Consideration in partnership reconstitution excludes gift-tax where the transfer of interest is supported by intended and actual consideration.

A surrender or reduction of a partner's share in goodwill and development rebate reserve is not a taxable gift under the Gift-tax Act where it is supported by consideration. The arrangement showed that the assessee's major sons were inducted into the business, with capital contributions contemplated and later made, indicating that consideration was intended to pass and did pass. On that footing, the transfer fell outside the definition of gift, and only any uncompensated portion, if present, could be treated as a deemed gift under the statutory provision. The transfer was therefore held not to constitute a gift, and the assessee's position was accepted.

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Issues: Whether the assessee's surrender of 40% share in the partnership goodwill and development rebate reserve in favour of his sons was for consideration and, therefore, outside the ambit of a gift under the Gift-tax Act, 1958.

Analysis: The question turned on whether any consideration had passed or was intended to pass in return for the reduction of the assessee's share on reconstitution of the firm. The arrangement showed that experienced major sons were inducted into the business and that capital contributions were contemplated and later made. The statutory scheme also recognises that where property is transferred for consideration, the transfer is not a gift, while section 4(1)(b) deems only that part of the consideration which has not passed or is not intended to pass to be treated as a gift. The surrender of an interest in property under section 4(1)(c) could not be treated as a non-bona fide transfer where the transfer was supported by consideration.

Conclusion: The transfer was for consideration and did not amount to a gift within the meaning of the Act.

Final Conclusion: The reference was answered in favour of the assessee, and the Tribunal's view that no gift arose from the transaction was upheld.

Ratio Decidendi: A surrender or transfer of partnership interest is not a taxable gift where it is supported by consideration that is intended to pass and does in fact pass, and only the uncompensated portion, if any, can fall within the deeming provision.

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