Case: M/s. Khoday Eswarsa and Sons Vs. The Commissioner of Gift Tax

3. the appellant, a partnership firm, was carrying on various businesses. The partnership firm consisted of sever partners. On 20th November, 1969, four partners retired from the firm which was reconstituted by the remaining partners by taking into reconstituted firm, the children of the outgoing partners. On 21st November, 1969, the newly constituted firm entered into an agreement with a private limited company floated by the four outgoing partners. Under the said agreement, the firm granted licence and permission to the private limited company as a licensee to carry on and conduct the business of manufacturings, typewriting ribbons etc. and for running the business handed over the premises, buildings, plants, machineries and all other equipments which were being used by the firm for the said businesses. The period of licence provided in the agreement was five years subject, however, to the termination by either party, giving to the other six months notice in writing. As a consideration for the agreement, the licensee agreed to pay a minimum fee or compensation of Rs. 50,000/per month and maximum of Rs. 60,000/4. TheOfficer treated the transfer of business by the firm to the private limited company as a gift under the Gift Tax Act made for inadequate consideration and levied the gift tax on the value of the deemed gift which was computed at Rs.On the appeal preferred by the assessee, the Appellate Authority held that the deemed gift made by the assessee under the agreement dated 21st November, 1969 was exempt under Section 5(1)(xiv) of the Act on the ground that the gift made was for the purpose of business of the donor.5. On the appeal of the Revenue, the Income Tax Appellate Tribunal, reversing the order of the Commissioner of Income Tax (Appeals), held that the agreement amounted to transfer of property; the consideration was not adequate with the result that there was a deemed gift within the meaning of Section 4(1) (a) of the Gift Tax Act and that the transaction was not bona fide. Therefore, the Tribunal held that Section 5(1)(xiv) which, inter alia, provides that the gift tax shall not be charged in respect of gifts made by any person in the course of carrying on a business o the extent to which the gift is proved to the satisfaction of theOfficer to have been made bona fide for the purpose of such business, is not applicable.6. The aforestated questions were answered by the High Court against the appellant.

Court's reasoning:
9. The termination has been provided for in clause (3) of the agreement.The Tribunal held that since Section 6(2) refers to revocable gifts for a specified period and in the present case, the licence was for a period of five years and, therefore, it has to be taken as a full period according to Rule 11. The Tribunal was of the opinion that "The fact that it is terminable at six months notice is also not relevant" Further, the Tribunal took into consideration the fact that the agreement was not cancelled within the period of five years. The High Court affirmed the view of the Tribunal by holding that "Though the also provided for revocation with six months notice on either side, it was not acted upon. Therefore the Tribunal was right in upholding the levy of gift tax on the capitalized value of the gift, taking the gift as for five years".13. The Tribunal as well as the High Court clearly fell into an error in upholding the levy of gift tax on the capitalized value of the gift taking the gift as for five years and treating as irrelevant the clause providing for termination at six months notice and also taking into consideration the fact that the agreement was not canclelled within the period of five years. In our view, that is of no consequence. the language of Rule 11(1) is clear. It doe snot admit of any no two interpretations. The relevant factor is the revocability of the gift and not whether, in fact, it was revoked or not within the period of five years. Under Rule 11(1) what is of relevance is "the number of compete years .... for which the gift is not revocable..." In the present case, the gift was revocable/terminable with six months notice. Thus, it was not revocable for a specified period which was less than a year, namely, six months. The capitalized value has to be fixed under Rule 11(1) under which if it was revocable for a period less than one year, the value could not be worked out and, thus, it had to be `nil.The Tribunal as well as the High Courtwere in error in rejecting the assesss contention that in terms of Rule 11(1), no gift tax was payable. Admittedly, there is no other provisions under which the capitalized value could be fixed.