Deemed gift and partnership admission: sons' entry as partners was treated as supported by adequate business consideration.

Admission of the assessee's sons as partners was not a deemed gift under the Gift-tax Act because their capital remained invested in the business, they were required to retain that capital and actively participate, and their contribution provided adequate consideration supported by business necessity. The assessee also retained the goodwill and the licence to supply electricity, but on the stated facts the arrangement was still treated as a genuine partnership reorganisation in the course of business. The assessed gift was therefore not sustainable.

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Issues: Whether the admission of the assessee's sons as partners in the business constituted a deemed gift under the Gift-tax Act, and whether any such transfer was exempt as being made in the course of business and in the interest of business.

Analysis: The business had earlier belonged to a Hindu undivided family and thereafter was carried on by the assessee individually. The sons' capital amounts remained invested in the business, they had earlier been employed in the concern, and under the partnership terms they were required to retain their capital and actively participate in the business. The assessee retained the right to the goodwill and licence to supply electricity. On these facts, the contribution of capital and active participation by the sons constituted adequate consideration for their admission as partners, and the arrangement was supported by business necessity.

Conclusion: No deemed gift arose on the admission of the sons into the partnership, and the assessment of gift of Rs. 1,42,000 was not justified. The assessee succeeded.

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