Retirement of partner and settlement of accounts does not create a deemed gift where only partnership rights are readjusted.

Retirement of a partner from a firm and receipt of his share on settlement of accounts was held to involve only a readjustment of partnership rights between the retiring and continuing partners. It did not amount to a transfer of property or a relinquishment within the meaning of deemed gift under the Gift-tax Act, so gift-tax was not leviable on the settlement amount. The Tribunal was therefore correct in holding that no deemed gift arose.

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Issues: Whether the retirement of a partner from a firm and receipt of his share on settlement of accounts gave rise to a deemed gift under section 4(1) read with section 2(xxiv) of the Gift-tax Act, 1958.

Analysis: On retirement, the partner's rights in the partnership assets were only readjusted between him and the continuing partners. The transaction did not involve any transfer of property or relinquishment attracting the definition of deemed gift. The Court followed its earlier view that such retirement does not amount to a gift and that gift-tax is not leviable on the amounts received on settlement of accounts.

Conclusion: The question was answered in the affirmative and against the Revenue. The Tribunal was justified in holding that there was no deemed gift.

Ratio Decidendi: Retirement of a partner from a firm, resulting only in readjustment of partnership rights on settlement of accounts, does not constitute a transfer and therefore does not amount to a deemed gift for the purposes of gift-tax.

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