Reduction of partnership share can be a taxable gift when reciprocal benefits are not consideration in money or money's worth.

Reduction of a partner's profit share on reconstitution of a partnership firm is treated as a taxable gift under the Gift-tax Act, 1958 where the partner receives no consideration in money or money's worth. The alleged benefits from admission of new partners, including capital contribution, sharing of future losses, and participation in the business, may advantage the firm but do not constitute consideration flowing to the partner for surrendering part of his interest. On that footing, surrender of a 20% share in the partnership was treated as a taxable gift, and the reciprocal arrangements were held insufficient to exclude gift-tax liability.

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Issues: Whether surrender of part of a partner's share in a reconstituted firm amounts to a taxable gift under the Gift-tax Act, 1958, and whether the alleged benefits arising from admission of new partners constitute consideration in money or money's worth.

Analysis: The reduction in a partner's share of profit on reconstitution of a partnership firm is treated as a gift exigible to tax. The legal position had already been settled by the Supreme Court and further clarified by the Kerala High Court, which held that a reconstitution resulting in reduction of some partners' shares and corresponding increase in others' shares gives rise to a gift within the meaning of the Gift-tax Act. The claimed elements of consideration, namely capital contribution by incoming partners, sharing of future losses, and working for the business, may benefit the firm, but they do not amount to consideration flowing to the assessee for surrendering part of his interest.

Conclusion: The surrender of 20% share in the partnership amounted to a taxable gift, and the transaction was not supported by consideration in money or money's worth.

Ratio Decidendi: In a reconstituted partnership, reduction of a partner's profit share constitutes a taxable gift if the alleged reciprocal benefits do not amount to consideration received by that partner within the meaning of section 2(xii) of the Gift-tax Act, 1958.

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