The main legal point established in the judgment is the interpretation and application of the provisions of the Gift Tax Act, particularly Section 4 (c) and Section 5 (1) (xiv), to determine the taxability of gifts and the conditions for exemption.

P. Subramonian Poti, J.

1. The question referred to us under section 26 (1) of the Gift Tax Act, 1958 by the Income-tax Appellate Tribunal, Cochin Bench is”

" Whether, on the facts and in the circumstances of the case, the appellate Tribunal was right in law in holding that the gift made by the applicant was not entitled to exemption under section 4 (c) or under section 5 (1) (xiv) of the Gift Tax Act?"

2. The question arises in connection with the assessment for the year 1965-66 under the Gift Tax Act, 1958 (hereinafter referred to as the Act). The Gift-Tax Officer held that during the previous year relevant to the assessment year, the assessee had made certain gifts. These included (1) a cash gift of Rs. 2,500 and (2) gift of 25 per cent of the good-will in two firms, namely, M/s C. A. Ouseph and Sons and M/s C. A. Ouseph and V. J. Paul. The dispute concerns the latter item. Prior to the relevant accounting year the assessee was one of the partners of the above-mentioned firms and the share of the profit which he was entitled to after deducting the remuneration payable to the manager of the respective firms was said to be 50 per cent. One of the firms namely C. A. Ouseph and Sons was carrying on business in jewellery and bullion and the other in grocery, edible oil, etc. The two firms were reconstituted by two deeds executed on 1st Dhanu 1139 corresponding to 16th December 1963. In so reconstituting one of the sons of the assessee was introduced as partner in both the firms. Necessarily there was readjustment of the share of the profits. The Gift-tax Officer considered this readjustment resulting in the reduction of the profit of the assessee as amounting to a transfer of property by him in favour of his son who was introduced as a fresh partner under the new partnership deeds and such transfer was considered as of 25 per cent of the good-will in view of the reduction of that percentage in the profit due to the assessee before the firms were so reconstituted. Since the new partner had brought in new capital to the business, proportionate value of the good-will alone was considered as such transfer by way of gift by the assessee to his son. The assessment was made overruling the objection by the assessee to the inclusion of the estimated value of the good-will of these firms on the ground that it was exempt under section 5(1) (xiv) of the Act and alternatively that it could not be considered as the subject of a gift. The matter was taken to the Appellate Assistant Commissioner by the assessee. Before him a preliminary objection was taken, that the assessee had not made any gift to his son, that the mere re-adjustment of the shares in the profit of the partners cannot amount to any gift by the assessee and, that at any rate even if it was considered that the assessee had released or surrendered or abandoned a portion of his interest in the firm it must be a case falling within section 4 (c) of the Act and consequently exempt from taxation. It was further urged that gift, if at all, could only be in the course and for the purpose of carrying on the business of the original firm and if that be the case the gift would be (exempt under section 5 (1) (xiv) of the Act. There was a further contention that, at any rate, the gift could only be of 6¼ per cent of the total value of the good-will. The appellate authority took the view that it was a case of surrender or abandonment and therefore exempt under section 4 (c) of the Act in view of the absence of any finding by the Gift Tax Officer that the surrender or abandonment had not been bona fide made.

3. Before the Appellate Tribunal to which the matter was taken at the instance of the department the assessee reiterated these pleas. But the Appellate Tribunal found that there was a gift in regard to the good-will which was liable to be taxed and in support of this the decision of the Madras High Court in C. G. T. v. V. A. M. Ayya Nadar (73 I.T.R 761) cited by the department was rel