Partnership conversion with capital contributions is not a deemed gift where the transfer of business interest is for consideration.

Conversion of a proprietary business into a partnership did not amount to a deemed gift where the incoming partners contributed capital in proportion to their shares, the proprietor also introduced capital for his reduced interest, and he was separately paid for managing the firm. The decisive test under the Gift-tax Act was whether the proprietor had relinquished his interest without consideration; on these facts, the capital contributions by the other partners supplied adequate consideration for the restructuring. The transfer of interest in the business was therefore not gratuitous, so no deemed gift arose and the addition was deleted.

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Issues: Whether the conversion of a proprietary concern into a partnership, with the incoming partners contributing capital and sharing profits and losses, amounted to a transfer without consideration so as to constitute a deemed gift under the Gift-tax Act.

Analysis: The business had goodwill, but the decisive question was whether the proprietor had relinquished his interest without consideration. The partnership deed showed that the sons and daughters contributed capital in proportion to their shares, the proprietor also brought in capital for his reduced share, and he was separately remunerated for managing the firm. On these facts, the transfer of interest in the business was not gratuitous. A gift under the Gift-tax Act requires a transfer without consideration, and the capital contributions by the other partners constituted adequate consideration for the formation of the partnership.

Conclusion: The conversion did not give rise to a deemed gift. The addition was rightly deleted and the departmental appeal failed.

Ratio Decidendi: Where a proprietary business is converted into a partnership and the incoming partners contribute capital for their shares, the transfer of interest is for adequate consideration and does not amount to a gift under the Gift-tax Act.

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