- (1.) This is an appeal by the revenue objecting to the order of the Dy. Commissioner (Appeals) holding that the gift of the assessees right to share 80% of the profits of the business was completely exempt under section 5(1) (xiv) of the Gift-tax Act, 1958.
(2.) This appeal arises out of the gift-tax assessment made on the late Rajamony Nadar, by his legal representative Shri R. Karunakaran. Shri Rajamony Nadar was the sole proprietor of the business carried on by him under the name and style of Shenbagam Match Works at Sivakasi. With effect from 1-4-1978, he entered into a partnership with his two sons and two daughters-in-law and in this partnership he had a 20% share. According to the Gift-tax Officer, the assessee Rajamony Nadar had relinquished his right to 80% of the profits of the business in favour of his two sons and two daughters-in-law, which amounted to a deemed gift, which was liable to gift-tax under the Gift-tax Act. He determined the value of this alleged gift by adopting the super-profit method for determining the goodwill of the business, and arrived at the value of this gift at Rs. 77,304, which he brought to charge in the hands of the assessee.
(3.) The assessee appealed objecting to this assessment and contended that the late Rajamony Nadar was 58 years old at the time of entering into the partnership with his sons and daughters-in-law, that he was suffering from heart ailment and could not look after his business personally and that therefore he took his two sons and daughter-in-law as partners, who had agreed to contribute capital to the partnership business as and when required. It was further submitted that on account of the ill-health of Rajamony Nadar there was a decline in the profits of the business, as could be seen from the figures of profits set out in the assessment order by the Gift-tax Officer himself while computing the value of the gift in the super profit method. It was argued that his two sons were Engineering Graduates, that one of them was working in Minnsota University, U. S. A. and the other was working in Travancore chemicals and Manufacturing Co. Ltd., Kalamassery, Kerala, that both these sons resigned their jobs and joined the father in partnership to look after the partnership business and that the two daughters-in-law had promised to contribute adequate capital as and when necessary. It was therefore argued that the late Rajamony Nadar had taken these four partners only for the purpose of expansion of the business, that there was no element of gift involved as there was adequate consideration for taking the four persons as partners and that as the admission of these four persons as partners was supported by valid and adequate consideration, it must be held that the alleged gift, if any, must be held to have been made bona fide for the purpose of the business carried on by the late Rajamony Nadar and therefore it would be exempt under section 5(1) (xiv) of the Gift-tax Act. In support of these contentions, the assessee relied on the judgment of the Madras High Court in Cgt V. G. Shanmugam, 1979 118 ITR 890. The Dy. Commr. (Appeals) accepted the assessees contentions and allowed the appeal by following the said decision of the Madras High Court. It is against this order of the Dy. Commissioner (A) that the department has come up on further appeal to the Tribunal.;