Deemed gift on partnership reconstitution rejected where no transfer of goodwill or assets without consideration was proved.

A deemed gift under the Gift-tax Act was not established on a partner's retirement and reconstitution of the firm because the record did not show any transfer or surrender of goodwill or assets without consideration in favour of the minors. The retiring partner's account was settled on the basis of a debit balance, the reconstituted deed did not evidence consent to any transfer of goodwill, and the minors had contributed capital to the firm. In the absence of material proving the essential element of transfer in favour of the beneficiaries, the deeming provision was inapplicable and the addition treating the transaction as a gift was deleted.

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Issues: Whether the assessee's retirement from the firm and the admission of minors to the benefits of the reconstituted partnership amounted to a deemed gift of goodwill or assets under section 4(1)(c) of the Gift-tax Act, 1957.

Analysis: The relevant accounts showed that on retirement the assessee's account had a debit balance and that accounts were settled on that basis. The reconstituted partnership deed did not show any consent by the retiring partner to a transfer of goodwill in favour of the minors. The minors had also contributed capital to the firm, and the record did not establish that any asset or goodwill was surrendered by the assessee without consideration. On these facts, the essential element of transfer in favour of the minors was not proved, and the case did not fall within the deeming provision relating to gift.

Conclusion: The addition treating the transaction as a deemed gift was not sustainable and was deleted in favour of the assessee.

Ratio Decidendi: A deemed gift cannot be inferred on a partner's retirement and reconstitution of the firm unless there is material showing a transfer or surrender of goodwill or assets without consideration in favour of the beneficiaries.

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