COMMISSIONER OF GIFT TAX Vs. SURSINGH JAIRAM ASHER
HIGH COURT OF KERALA
COMMISSIONER OF GIFT-TAX
SURSINGH JAIRAM ASHER
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K.P. Balanarayana Marar, J. -
(1.)AT the instance of the Revenue, the Income-tax Appellate Tribunal, Cochin Bench, has referred the following question of law for the decision of this court :
"Whether, on the facts and in the circumstances of the case, the Tribunal was right and had materials in holding that the induction of the new partners was in the interest of the business and hence the assessee was entitled to exemption under Section 5(1)(xiv) of the Gift-tax Act, 1958 ?"
(2.)THE respondents in these references are the assessees. We are concerned with the assessment year 1975-76. THE assessees were partners in the firm Messrs. Jairam and Sons, each having one-third share. THE partnership business was started in 1958. One son of each of the partners was introduced in the partnership on October 27, 1973, and each of them was given half share of his father. THE sons contributed Rs. 15,000 each. THE original partners were assessed to gift-tax on the ground that they have forgone 16-2/3 per cent. of the profit-sharing right to the incoming partners without adequate consideration. THE value of such a right was worked out by taking the average of five years' income, deducting the interest for one year at Rs. 9,000 and managerial remuneration at the rate of 15 per cent. and taking three years' purchase value. Deduction under Section 5(2) of the Act was given. On appeal, the Appellate Assistant Commissioner concurred with the Assessing Officer and dismissed the appeal. THE matter was carried to the Income-tax Appellate Tribunal. By order dated September 3, 1987, the Tribunal allowed the appeals and the assessees were found entitled to the exemption claimed by them under Section 5(1)(xiv) of the Gift-tax Act. It was thereafter at the instance of the Revenue that the question aforementioned was referred to this court for a decision thereon.
Heard standing counsel for the Revenue and counsel for respondent.
The short question that arises for consideration in these references is whether the assessee is entitled to the exemption claimed under Section 5(1)(xiv) of the Gift-tax Act. That sub-clause enables the assessee to claim exemption in respect of gifts made by a person 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. In order to avail the benefit of this sub-clause, the gift must be one made "in the course of carrying on business" and it should be proved to the satisfaction of the Gift-tax Officer to have been made bona fide for the purpose of such business". On these two aspects, the Appellate Tribunal found in favour of the assessee. As observed by a Division Bench of this court in V. O. Markose v. CIT  98 ITR 504, the question whether the requirements of Section 5(1)(xiv) have been satisfied is not a pure question of fact. It depends in the first instance on evidentiary facts. But the conclusion to be reached from such evidentiary facts depends on the correct legal principles that should be applied and upon the proper legal approach and this is a question of law.
(3.)THE Supreme Court in CGT v, P. Gheevarghese, Travancore Timbers and Products  83 ITR 403, observed that the expression "in the course of carrying on the business, etc.", means that the gift should have some relationship with the carrying on of the business. It was held that, 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 that there was some integral connection or relation between the making of the gift and the carrying on of the business in order to bring the gift within that provision.
Viewed in the light of the principles enunciated in the foregoing decisions, the Tribunal has not committed any error in granting the exemption claimed by the assessee. It is observed by the Tribunal that the new partners were already working in the firm and making them partners would be in the interest of the firm. After referring to the total gross earnings as per the profit and loss account and the net profit earned by the assessee for the years 1971-72 to 1978-79, the Tribunal observed that those details show that the business of the firm has increased after the joining of the new partners. The Tribunal ultimately held that the induction of the new partners was in the interest of the business.
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