(xiv) makes it quite clear that in order to earn the exemption the assessee should prove that the transformation of his proprietary business into a partnership concern and the induction of his two daughters as the owners of a 1/8th share in the assets of that partnership was made bona fide for the purpose of that business. The expression ‘for the purpose’ has come up for consideration in connection with Section 10(2)(xv) of the Indian Income-tax Act, 1922, and the corresponding provision in England and in the Income-tax Act, 1961. As pointed, out by the Supreme Court in Commissioner of Income-tax v. Malayalam Plantations Ltd., [1964] 53 I.T.R. 140; [1964] 7 S.C.R. 693 (S.C.) the expression ‘for the purpose of the business’ is wider in scope than the expression ‘for the purpose of earning profits’ and may include measures for the preservation of the business and for the protection of its assets and property.
The Appellate Tribunal having discussed the relevant aspects of the case in detail, stated its conclusions as follows :
‘It is, therefore, quite clear that the main intention of the assessee in forming the partnership was to ensure the continuity of the business and to prevent its extinction on his death,’
and held that ‘the gift of the goodwill, in whatever proportion, made to the daughters is exempt from taxation under Section 5(1)(xiv) of the Gift-tax Act, 1958.’
In the light of the finding of the Tribunal that the creation of the partnership was to ensure the continuity of the business and to prevent its extinction on the death of the assessee, the only conclusion possible is the conclusion reached by the Appellate Tribunal.”
9. In Commissioner of Gift-tax v. P. Geevarghese, Travancore Timbers & Products, Kottayam, [1972] 83 I.T.R. 403 (S.C.).
their Lordships of the Supreme Court reversed the said decision. Their Lordships observed that to bring the gift within the first condition of Section 5(1)(xiv), namely, “in the course of carrying on of business, profession or vocation”, some integral connection or relation between the making of the gift and the carrying on of the business has to be established and to satisfy the second condition contained in the
provision, namely, “for the purpose of such business, profession or vocation”, it must be established that the object in making the gift or the design or intention behind it should relate to the business. It is clear from the decision that a mere conversion of a proprietary business into a partnership concern without anything more is not enough to satisfy the requirements of Section 5(i)(xiv).
10. The terms of the partnership deed show that Sankaran Nair was only 53 years old and he was continuing as the managing partner of the partnership and apart from making the adult son as a junior partner, all his other minor children were admitted to the benefits of the partnership. The mere statement that the partnership was formed to ensure continuing of the business is not sufficient for Claiming the exemption. In the case before us the test of commercial expediency is also not satisfied. As we had indicated in I.T.R. No. 14 of 1969 Commissioner of Gift-tax v. R. Narasimhan Potti [1972] 83 I.T.R. 296 (Ker.)
the burden to make out the grounds for claiming the exemption is on the assessee. Except producing the partnership deed the assessee did not adduce any evidence to prove the grounds for the formation of the partnership. To us it appears that the real motive behind the partnership is to benefit the children of the assessee. Section 5(1)(xiv) has no application to such cases. The terms of annexure “A” are almost identical with the document interpreted by their Lordships of the Supreme Court in Commissioner of Gift-tax v. P. Geevarghese, Travancore Timbers & Products, Kottayam. We, therefore, hold that the assessee is not entitled to the exemption under Section 5(1)(xiv) of the Gift-tax Act, 1958. We answer the question in the negative, that is, in favour of the department and against the assessee.
11. 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.