R.V Raveendran, J.:—

This reference under Section 26(1) of the Gift Tax Act, 1958(‘Act’ for short) is made by the Income Tax Appellate Tribunal at the instance of the Assessee. The facts leading to the reference are given below briefly.

1.1 The petitioner was the owner of two sites bearing Nos. 20 and 27, I Main Road, Kumara Park West, Bangalore, which were valued at Rs. 4,50,000/- by an approved valuer on 16.4.1979 in connection with his Wealth Tax Assessment for the Assessment year 1979-1980. He entered into a partnership with his mother with effect from 1.7.1979 and contributed the said two sites as his capital at a value of Rs. 1,35,000/-. Subsequently, the firm was reconstituted on 14.3.1980 by inducting the petitioner's father as a partner, resulting in a change in the profit-sharing ratio of the partners. The Gift Tax Officer issued a notice to the petitioner calling upon him to file his return. The petitioner filed a Nil Return on 27.2.1987 Thereafter, the GTO passed an Order on 31.3.1987 assessing the gift Tax for the Assessment Year 1980-1981 under Section 15(3) of the Act, the valuation date being 31.3.1980

1.2 The GTO held that the contribution of the sites towards the capital of the firm amounted to a transfer and determined the value of the sites as Rs. 6,00,000/-. As petitioner had contributed the sites to the firm valuing them at Rs. 1,35,000/- he treated the difference in value, namely, Rs. 4,65,000/- as a gift by the petitioner to the firm and made an assessment subjecting the same to gift tax.

1.3 Feeling aggrieved, the Petitioner filed as appeal before the Commissioner of Income-Tax (Appeals III), Bangalore. The Appellate Authority by Order dated 28.9.1987, allowed he Appeal holding that no gift tax was leviable. He held that there was nothing to prove that the fair market value was Rs. 6,00,000/- and at best, the value can be taken as Rs. 4,50,000/- as per the valuation adopted for wealth tax purposes; that the other partners had also contributed Rs. 2,95,950/- as against the contribution by the petitioner of the value of Rs. 4,50,000/- and the petitioner's capital was subsequently increased to Rs. 3,65,000; that there was a liability of Rs. 13.43 lakhs to K.S.F.C and unsecured Loans to an extent of Rs. 10.91 lakhs and the other partners had considerable, assets that could be proceeded against by the creditors in the event of non-payment by the firm; that these factors could not be evaluated strictly in terms of monetary value, in order to judge the adequacy of consideration; and therefore, the finding by the GTO that there was inadequacy of consideration was not based on proper evidence. He also held that even if the difference is to be construed as a deemed gift, as petitioner had contributed the same in the course of his business in partnership, it was exempted under Section 5(1)(xiv) of the Act and therefore, no gift tax was payable. Consequently, he directed the GTO not to subject the petitioner to any tax under Section 4(1) of the Act.

1.4 The GTO filed an appeal against the said decision before the Tribunal. The Tribunal by order dated 6.9.1990 held that the transfer of the property by the Assessee to the Firm was without any consideration and therefore Section 2(xii) and Section 3 of the Act applied and transaction was not exempted under Section 5(1)(xiv). The Tribunal further held that for the purpose of computation of gift tax, the value of the properties should be taken as Rs. 4,50,000/- and the value of the deemed gift as Rs. 4,50,000/- less Rs. 1,35,000; and as the petitioner was entitled to a specific share in the firm, his share had to be excluded while quantifying the value of the gift and only the balance will have to be taken into account for computing the value of the gift. Hence the Tribunal reversed the order of the first Appellate Authority and restored the Order of the GTO with a direction to re-compute the taxable gift as indicated. Thus, though the Tribunal did not refer to Section 4(1)(a), having regard to the computation adopted, it has impliedly held that the matter fell under Section 4(1)(a).

2. Feeling aggrieved, the petitioner the sought a reference of several questions; in pursuance of it, the Tribunal has formulated and referred the following questions of law for decision of this Court:

(i) Whether, on the facts and in the circumstances of the case, there was a gift within the meaning of Section 4(1)(a) of the Gift-Tax Act by giving of the site worth Rs. 4,50,000/- as accessee's contribution to the firm constituted on 1.7.1979?

(ii) If “Yes” whether it was taxable under the provisions of the Gift Tax Act?

(iii) Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the exemption under Section 5(1)(xiv) of the Gift Tax Act was not available?

RE: QUESTION (i):

3. The Learned Counsel for the Petitioner submitted that contribution of a personal property of a partner towards the capital of the partnership cannot be considered as a gift as it was not a transfer without consideration as defined in Section 2(xii). He also contended that though the transfer was for consideration, having regard to the nature of such transfer, the consideration for such transfer is incapable of ascertainment in monetary terms; and where the consideration is indeterminate, the question of inadequacy of consideration will not arise and consequently such a transactioh cannot be treated as a deemed gift under Section 4(1)(a) of the Act; and that the transaction did not also fall under clauses (b), (c), (d) or (e) of Section 4(1); and therefore, the transaction can neither be treated as a gift nor as a deemed gift, which can be charged to gift tax under the Act. Strong reliance is placed on the decision of the Supreme Court in Sunil Siddharthbahi v. Commissioner of Income Tax . 156 1985 ITR 509. to contend that the consideration for contribution of the asset of a partner to the firm cannot be ascertained. Reliance is also placed on the decision in Cit v. B.C Srinivasa Setty. . 128 ITR 294. wherein the Supreme Court observed that the charging section and computation provisions under each head of income constituted an integrated code and if the computation provision cannot apply to a particular case, such a case was not intended to fall within the charging section. Petitioner contends that if Section 4(1)(a) is inapplicable as consideration could not be ascertained, Section 3 will not apply.

4. The learned counsel for the Department on the other hand, contended that certain amount was credited to the Capital Account of the petitioner with the firm, as value of the two properties contributed by him, and that amount was the “consideration” for the purposes of the Act and if it is found that the said ‘consideration’ fell short of the market value of the said properties, the difference will have to be deemed as a gift under Section 4(1)(a) and taxed accordingly. Though the Tribunal held that the contribution by the partner of his property, to the capital of the firm is a transfer without consideration in money's worth and therefore a ‘gift’ as defined under Section 2(xii), the Department did not subscribe to that view and contended that such transfer may give rise to only a deemed gift under Section 4(1)(a). He rightly did not contend that the transaction was a transfer without consideration falling under the definition of gift under Section 2(xii) of the Act.

5. Therefore the question that arises is whether a contribution of the individual asset of a partner to the capital of a firm can be brought under Section 4(1)(a) by treating the difference between the market value of the asset and the amount credited to the account of the partner as the value of the asset, as a deemed gift.

6. A brief reference to the relevant provisions of the Act is necessary to consider the contentions urged by the parties.

6.1 Section 3 of the Act provides that subject to the other provisions contained in the Act, there shall be charged for every assessment year, a tax in respect of gifts made by a person during the previous year at the rates specified in the schedule. Section 2(xii) defines “Gift” as a transfer by one person to another of any existing movable or immovable property made voluntarily and without consideration in money or money's worth and includes the transfer or conversation of any property referred to in Section 4, deemed to be a gift under that section. Section 2(xxiv) defines “transfer of property” as any disposition, conveyance, assignment, settlement, delivery or other alienation of property and, without limiting the generality of the foregoing includes, among others, the grant or creation of any lease, mortgage, easement, licence, partnership or interest in the property, or any transaction entered into by any person with intent thereby to diminish directly or indirectly the value of his own property and to increase the value of the property of any other person.

6.3 Section 4(1) enumerates five categories of transfers which shall be deemed to be gifts for the purposes of the Act. What is relevant is only category (a) which provides that for the purposes of the Act, where property is transferred otherwise than for adequate consideration, the amount by which the market value of the property at the date of the transfer exceeds the value of the consideration, shall be deemed to be a gift made by the transferor. The deemed gifts described in clauses (b) to (e) of Section 4(1) and Section 4(2) are not relevant for this case and it is not therefore necessary to refer to them.

6.3 Dealing with the aforesaid provisions, this Court in Khoday Eswarsa & Sons v. CGT . 1990 186 ITR 388. observed that the Act is self contained. The purpose of the Special definition of “transfer of property” in Section 2(xxiv) is to rope in artificial devices which may include mere agreements or arrangements intended to confer gifts, which may not however fall under the normal meaning of ‘transfer’ or gift; and the definition of “gift” in Section 2(xii) is wide enough to include many transactions which could not ordinarily be described as transfer of property and has a wider import that the meaning given to “Gift” in Section 122 of Transfer of Property Act. Moreover the definition of “gift” in the Act is on inclusive definition and gives an artificial extention to the meaning of the word “gift” by deeming certain transactions to be gifts under Section 4. In order to find out whether a transaction falls within the provisions of Section 4, two separate enquiries have to be made: (i) as to the existence of ‘transfer of property’, the essence of such transfer being passing of control over the economic benefits of a property rather than any technical changes in title; and (ii) as to the adequacy of consideration to be decided in a broad commercial sense.

7. Keeping the relevant provisions of the Gift Tax Act and its purpose in view, we will now refer to the decision in SIDDARTHBHAI, on which strong reliance is placed by the petitioner. In that case, the point that arose for consideration was whether Capital Contribution by a partner (assessee) to the assets of a partnership firm can gave rise to a capital gain in his hands liable to Income tax. This necessitated examination of two questions: (a) Whether a contribution of the personal asset of a partner towards the capital of the firm amounted to a transfer of property; and (b) if so, whether the partner can be said to have received any ‘consideration’ as that expression is understood in the scheme of Capital gains under the Income Tax Act, 1961 for such transfer and whether the credit given to the partner in his capital account as a consequence of such transfer can be said to be the consideration for such transfer, for computation or capital gains. The Supreme Court answered the first question in the affirmative and the second question in the negative.

7.1 The reasoning given by the Supreme Court in Siddarthbhai's case to hold that there is a transfer when a partner brings his personal asset into the partnership as his contribution to its capital, are apposite:—

“In its general sense, the expression ‘transfer of property’ connotes the passing of rights in the property from one person to another. In one case there may be a passing of the entire bundle of rights from the transferor to the transferee. In another case, the transfer may consist of one of the estates only out of all the estates comprising the totality of rights in the property. In a third case, there may be a reduction of the exclusive interest in the totality of rights of the original owner into a joint or shared interest with other persons. An exclusive interest in property is a larger interest than a share in that property. To the extent to which the exclusive interest is reduced to a shared interest it would be seen that there is a transfer of interest. Therefore when a partner brings in his personal asset into the capital of the partnership firm as his contribution to his capital he reduces his exclusive rights in the asset to shared rights in it with the other partners of the firm. While he does not lose his rights in the asset altogether what he enjoys now is an abridged right which cannot be identified with the fullness of the right which he enjoys in the asset before it entered the partnership capital.”

(Emphasis supplied)

Having regard to the extended definition of ‘transfer of property’ in Section 2(xxiv) of the Act, extracted above, and the above observations of the Supreme Court, there cannot be any doubt that contribution of an asset by a partner to the firm is a ‘transfer of property’.

7.2 The reasoning of the Supreme Court to hold that the consideration received by a partner or accruing to him as a result of contribution of his personal asset to the firm is not capable of being ascertained in monetary terms, is extracted below:—

“The second question is whether the assessee can be said to have received any consideration as that expression is understood in the scheme of capital gains under the Income Tax Act. In Commr. of Income-Tax, Bangalore v. B.C Sreenivasa Setty, 128 ITR 294 ((1981) 2 SCC 460 : AIR 1981 SC 972) this court observed that the charging section and the computation provisions under each head of income constitute an integrated code, and when there is a case to which the computation provisions cannot apply at all, it is evident that such a case was not intended to fall within the charging Section. On the basis of that proposition learned counsel for assessee has urged that Section 45 is not attracted in the present case because to compute the profits or gains under Section 48 the value of the consideration received by the assessee or accruing to him as a result of the transfer of the capital asset must be capable of ascertainment in monetary terms. The consideration for the transfer of the personal assets is the right which arises or accrues to the partner during the subsistence of the partnership to get his share of the profits from time to time and, after the dissolution of the partnership or with this retirement from the partnership, to get the value of a share in the net partnership assets as on the date of the dissolution or retirement after a deduction of liabilities and prior charges. The credit entry made in the partner's capital account in the books of the partnership firm does not represent the true value of the consideration. It is a notional value only, intended to be taken into account at the time of determining the value of the partner's share in the net partnership assets on the date of dissolution or on his retirement, a share which will depend upon a deduction of the liabilities and prior charges existing on the date of dissolution or retirement. It is not possible to predicate beforehand what will be the position in terms of monetary value of a partner's share on that date. At the time when the partner transfers his personal asset to the partnership firm, there can be no reckoning of the liabilities and losses which the firm may suffer in the years to come. All that lies within the womb of the future. It is impossible to conceive of evaluating the consideration acquired by the partner when he brings his personal asset into the partnership firm when neither the date of dissolution or retirement can be envisaged nor can there by any ascertainment of liabilities and prior charges which may not have even arisen yet. In the circumstances, we are unable to hold that the consideration which a partner acquires on making over his personal asset to the partnership firm as his contribution to its capital can fall within the terms of Section 48. And as that provision is fundamental to the computation machinery incorporated in the scheme relating to the determination of the charge provided in Section 45, such a case must be regarded as falling outside the scope of capital gains taxation altogether…..When his personal asset merges into the capital of the partnership firm a corresponding credit entry is made in the partner's capital account in the books of the partnership firm, but that entry is made merely for the purpose of adjusting the rights of the partners inter se when the partnership is dissolved or the partner retires. It evidences no debt due by the firm to the partner. Indeed, the capital represented by the national entry to the credit of the partner's account may be completely wiped out by losses which may be subsequently incurred by the firm, even in the very accounting year in which the capital account is credited. Having regard to the nature and quality of the consideration which the partner may be said to acquire on introducing his personal asset into the partnership firm as his contribution to its capital, it cannot be said that any income or gain arises or accrues to the assessee in the true commercial sense which a business man would understand as real income or gain.”…

“Inasmuch as we are of the opinion that the consideration received by the assessee on the transfer of his shares to the partnership firm does not fall within the contemplation of Section 48 of the Income-Tax Act and further that no profit or gain can be said to arise for the purposes of Income Tax Act, we hold that these cases fall outside the scope of Section 48 of the Act altogether.”

(emphasis supplied)

The Supreme Court has, thus, held that the value of the consideration received by the partner or accruing to a partner as a result of the transfer of the capital assets is incapable of ascertainement in monetary terms at the time of such transfer; and that the amount credited to the partner's account at the time of such transfer cannot represent the true value of the consideration. It, therefore, follows that if the consideration for the transfer of the capital assets by the partner to the firm is incapable of ascertainment at the time of such transfer, the question of inadequancy of consideration would not arise. Hence, there can be no deemed gift as contemplated under Section 4(1)(a).

8. The Learned Counsel for the Department, however, contended that the decision in Sunil Siddarth Bhai was inapplicable as that dealt with the capital gains under the Income Tax Act and not Gift Tax Act. He contended that though the sine qua non for a capital gain and gift is ‘transfer’ the factors necessary for computing capital gain for purposes of capital gain tax are wholly different from the factors necessary to determine the value of the gift, necessary to determine the value of the gift, for purposes of gift tax; that to determine capital gains, the two relevant factors are the cost of acquisition of property and the consideration received for the transfer of the property, the capital gain being the difference between them; and that on the other hand, neither the cost of acquisition nor the consideration for transfer are relevant to determine the value of the gift and the only relevant factor to determine gift tax is the market value of the property transferred on the date of transfer. Eloberating the said contention, he stated that in a capital gain, emphasis is on consideration received; and in a gift, emphasis is on the value of the property gifted and in a deemed gift, emphasis is on the deficiency in consideration not received. While what an assessee gets as consideration by transfer, is taxed as a capital gain, what the assessee does not get as consideration for the transfer, is taxed as a gift. Further, “Consideration” may have different meanings under different legislations or in different contexts. It may refer to actual consideration or deemed consideration or a mixture of actual and deemed consideration or consideration due or consideration received as also receivable; and therefore the concept of “consideration” from one law should not be mechanically imported to interpret the same word used in a different context in a different law. He relied on the decision of the Supreme Court in Municipal Corporation of Delhi v. Mohamed Yasin . 1983 3 SCC 229 where in it is pointed out:

“Words and phrases take colour and character from the context and the times and speak differently in different contexts and times. And, it is worthwhile remembering that words and phrases have not only a meaning, but also a content, a living content which breathes, and so, expands and contracts.”

He, therefore, submitted that the factors they should be considered for the purpose of capital gains are different from the factors necessary to determine a gift or deemed gift; and as Siddartha Bhai's case makes it clear at more that one place that the word ‘consideration’ was explained therein only with reference to the scheme of capital gains under the Income Tax Act, the meaning assigned to the word ‘consideration’ for purposes of capital gains under the Income-Tax Act, cannot be imported to ascertain the meaning of ‘consideration’ with reference to gifts and deemed gifts under the Gift Tax Act. Hence, he submitted that the decision in Siddartha Bhai is of no assistance to understand the meaning of the term “consideration” under the Gift Tax Act.

9. It is no doubt true that ‘consideration’ for transfer, which is very relevant to determine capital gains, has normally no relevance to a gift, which in the generally accepted sense is a transfer without consideration. But, we are concerned here not with a ‘gift’ which is a transfer without consideration, but with a ‘deemed gift’ created by a legal fiction under Section 4(i)(a) of the Act. The transaction is not sought to be taxed as a transfer without consideration, but as a deemed gift arising under Section 4(i)(a). To determine the extent of deemed gift, contemplated under Section 4(1)(a), consideration is the relevant factor, as a deemed gift under the said provision arises where the property is transferred otherwise than for adequate consideration, that is for inadequate consideration. When the question relates to extent or adequacy of consideration for the transfer arising from a transaction where a partner contributed his individual property to the partnership becomes relevant, the decision in Siddarth Bhai, which holds that the consideration for such a transfer is unascertainable until the dissolution of the partnership, becomes relevant and applicable. The principles laid down relating to consideration in the said decision with reference to transfer of an asset by a partner to the firm, as a capital contribution apply with equal fire in this case. In the absence of statutory deeming provision as in Section 45(3) of the Income Tax Act, 1961, inserted with effect from 1.4.1988 (providing the amount recorded in the books of account of the firm, as the value of the capital asset contributed by the partner to the firm shall be the consideration received or accrued as a result of the transfer of the capital asset it is impermissible to treat the amount entered as the value of the capital asset in the books of account of the firm, as the consideration for the transfer for purpose of Section 4(1) of the Act. The effect of the decision in Sunil Siddarth Bhai, holding that the consideration received by a partner for contributing his individual asset towards the capital of the firm is unascertainable in monetary terms, when the contribution is made, is taken away by the deeming provision introduced in Section 45(3) of the Income Tax Act, for purposes of capital gains. But, the similar effect of the said decision for purposes of Gift Tax Act, is not taken away, in the absence of a corresponding deeming provisions in the Gift Tax Act. In the absence of an explanation or deeming provision in the Gift Tax Act, that the amount recorded in the books of account of the firm, as the value of the capital asset contributed by a partner, is the deemed consideration for the transfer, the said figure cannot form the basis to determine adequacy of consideration vis-a-vis the fair market value of the property. Hence, it has to be held that though a contribution by a partner of his individual property towards the capital of the firm, amounts to ‘transfer of property’ for the purpose of Gift Tax Act, there cannot be a deemed gift in such a case for the purpose of gift tax, as it is not possible to determine the ‘adequacy’ of consideration. This matter falls under the principle laid down in B.C Srinivasa Setty's case (supra).

10. But the above is the position only if the transaction is bona fide. If however the GTO finds on examination and verification that the transaction is a sham or illusory device or ruse, he can penetrate the veil covering the transaction and reach the truth. If in a given case, the GTO on an examination of the facts and circumstances, finds that the transaction is not genuine, but sham or illusory, and the amount credited to the partner's account is absurdly low wholly disproportionate to the value of the asset and the obvious intention is to transfer the asset to the other partner's without consideration and without payment of gift tax, then he is entitled to treat the value of the capital asset recorded in the books of account of the firm as the consideration and proceed to examine the matter under Section 4(1)(a). It is relevant to refer to the following observations in Sunil Siddarth Bahi's case:—

“We have decided these appeals on the assumption that the partnership firm in question is genuine firm and not the result of the sham or unreal transaction, and that the transfer by the partner of his personal asset to the partnership firm represents a genuine intention to contribute to the share capital of the firm for the purpose of carrying on the partnership in which he is or becomes a partner is merely a device or ruse for converting the asset into money which would substantially remain available for his benefit without liability to income tax on a capital gain, it will be open to the income tax authorities to go behind the transaction and examine whether the transaction of creating the partnership is a genuine or a sham transaction and, even where the partnership firm represents a real attempt to contribute to the share capital of the partnership firm for the purpose of carrying on the partnership business or in nothing but a device or ruse to convert the personal asset into money substantially for the benefit of the assessee while evading tax on a capital gain. The income tax officer will be entitled to consider all the relevant indicate in this regard, whether the partnership is formed between the assessee and his wife and children or substantially limited to them, whether the personal asset is sold by the partnership firm soon after is sold by the partnership firm soon after it is transferred by the assessee to it, whether the partnership firm has no substantial or real business or the record shows that there was no real need of the partnership firm for such capital contribution from the assessee. All these and other pertinent consideration may be taken into regard when the income tax officer enters upon a scrutiny of the transaction, for in the task of determining whether a transaction is a sham or illusory transaction or a device or ruse, he is entitled to penetrate the veil covering it and ascertain the truth.”

Having regard to the facts of this case and the several circumstances set out by the first appellate authority, there is nothing to doubt the bona fides of the transaction. Hence, the first question is answered in the negative.

RE: QUESTION (ii):

11. The learned counsel for the petitioner contended that even if the answer to the first questions is in the affirmative, no gift tax is payable, as a partnership firm is not a ‘person’ as defined in Section 2(xviii) os the Act and therefore there cannot be ‘gift’ or ‘deemed gift’ in favour of a partnership firm, under the Act. Section 2(xviii) of the Gift Tax Act defines a ‘person’ as including a Hindu Undivided Family or a Company or Association or Body of Individuals or persons whether incorporated or not. It is pointed out that the said definition does not include partnerships. He invited reference to corresponding definition of ‘person’ in Section 2(31) of the Income Tax Act, which includes a partnership. This contention is without merit. Firstly, the question whether the recipient of a gift is a ‘person’ as defined in the Act or not, is not relevant. Under the charging section, it is the person making the gift who is liable to pay gift tax. In this case, the petitioner who is an individual and a ‘person’ as defined under the Act, is transferring the asset, and not the firm. Secondly, even a partnership firm has been held to be a ‘person’ within the meaning of that expression under the Gift Tax Act by this Court in Khoday Eswarsa v. CGT following the decisions of the Allahabad High Court in CGT v. S.B Sugar Mills . 120 1979 ITR 126. and the decision of the Madras High Court in Commissioner Of Income-Tax, Tamil Nadu-I v. Bharani Pictures . 129 1981 ITR 244.. As the first question is answered in the negative, the second question however does not survive for consideration.

RE: QUESTION No.(iii):

12. During the relevant assessment year Section 5(1)(xiv) of the Act exempted gifts made by any person in the course of carrying on a business profession or a vocation from payment of gift tax to the extent to which the gift is proved to the satisfaction of the GTO to have been made bonafide for the purposes of such business, profession or vocation. Petitioner contends that the contribution by him as a partner to the firm is therefore exempted from payment of gift tax.

13. A careful reading of the said provision shows that the following conditions should have been fulfilled, before exemption could be claimed:

i) gift must be made by a person in the course of carrying on a business, profession or vocation - that is the donor must carry on business, profession or vocation before and after the gift.

(ii) the business, profession or avocation should be of the person making the gift; that is, the gift cannot be made in respect of a business, profession or vocation of some one else;

(iii) The gift should be for the purpose of the business, profession or vocation carried on by the person making the gift, that is either for maintaining, preserving or improving such business, profession or vocation or protection of its assets and property; and there should be an integral and real connection between making of the gift and the carrying on of the business, profession or vocation.

(iv) The gift should be made bonafide, that is, it should be truly and reasonably be made in good faith for the purpose of the business, profession or avocation of the donor.

14. In CGT v. Smt. E.S.M.P Rasiya Banu . 146 1984 ITR 592. the Madras High Court held as follows, with reference to Section 5(1)(xiv):

“This Section was obviously intended to exempt what may be called business gifts. We are quite familiar with free gifts scheme and other presents with modern business men make in the course of carrying on business men make in the course of carrying on business and for furthering their business purposes. The gift may be for a variety of business purposes. Free gifts are given by manufacturers of advertised products in a competitive market. A buyer of articles, such as soap powder or fans, is given free gifts of plastic buckets, stainless steel vessels and the like. Favoured customers may be given large-scale discounts in the listed price of articles. People in business may sponsor a cricket match or other sport and give prizes to the best man in the field just to push their business. Industrialists are known to make presentations and give valuable articles to dignitaries who lay foundation stones for factories, cut the tapes for opening branches, or preside over jubilees. They may be presented with costly shawls, models of keys and trowels, building models and the like, made of silver, marble, ivory or other costly material. There may be various other presents by tradespeople both to customers and to officialdom; large sized donations are given to political parties by industrial houses. Some even undertake to adopt villages. So far as the receipts of the benefits are concerned, they are pure gifts. From the point of view of the businessmen, however, who disburse them, the presents are made only with a view to a substantial return for the business. They return may not be apparent; it may not even be measurable in terms of money in the immediate present, but it will have long term advantages in the enlargement of markets, the enhancement of goodwill and the like. Otherwise, businessmen will not be making these gifts at all. Apparently in view of these larger economic considerations, Parliament has exempted these gifts from gift tax, taking care, however, to stipulate, that the gifts should be made ‘in the course’ of the business and ‘for the purpose’ of the business.”

15. Under this head of exemption, courts have accepted claims for exemption which would ultimately benefit the business, that is for example, where to preserve, promote and strengthen the business, a proprietor business is converted into a partnership or where fresh partners are admitted to a partnership, provided it is done not with the sole intention of benefiting the persons admitted to the partnership. In Khoday Eswara's case, referred to above, this Court held that Section 5(1)(xiv) can be applied only if it is shown that the gift was made on the ground of commercial expediency or in order to directly or indirectly facilitate the carrying on of the business, profession or vocation.

16. In this case, the transfer was at the time of formation of the partnership. That is, the person effecting the transfer was not carrying on business before the transfer and therefore, it was not in the course of business. Secondly, the gift was not for the purpose of the business, profession or vocation carried on by the petitioner. Hence, it cannot be said that the gift was made by the petitioner in the course of carrying on business. Hence, the exemption under Section 5(1)(xiv) is not available.

CONCLUSION:

17. In view of the above, we answer the questions referred as follows:

a) Contribution of the individual asset of the partner towards the capital of the firm is a ‘transfer of property’ under the Gift Tax Act. But, it is neither a gift nor a deemed gift under Section 4(1)(a) of the Gift Tax Act (subject to the reservation in para 10 above).

b) As the answer to first question is in the negative, the second question does not survive for consideration.

c) The exemption under Section 5(1)(xiv) of Gift Tax Act was not available in respect of a contribution of the personal asset of a partner to the capital of the firm at the time of constitution of the firm. The said question is accordingly answered in the affirmative and against the assessee.

As the first question is answered in favour of the assessee, the contribution of the gift by the petitioner to the firm is not taxable under the Gift Tax Act.