Genuine partnership reconstitution with capital contribution and liabilities was not treated as a gift for gift-tax purposes.

A genuine reconstitution of a firm, with admission of a new partner who contributed capital and assumed future partnership liabilities and business duties, was treated as supported by consideration and not as a gift. The reduction in an existing partner's profit-sharing ratio, by itself, did not convert the reallocation of shares into a taxable gift. The allotment of a profit share to the minor, who also brought capital into the firm, likewise could not be treated as a gift of the shares previously held by the other partners. The separate claim based on exemption under section 5(1)(xiv) of the Gift-tax Act was not examined because it did not survive.

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Issues: Whether the reduction in the assessee's profit-sharing ratio on reconstitution of the firm and the admission of a new partner and a minor to the benefits of partnership amounted to a gift liable to gift-tax, and whether the transaction was supported by adequate consideration.

Analysis: The reconstitution was found to be real and not sham or nominal. The newly admitted partner contributed capital and, as a partner, assumed future liabilities and losses and the duty to exercise due diligence in the conduct of the business. These features constituted consideration and negatived the character of the transaction as a gift. The allotment of a share in profits to the minor, who had also brought capital into the firm, could not by itself be treated as a gift of the shares earlier held by the other partners. The separate question based on exemption under section 5(1)(xiv) of the Gift-tax Act was not gone into, as it did not survive.

Conclusion: The reduction in the assessee's share on reconstitution did not create any liability to gift-tax, because the admission of the new partner and the allotment of share were for consideration and were not gifts.

Ratio Decidendi: Where a partner is admitted to a firm on a genuine reconstitution and contributes capital while assuming partnership obligations and liabilities, the allotment of profit share is supported by consideration and is not taxable as a gift.

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