Deemed gift from surrender of partnership interests upheld, with valuation to be recomputed using super-profit capitalisation.

Reduction and later relinquishment of partners' profit-sharing interests, including goodwill, in favour of family trusts without consideration was treated as a deemed gift under section 4(1)(c) of the Gift-tax Act, because the trusts acquired property and the assessees' interests were correspondingly diminished. The valuation of that deemed gift was required to be recomputed on remand by applying capitalisation of super-profits, using the preceding four or five years' assessed income with appropriate adjustments, including reasonable deductions for partners' remuneration and interest on capital, in line with the Board's circular on partnership interest valuation.

---

---

Issues: (i) Whether the reduction and later relinquishment of the partners' shares in favour of the family trusts constituted a deemed gift under section 4(1)(c) of the Gift-tax Act, 1958. (ii) Whether the valuation of the alleged gift had to be recomputed by applying the proper basis for capitalisation of super-profits and the Board's circular instructions.

Issue (i): Whether the reduction and later relinquishment of the partners' shares in favour of the family trusts constituted a deemed gift under section 4(1)(c) of the Gift-tax Act, 1958.

Analysis: The assessees reduced their profit-sharing shares on the induction of the trusts and thereafter released and relinquished their remaining interests, including goodwill, in favour of the trusts. The partnership rights in profits and assets were treated as property capable of transfer, and the re-alignment of shares resulted in diminution of the assessees' interests and corresponding enrichment of the trusts. The acquisition by the trusts was held to be without consideration.

Conclusion: The transactions amounted to a deemed gift in both assessment years under section 4(1)(c), against the assessees.

Issue (ii): Whether the valuation of the alleged gift had to be recomputed by applying the proper basis for capitalisation of super-profits and the Board's circular instructions.

Analysis: The basis adopted by the Gift-tax Officer was not ascertainable from the assessment orders. The proper method was held to be capitalisation of super-profits, taking the assessed income of the preceding four or five years, with appropriate adjustments. Deduction towards partners' remuneration and interest on capital was also directed at reasonable rates, and the Board's circular on valuation of partnership interests was applied.

Conclusion: The valuation was remitted to the Gift-tax Officer for fresh computation in accordance with the stated guidelines, in favour of neither side on the valuation aspect.

Final Conclusion: The existence of taxable gift was upheld, but the quantum of gift-tax was left to be recomputed on remand by applying the prescribed valuation approach.

Ratio Decidendi: Re-alignment or surrender of a partner's profit-sharing interest, including goodwill, in favour of another without consideration amounts to a transfer of property constituting a deemed gift, while the value of such interest must be determined on the basis of super-profit capitalisation applied with reasonable valuation adjustments.

---