Partnership goodwill on retirement: no gift arises where a retiring partner only realises a pre-existing share in firm assets.

On a partner's retirement from a partnership firm and induction of another partner, no gift arose in relation to the retiring partner's share in the firm's goodwill. The partnership continued, and the firm's assets and goodwill remained those of the firm; the retiring partner merely received the value of his share in partnership assets after liabilities, which was a realisation of a pre-existing right rather than a transfer to the continuing or incoming partner. The attempted distinction based on the admission of an incoming partner did not alter the principle. The court held that relinquishment of the goodwill share did not attract gift-tax, and the question was answered in favour of the assessee.

---

---

Issues: Whether, on the retirement of a partner from a partnership firm and induction of another partner, any element of gift arose in respect of the retiring partner's share in the goodwill of the firm.

Analysis: The governing principle applied was that on retirement of a partner, the partnership continues and the firm's assets and goodwill remain those of the firm. The retiring partner receives only the value of his share in the partnership assets less liabilities, which is treated as realisation of a pre-existing right and not as a transfer to the continuing or incoming partner. The distinction sought to be drawn on the facts of an incoming partner was held to make no difference in principle, because the relinquishment of share in goodwill in both situations does not amount to a transfer giving rise to gift-tax.

Conclusion: No element of gift was involved on the assessee's retirement from the firm. The question referred was answered in the affirmative, in favour of the assessee and against the Revenue.

---