Partnership reconstitution and reduced profit shares were held outside deemed gift-tax where commercial expediency supported the change.

Reduction of profit-sharing shares on reconstitution of a partnership firm was treated as a business arrangement, not a gratuitous transfer. Where new partners brought capital and active participation, and the firm's business expanded after reconstitution, the change in shares was supported by commercial expediency and adequate consideration. On those facts, the reduction in the assessees' shares did not constitute a taxable deemed gift, and gift-tax proceedings were held unsustainable. The departmental appeals therefore failed on the substantive gift-tax issue.

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Issues: Whether the reduction of the assessees' profit-sharing shares on reconstitution of the partnership firm constituted a taxable deemed gift, or whether the change was supported by business considerations and adequate consideration so as to fall outside the gift-tax charge.

Analysis: The reduction in shares occurred in the course of a reconstituted partnership that introduced new partners who brought capital and working participation, while the retiring partner was likely a sleeping partner. The facts showed that the firm's business expanded after reconstitution, indicating commercial expediency. On these circumstances, the change in profit-sharing ratio was treated as arising from business considerations rather than from a gratuitous transfer lacking consideration.

Conclusion: The reduction in shares did not amount to a taxable deemed gift, and the initiation of gift-tax proceedings was not sustainable.

Final Conclusion: The departmental appeals failed and the assessee's position was accepted on the substantive gift-tax issue.

Ratio Decidendi: A reconstitution of a partnership resulting in reduced profit shares is not a deemed gift where the change is shown to be supported by commercial expediency and adequate consideration in the course of business.

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