Appeal No 2293 of 1968
Appeal by special leave from the judgment and order dated October 9 1967 of the Kerala High Court in Income tax Reference No 64 of 1966
OP Malhotra R N Sachthey and B D Sharma for the appellant
ST Desai A K Verma and J B Dadachanji for the respondent
The Judgment of the Court was delivered by Grover J
This is an appeal by special leave from a judgment of the Kerala High Court in a reference made under section 26 1  of the Gift Tax Act 1958 hereinafter referred to as the Act relating to the assessment year 1964 65
The assessee was the sole 819 proprietor of the business run under the name and style of Travancore Timbers and Products at Kottayam
He converted the proprietary business into a partnership business by means of a deed of partnership dated August 1 1963
The partnership consisted of the assessee and his two daughters
The capital of the partnership was to be Rs 400000 
The assessee contributed Rs 350000and each of his two daughters one of whom was married and the other unmarried contributed Rs 25000 
The contribution of the capital by the daughters was effected by transfer of Rs 25000from the assessee s account to the account of each of the daughters
All the assets of the proprietary business were transferred to the partnership
In these assets the assessee and his daughters were entitled to shares in proportion to their share capital
In other words the assessee was entitled to a 78 share and each of his daughters to 116 share
The profits and losses of the partnership business however were to be divided in equal shares 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 50000 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 gifted 13rd 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 161865 and the value of the 23rd share of the goodwill gifted to the daughters at Rs 107910 which was added to the amount of Rs 50000 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 exiting immovable property at the time of the admission of the assessee s daughters into the business ii the gift was exempt under section 5 i 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 18 share in the assets of the business
The gift or the goodwill were therefore only of 18 share
The following questions of law were referred by the Tribunal at the instance of the Commissioner of Gift Tax  i Whether on the facts and in the circumstances of the case the goodwill of the assessee s business is an existing property within the meaning of section 2 xii of the Gift tax A ct  820 iiWhether on the facts and in the circumstances of the case the assessee gifted only a 18th share in the goodwill of the business to his two daughters or whether he gifted a 23rd share  iiiWhether on the facts and in the circumstances of the case the gift was exempt from assessment under section 5 1 xiv of the Gift tax Act  The High Court answered all the questions in favour of the assessee and against the Revenue
It is essential to look at the deed of partnership closely because certain clauses which have a material bearing do not appear to have received the attention either of the Appellate Tribunal or the High Court
It was recited inter alia that the assessee was desirous of introducing into the business of Travancore Timbers and Products his major daughters and also his minor children as and when they attained majority
It was next stated that upon the treaty for the introduction of the said partners into the business for the par  and for the partnership it was agreed that the first partner assessee would gift a sum of Rs 25000 to each of his two major daughters
The property of the business was next described
It was stated to consist of the land and buildings plant fixtures
and machinery book debts benefits of existing contracts etc
and stock in trade and other movable chattels and effects
The assessee as beneficial owner conveyed and assigned unto the partners including himself all these properties including the good Will of the marks and all rights and privileges belonging thereto
Each of the partners covenanted that he or she will duly pay discharge or perform all the debts and liabilities contracts and engagements of the individual business of the assessee subsisting in the shares and proportions in which they respectively became entitled under the business
It was expressly stated in the first schedule which contained the terms conditions and stipulations that the partnership was to be at will
Clause 2 in the schedule is of particular importance
According to clause 2 a if the partners or partner who for the first time represented or possesses 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 821 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 than two equal third parts of the capital would be at liberty to continue the business by giving six calendar months  previous notice of their his or her desire to do so and paying to the partners or partner not desiring to continue the value of their his or her shares or share and interest for the time being of the business and the property and goodwill thereof etc
If the partnership was to continue under either of the eventualities mentioned
before every partner for the time being who desired to continue would have the right to do so
Clause 7 laid down that the parties shall be entitled to the capital and property of the partnership for the time being in the following shares  The said first partner Ghee Varghese shall be entitled to 78th share thereof and each
of second and third partners to 1 16th part thereof
Clause 8 a and Clause 9 are reproduced below  8 a The capital of the partnership shalt be the sum of Rs 400000 Rupees Four lakhs only being the value ascertained as aforesaid of the property of the said late business taken over by the said parties hereto and of such further capital as shall be hereafter contributed by the partners and all such further capital shall whether the same shall be contributed out of the profits or otherwise be contributed by the partners for the time being in the shares in which they are for the time being entitled to the existing capital of the partnership 9The net profits or losses of the partnership shall subject to the provisions of these presents belong to the partners for the time being in equal shares
 Under clause 10 the assessee was to be the managing partner of the firm
He alone had the power to sign the cheques on account of the partnership in the name of the firm
He had the power to borrow from Banks and other private parties for the purpose of the business and to execute bands documents agreements and other activities as might be necessary
There were other provisions also which showed that it was the assessee who retained substantially the control of the running of the business in his own hands
Clause 17 provided that whenever any of the partners died during the continuance of the partnership then the partnership would not be dissolved between the surviving partners and elaborate provisions were made with regard to what would pass to 822 the representatives of such 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 the 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 the assets of the business of the assessee namely the goodwill for treating that as a gift apart from the amount of Rs 50000 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 171 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  xiv of the Act
Without examining the contentions that the value of the goodwill should not be included as a part of the gift the Appellate Assistant Commissioner examined the other contentions and agreed with the view taken by the Gift Tax Officer
The way the Tribunal examined the question relating to the goodwill was by treating it as an asset which had been gifted by the assessee to his two daughters
This is what the Tribunal observed  By admitting his two daughters as partners of the business the assessee also admitted them to the benefit arising out of the goodwill of the business
Now it is quite clear that according to the deed of partnership and even otherwise on admitted facts goodwill was a part of the properties and assets of the business which the assessee was running under the style of Travancore Timber  Products at Kottayam
All these were valued at Rs 400000 
The entire property of the assessee s proprietary business was transferred to the new partnership
According to clause 7 in the schedule to the partnership deed the parties were to be entitled to the capital and property of the partnership in the following shares  Assessee 78th share
each daughter 116 share 823 These shares were proportionate to the capital with which the partnership was stated to have been started
out of Rs 400000the assessee was deemed to have contributed Rs 350000 and each of the daughters Rs 25000 
The goodwill as stated earlier was a part of the assets which had been transferred to the partnership
Under section 14 of the Indian Partnership Act subject to 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 goodwill of the business
The departmental authorities in the present case never treated all the assets and property of the assessee which were transferred to the partnership pertaining to his proprietary business as a gift nor has any suggestion been made before us on behalf of the Revenue that the property and assets valued at Rs 400000 were the subject matter of gift
All that the departmental authorities did and
that position continued throughout was that they picked up one of the assets of the assessee s proprietary business 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 he 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 exemption in respect of certain gifts
Sub clause xivof 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 xivin 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
824 The critical words are in the course of and for the purpose
Therefore the gift should be proved to have been made not only in the course of carrying on the business profession or vocation but also bona fide for the purpose of such business profession or vocation
The words in the course of were considered by this Court in State of Travancore Cochin  Others vs Shanmugha Vilas Cashew Nut Factory  Others1 in connection with the language employed in article 286 of the Constitution
It was pointed out that the word course etymologically denotes movement from one point to another and the expression in the course of not only implies a period of time during which the movement is in progress but also postulates a connected relation
There clause 1b of the Article was under consideration and what was exempted under the clause was the sale or purchase of the goods taking place in the course of the import of the goods into or export of the goods out of the territory of India
The only assistance which can be derived in the present case is the emphasis on there being connected relation between the activities for which these words are used
Thus 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 clause xiv of section 51 of the Act
it must further be established to bring the gift within that provi sion that there was some integral connection or relation between the making of the gift and the carrying on of the business
Under clause xiv of section 5 1 the second requirement is that the gift should have been made bona fide for the purpose of such business etc
According to the meaning of the word  purpose in Webster s New International Dictionary it is that which one sets before himself as an object to be attained the end or aim to be kept in view in any plan measure exertion or operation design intention
Therefore on the plain meaning of the word purpose as employed in 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 19 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 vs Mitchell2 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 2  1  825 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 LJ 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 adopting any dogmatic or set line for discovering the meaning of the expression for the purpose of when used in connection with trade or business because it is essentially a matter which depends on the various sets of circumstances and facts of a particular case for determining whether certain expenditure has been incurred for the purpose of the trade or business  See Morgan vs Tate  Lyle Ltd1
According to a recent decision of this court in Civil Appeals Nos 1351 1353 1897  1241 of 1968 The Commissioner of Income tax West Bengal vs Birla Cotton Spinning  Weaving Mill Ltd etc
2 the expression for the purpose of the business is essentially wider than the expression for the purpose of earning profits
It covers not only the running of the business or its administration but also measures for the preservation of the business protection of its assets and property
It may legitimately comprehend many other acts incidental to the carrying on of the business
Another test that has often been taken into consideration is whether the expenditure was necessitated or justified by commercial expediency
The High Court in the present case relied on Commissioner of Gift Tax Kerala vs Dr George Kuruvilla 3 
There the assessee was a doctor by profession at the time of the gift which lie made in favour of his son who also joined his father s profession
The Kerala High Court took the view that the gift had been made in the course of carrying on of the business profession a or vocation within the meaning of section 5  1  xiv of the Act and also for the purpose of such business profession or vocation
That decision was reversed by This court in Commissioner of Gift Tax vs Di 
George Kuruvilla 4 It has been observed that section 5  1  xiv of the Act does not indicate 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 was strictly appropriate to the claim for exemption under the aforesaid provision this court held that there was no evidence to prove that the gift to the donee in that case was in the course of carrying on the business of the donor and for the purpose of the business
1  378
2 Decided on 17 8 1971
3 4 826 We are satisfied that in the present case also it has not been established 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 cut 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 8 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 or management of the business
We are wholly unable in these circumstances to accept that the present case is different from Dr George Kuruvilla s1
in our judgment there was no cogent material to come to the conclusive that the gift of Rs 25000 to each of the daughters by the assessee was in the course of carrying on the business of the assesese and was for the purpose of the business
It may be recalled that the assessee had himself made a return in the matter of assessment of Gift tax payable tinder the Act in respect of the amount of Rs 50000 which had been gifted by him to his two daughters
The answer to question No 3 consequently would be in favour of the Revenue and against the assessee so far as that amount is concerned
For the reasons given above the answers returned by the High Court are discharged and in their place the question shall stand 827 answered in accordance with this judgment in the following manner  Question No 1  does not arise
Question No 2 as reframed  The first part is answered in the negative and in favour of the assessee
The second part does not arise
Question No 3  The answer is in favour of the Revenue and against the assessee so far as the gift of Rs 50000 is concerned
The appeal shall stand disposed of accordingly
In the circumstances of the case we make no order as to costs
G C Appeal dismissed


Summary:
The assessee was the sole proprietor of a business in timber and timber products
He converted the proprietary business into a partnership business by means of a deed of partnership dated August 1 1963
The partnership consisted of the assessee and his two daughters
The capital of the partnership was to be Rs 400 000
The assessee contributed Rs 350000 and each of his two daughters one married and the other unmarried contributed Rs 25000
The contribution of the capital by the daughters was effected by transfer of Rs 25000 from the assessee s account to the account of each of the daughters
All the assets of the proprietary business were transferred to the partnership
In these assets the assessee and his daughters were entitled to shares in the proportion of their share capital ie the assessee was entitled to a 78 share and each of his daughters to 116 share
The profits and losses of the partnership business were to be divided in equal shares 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 50000 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 gifted 13rd portion of the goodwill of his proprietary business to each of his daughters
Accordingly he added a sum equal to 23rd of the goodwill as estimated by him to the gift of Rs 50000 admitted by the assessee
The Appellate Assistant Commissioner dismissed the assessee s appeal
The Appellate Tribunal held that only 18 of the goodwill was gifted to each of the daughters but the gift was exempt under section 5 1 xiv of the Gift Tax Act
The High Court in reference held in favour of the assessee
In appeal by special leave HELD  The goodwill was a part of the assets which had been transferred to the partnership
Under section 14 of the Partnership Act subject 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 authorities in the present case never treated as all the assets and property of the 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 400000 were the subject matter of the gift
The departmental authorities only picked up one of the assets of the assessee s L3Sup
CI72 818 proprietary business namely its goodwill and regarded that as the subject of gift having been made to the daughters
There was no justification for this approach
Accordingly no gift tax was payable by the assessee on the goodwill of the assessee s business
823A D iiTo be exempt under section 51xiv a gift should be proved to have been made not only in the course of carrying  the business profession or vocation but also for 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 el
xiv of section 51 of the Act
It must further be established to bring the gift within that provision that there was some integral connec tion or relation between the making of the gift and the carrying on of the business
The meaning of the word purpose  is that which one sets before himself as an object to be obtained the end or aim to be kept in view in any plan measures exertion or operation design intention
Therefore on the plain meaning of the word purpose  as employed in el
xiv the Object plan or design must have connection or relationship with the business
824 A G In the present case considering the terms of the partnership dead there was no cogent material to come to the conclusion that the gift of Rs 25000 to each of the daughters by the assessee was in the course of carrying on the business of the assessee and was for the purpose of the business
The real object of the assessee was to benefit the daughters for the natural reason that the father wanted to look to the advancement of his daughters
Accordingly the assessee who had himself shown the amount of Rs 50000 in his return of gift tax could not claim exemption for that amount under section 5 7 xiv
826 C G State of Travancore Cochin  Ors
vs Chanmugha Vilas Cashew Nut Factory  Ors   B W Noble Ltd vs Mitchell   Morgan vs Tate  Lyle Ltd 35 TC 367 378 CIT West Bengal T Birla Cotton Spinning  Weaving Mills Ltd dt
17 8 71 and Commissioner of Gift Tax vs Dr Grorge Kuruvilla  applied
Commissioner of Gift Tax Kerala vs Dr George Kuruvilla  referred to