Partner profit-share reduction in firm reconstitution can attract gift-tax when no consideration is shown and bona fide relinquishment is unavailable.

A reduction in a partner's profit-sharing share on reconstitution of a firm, without fresh capital or other consideration, is treated as a transfer of property and may attract gift-tax because partnership rights and goodwill are property. The bona fide relinquishment exception under section 4(1)(c) does not apply where the transaction is only a mutual readjustment of partnership interests and not an independent surrender supported by consideration or other exempting circumstances. On this reasoning, the gift-tax assessment was upheld and the challenge failed.

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Issues: (i) Whether reduction of a partner's share in a reconstituted firm, without introduction of new capital or other consideration, constituted a taxable gift under the Gift-tax Act, 1958. (ii) Whether the transaction could escape tax as a bona fide relinquishment under section 4(1)(c) of the Gift-tax Act, 1958.

Issue (i): Whether reduction of a partner's share in a reconstituted firm, without introduction of new capital or other consideration, constituted a taxable gift under the Gift-tax Act, 1958.

Analysis: The reduction in the assessee's profit-sharing ratio was effected in favour of the continuing partners on reconstitution of the firm. No fresh capital was introduced, no new partner entered, and no consideration was shown for the surrender of the reduced share. The Tribunal followed the Supreme Court view that goodwill and related partnership rights are property, and that diminution in one partner's share in favour of others amounts to transfer of value attracting gift-tax.

Conclusion: The reduction in share constituted a taxable gift and was rightly brought to gift-tax.

Issue (ii): Whether the transaction could escape tax as a bona fide relinquishment under section 4(1)(c) of the Gift-tax Act, 1958.

Analysis: Section 4(1)(c) applies where there is surrender of a debt, contract, actionable claim, or interest in property and the bona fides of that relinquishment are established. The Tribunal held that the provision did not govern a case where a partner gives up part of his share in the firm in the course of reallocation of partnership interests. The partnership deed disclosed only mutual readjustment, not any independent bona fide surrender supported by consideration or other circumstances showing exemption from deeming fiction.

Conclusion: The assessee was not entitled to the benefit of section 4(1)(c).

Final Conclusion: The gift-tax assessment was upheld and the assessee's challenge failed.

Ratio Decidendi: A reduction in a partner's profit-sharing interest on reconstitution of a firm, without consideration, constitutes a transfer of property liable to gift-tax, and the bona fide relinquishment exception does not apply to such a reallocation of partnership shares.

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