Judgment

GROVER, J.:- This is an appeal by special leave from a judgment of the Kerala High Court in a reference made under S. 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 proprietor of the business run under the name and style of Travancore Timbers and Products of 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 Rupees 4,00,000/-. The assessee contributed Rupees 3,50.000/- and each of his two daughters, one of whom was married and the other unmarried, contributed Rupees 25,000/-. The contribution of the capital by the daughters was effected by transfer of Rupees 25,000/- 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 proportion to their share capital. In other words the assessee was entitled to a 7/8 share and each of his daughters to 1/16 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 Rupees 50.000/- 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 gift of the aforesaid amount the assessee had gifted 1/3rd 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 Rupees 1,61,865/- and the value of the 2/3rd share of the goodwill gifted to the daughters at Rupees 1.07,910/- which was added to the amount of Rupees 50,000/- 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 existing immoveable property at the time of the admission of the assessee s daughters into the business; (ii) the gift was exempt under Section 5 (1) (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 1/8 share in the assets of the business. The gift or the goodwill were, therefore, only of 1/8 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 Act?

(ii) Whether on the facts and in the circumstances of the case, the assessee gifted only a 1/8th share in the goodwill of the business to his two daughters or whether he gifted a 2/3rd share?

(iii) Whether 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.

2. 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 wa