Deemed gift test under Gift-tax law: adequacy of consideration, not market value, governs transfers to a successor company.

The controlling test under section 4(1)(a) of the Gift-tax Act, 1958 is whether the consideration for a transfer is inadequate having regard to the transaction's circumstances, not whether it merely falls below market value. A bona fide transfer of a firm's assets to a company formed by the same partners, where the business continues and the partners and shareholders are identical, does not by itself justify treating the whole transaction or separate assets such as goodwill, machinery, or stock as a deemed gift unless the stated consideration is shown not to be the true consideration. The transfer was therefore not a deemed gift.

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Issues: Whether the transfer of the firm's assets to a company formed by the same partners attracted deemed gift under section 4(1)(a) of the Gift-tax Act, 1958 on the footing that the consideration was not adequate.

Analysis: The controlling test is not whether the consideration equals market value, but whether it is adequate having regard to the circumstances of the transaction. A bona fide transfer, where the partners and shareholders are identical and the same business continues, does not by itself justify treating the entire transaction or individual items such as goodwill, machinery, or stock as a deemed gift in the absence of a finding that the consideration stated was not the true consideration.

Conclusion: The transfer did not give rise to a deemed gift under section 4(1)(a) of the Gift-tax Act, 1958, and the answer was in favour of the assessee.

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