Partner's contribution of capital asset to firm was not a deemed gift under the Gift-tax Act because consideration could not be valued upfront.

Contribution of a partner's own capital asset to a partnership firm amounts to a transfer because the partner's exclusive ownership is reduced to a shared partnership interest. However, the consideration for that transfer is not merely the credit in the partner's capital account; it is the composite right to share profits and to receive a share in the net assets on dissolution or retirement. Because that consideration cannot be reliably valued at the time of contribution, adequacy of consideration is not ascertainable in praesenti. Section 4(1)(a) of the Gift-tax Act, 1958 therefore could not be invoked, and no deemed gift arose from the transfer of the building to the firm.

---

---

Issues: Whether contribution of a capital asset by a partner to a partnership firm amounts to a transfer attracting section 4(1)(a) of the Gift-tax Act, 1958, and whether the difference between the market value of the asset and the credit entry in the partner's capital account can be treated as a deemed gift for want of adequate consideration.

Analysis: A partner who introduces his own property into the firm does effect a transfer, because his exclusive interest is reduced to a shared interest in the partnership asset. However, the consideration received in exchange is not the book credit entry; it is the composite right to share profits during the subsistence of the firm and to receive a share in the net partnership assets on dissolution or retirement. That consideration is incapable of reliable valuation on the date of contribution. Since adequacy or inadequacy of consideration cannot be ascertained in praesenti, the essential condition for invoking section 4(1)(a) is not satisfied. The market value of the whole asset also cannot be used as the yardstick where only a lesser right is effectively transferred.

Conclusion: Section 4(1)(a) of the Gift-tax Act, 1958 could not be invoked, and no deemed gift arose from the contribution of the building to the partnership firm. The reference was answered in favour of the assessee and against the Revenue.

---