Deemed gift rules require proof of inadequate consideration or lack of bona fide partnership reconstitution before tax consequences arise.

A deemed gift under gift-tax law is not established merely because the Department values transferred theatres above the capital account credit; the note states that continued partnership interest and future appreciation to the transferor's benefit indicate adequate consideration. It also states that a reduction in a partner's share from 50% to 40% is not, by itself, a deemed gift where the incoming partners contribute capital, assume liabilities and share losses, and the reconstitution is bona fide. The analysis emphasises that the Revenue must show absence of adequate consideration or lack of bona fides before deeming a gift.

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Issues: (i) Whether the transfer of the assessee's theatres to the firm as capital contribution gave rise to a deemed gift for want of adequate consideration. (ii) Whether the reduction of the assessee's share in the partnership from 50% to 40% constituted a deemed gift under the gift-tax law.

Issue (i): Whether the transfer of the assessee's theatres to the firm as capital contribution gave rise to a deemed gift for want of adequate consideration.

Analysis: A deemed gift under the relevant provision arises only if the transfer is otherwise than for adequate consideration. Mere disparity between the market value estimated by the Department and the credit entered in the capital account is not enough by itself. The assessee continued to have an interest in the property through the partnership, and any enhancement in value would enure to his benefit. On these facts, the credit given in the capital account could not be treated as inadequate consideration.

Conclusion: No deemed gift arose in respect of the theatres contributed as capital.

Issue (ii): Whether the reduction of the assessee's share in the partnership from 50% to 40% constituted a deemed gift under the gift-tax law.

Analysis: The incoming partners contributed capital, assumed liabilities, and shared the losses of the firm. The reduction in the assessee's share was part of a bona fide reconstitution of the partnership and related to future profits rather than existing property. There was no material to show that the arrangement lacked bona fides, which is necessary before a reduction in share can be treated as a deemed gift.

Conclusion: No deemed gift arose from the reduction in the assessee's partnership share.

Final Conclusion: The deemed gift assessment was unsustainable, and the assessee succeeded on the substantive issues.

Ratio Decidendi: A deemed gift cannot be inferred merely from a difference between market value and book credit, or from a bona fide reduction in partnership share, unless the Revenue establishes absence of adequate consideration or lack of bona fides on the statutory footing required by the gift-tax law.

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