Surrender of a partner's existing interest, including goodwill, may attract the gift-tax deeming rule if not bona fide.

Section 4(1)(c) of the Gift-tax Act, 1958 focuses on surrender of an existing interest in property at the time of retirement, not on any supposed right to future profits. The High Court held that a retiring partner may still have an existing interest in the firm's assets, including goodwill, and that such interest can fall within the deeming provision if the surrender is not shown to be bona fide. The Tribunal erred by restricting its inquiry to future profits and by ignoring whether goodwill existed and whether the alleged surrender was genuine. The matter was remitted for fresh consideration on the relevant facts.

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Issues: Whether the surrender of a retiring partner's interest on reconstitution of a firm amounts to a deemed gift under section 4(1)(c) of the Gift-tax Act, 1958, and whether the focus should be only on future profits or also on existing rights such as goodwill.

Analysis: The provision deems a release, discharge, surrender, forfeiture or abandonment of any interest in property to be a gift if the surrender is not shown to be bona fide. A retiring partner may not have a right to future profits, but at the date of retirement he may still have an existing interest in the firm's assets, including goodwill. The Tribunal erred in confining its consideration to a supposed non-existent right to future profits and in ignoring the existing rights and the factual question whether goodwill existed and whether any surrender of that interest was bona fide.

Conclusion: The Tribunal's reasoning on future profits was incorrect, and surrender of an existing interest in the firm's property, including goodwill, can fall within section 4(1)(c) if the statutory conditions are met.

Final Conclusion: The matter was sent back to the Tribunal for fresh decision on the relevant facts and the bona fides of the alleged surrender, so no final determination on taxability was made by the High Court.

Ratio Decidendi: For section 4(1)(c) of the Gift-tax Act, 1958, the relevant inquiry is the surrender of an existing interest in property at the time of retirement, not a supposed right to future profits; goodwill of a firm is a property interest capable of attracting the deeming provision if the surrender is not bona fide.

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