Working partners and gift tax: no taxable transfer arose where only services were contributed and no business assets passed.

Induction of employees as working partners in a business did not, on these facts, create a taxable gift. The partnership deed showed that the new partners contributed personal services only, while capital remained with the assessee and they acquired no rights in the firm's assets, liabilities or goodwill. On that basis, there was no transfer of business property or goodwill capable of gift-tax assessment. Even if some profit-earning capacity was transferred, the partners' services and efforts constituted adequate consideration. The stated exemption under section 5(1)(xiv) was not the real basis of relief because the primary requirement of a taxable gift was not met.

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Issues: Whether the induction of employees as partners in the assessee's business amounted to a taxable gift, and whether the transaction was saved by adequate consideration so that no gift-tax liability arose.

Analysis: The partnership deed showed that the new partners were only working partners, that the entire capital continued to be contributed by the assessee, and that the new partners acquired no right in the assets, liabilities, or goodwill of the firm. On that basis, the transfer could not be treated as a transfer of goodwill or of any asset of the business. Even assuming that some transfer of the capacity to earn profits had taken place, the personal efforts and services of the new partners constituted adequate consideration. The exemption under section 5(1)(xiv) was therefore not the real basis of relief, because the threshold requirement of a taxable gift itself was not established.

Conclusion: No taxable gift arose from the conversion of the proprietorship into the partnership, and the assessed gift-tax liability was reduced to nil.

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