Partnership asset allocation during the firm's continuance can amount to a transfer and trigger deemed gift-tax liability.

Distribution of a firm's asset to an individual partner while the partnership continued was treated as a transfer, because the firm's interest in the asset was replaced by the partner's exclusive interest. The text distinguishes this from allocation on dissolution or retirement, where partners merely work out their existing share and no transfer occurs. Where the asset is allotted for less than its value, the shortfall falls within the deeming provision for gifts. On that basis, the machinery distributed to the partners during the subsistence of the firm constituted a deemed gift under section 4(1)(a) of the Gift-tax Act, 1958.

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Issues: Whether the distribution of partnership assets to partners during the subsistence of the firm constituted a transfer attracting deemed gift-tax liability under section 4(1)(a) of the Gift-tax Act, 1958.

Analysis: A distinction was drawn between cases where a partner receives an asset on dissolution or retirement, in which event the shared interest in the firm's assets is merely worked out and no transfer occurs, and cases where, while the partnership continues, an asset of the firm is allotted to an individual partner so that the firm's interest is replaced by the exclusive interest of that partner. In the latter situation, the transaction amounts to a transfer of the asset by the firm to the partner. Where such transfer is for less than the value of the asset, the difference falls within the deeming provision governing gifts.

Conclusion: The distribution of the machinery to the partners during the subsistence of the firm was a transfer and, since it was for less than its value, it constituted a deemed gift under section 4(1)(a) of the Gift-tax Act, 1958.

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