Commercial reconstitution of a firm was not a taxable gift where the incoming partner contributed capital and useful services.

Admission of the assessee's son as a partner, with a corresponding reduction in the assessee's profit share, was treated as a commercial reconstitution of the firm and not a gratuitous transfer. The incoming partner brought capital that had earlier stood as a loan with the firm and was converted into capital on admission, and he also contributed active services useful to the business. On those facts, the arrangement was supported by consideration and did not amount to an act of bounty. The alleged relinquishment of share therefore did not attract gift-tax, and no taxable gift was found.

---

---

Issues: Whether admission of the assessee's son as a partner in the firm, with a corresponding reduction in the assessee's profit share, amounted to a taxable gift.

Analysis: The incoming partner contributed about Rs. 70,000 as capital, which had previously stood as a loan with the firm and was converted into capital on his admission. He also brought youthful energy and active services useful for efficient conduct of the business. The reconstitution of the firm was therefore treated as a commercial arrangement supported by consideration and not as a gratuitous transfer or act of bounty. On those facts, the alleged relinquishment of share did not attract gift-tax.

Conclusion: No gift was made out and the departmental appeal failed.

---