Partnership reconstitution and profit-share reallocation do not by themselves create a taxable gift without proof of inadequate consideration.

A reconstitution of a partnership that reduced an existing partner's profit-sharing share and inducted a new partner did not, by itself, create a taxable gift under the Gift-tax Act. The incoming partner contributed capital and assumed partnership obligations for the common advantage of the firm, and the Revenue produced no material to show that the reallocation lacked adequate consideration. Mere decrease in one partner's share and increase in another's was insufficient to prove a gift. The Revenue bore the burden of establishing a transfer for less than adequate consideration, and that burden was not discharged.

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Issues: Whether the reduction of an existing partner's profit-sharing share on reconstitution of the firm, coupled with induction of a new partner contributing capital and undertaking partnership obligations, amounted to a taxable gift under the Gift-tax Act.

Analysis: The reconstitution of the firm did not involve a mere unilateral surrender of share without consideration. The incoming partner contributed capital, and the partnership deed obliged all partners to carry on the business for the common advantage of the firm. The Revenue led no material to show that the reassignment of shares was unsupported by consideration or that the contribution and mutual obligations were inadequate. The mere fact that one partner's share decreased and another's increased was insufficient, by itself, to establish a gift. On the facts, the consideration was adequate and the Revenue failed to discharge the burden of proving a taxable transfer for less than adequate consideration.

Conclusion: The reallocation of profit-sharing rights did not amount to a taxable gift under section 4(1)(a) of the Gift-tax Act, 1958, and the issue is decided in favour of the assessee.

Final Conclusion: The High Court's view was set aside and the assessee was held not liable to gift-tax on the reconstitution-based reallocation of partnership shares.

Ratio Decidendi: A change in partnership profit-sharing ratios on reconstitution does not, by itself, establish a taxable gift; the Revenue must prove that the transfer, if any, was without adequate consideration.

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