The court established that a mere conversion of a proprietary business into a partnership does not satisfy the requirements for tax exemption under S.5(1)(xiv) of the Gift Tax Act.

1The question referred to this Court under S.26(1) of the Gift Tax Act, 1955 at the instance of the Commissioner of Gift Tax, Kerala, Ernakulam, is the following:
"Whether, on the facts and in the circumstances of the case, the Appellate Tribunal is right in holding that the gift is exempt under S.5(1)(xiv) of the Gift Tax Act, 1958".
The assessee M. Sankaran Nair, now deceased, was running a proprietary business in the purchase and sale of yarn. On 1-7-1964 he transferred a sum of Rs. 50,0000 out of his capital account in the business to his five children, and converted his proprietary business into a partnership concern by taking his major son P. V. Harikrishnan as partner and by admitting the remaining four minor children to the benefits of partnership. The partnership deed is Annexure 'A'.

2 In the gift tax return for the assessment year 1955-66 the assessee showed the total value of the gift at Rs. 50,000/-. The Gift Tax Officer took the view that by the conversion of the proprietary business into a partnership business the assessee had parted with 75% of the goodwill of the business in favour of his children and that the value of 75% of the goodwill was liable to tax. He rejected the contention of the assessee that the business did not possess any goodwill as also the contention that the entire gift was liable to be exempt under the provisions of S.5(1)(xiv) of the Gift Tax Act, 1958. The Appellate Assistant Commissioner did not also agree with the assessee that the gift was liable to be exempted under S.5(1)(xiv) of the Gift Tax Act. In second appeal the Appellate Tribunal found that the gift is exempt under S.5(1)(xiv) of the Gift Tax Act relying on the decision of this Court in Commissioner of Gift Tax v. P.L. Gee Varghese (68 ITR 132).

3 It is seen from Annexure 'A' 'that on the date of the formation of the partnership Sankaran Nair was only 53 years old. The preamble in Annexure 'A' shows that the partnership was formed on the ground that Sankaran Nair was old and for the continuity of the business. By the partnership deed Sankaran Nair was constituted the managing partner of the business and his son P. V. Harikrishnan was named as junior partner. All the powers regarding the partnership were to be exercised by the managing partner. By Clause.10 and 11 the minor children of Sankaran Nair were admitted to the benefits of the partnership.

4 S.5(1)(xiv) of the Gift Tax Act, 1958 reads:
"5 (1) Gift Tax shall not be charged under this Act in respect of gifts made by any person--
 x x x x
(xiv) in 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."
To attract the benefit of the exemption two conditions have to be satisfied. The first is that the gift has to be in the course of carrying on a business, profession or vocation. The second is that the gift should have been made bona fide for the purpose of such business, profession or vocation. In Commissioner of Gift Tax v. Kuruvilla (1965 KLT 721), in interpreting S.5(1)(xiv) of the Gift Tax Act, 1958 this Court took the view that to apply S.5(1)(xiv) of the Gift Tax Act, 1958 it would be enough that the gift is made on grounds of commercial expediency and in order to directly or indirectly facilitate the carrying on of the business, profession or vocation. The learned Judges observed:
"We feel it difficult to resist the conclusion that in the background and circumstances, the gift could well be regarded as having been made for the better ordering of the business of the assessee. It seems to us that it would be enough to show that the gift was made on grounds of commercial expediency and in order to directly or indirectly facilitate the carrying on of the business, profession or vocation."
The above decision was reversed by Their Lordships of the Supreme Court in C. G. T. v. Dr. George Kuruvilla (1970 (77