Partnership reconstitution and profit-share surrender: adequate consideration prevented gift-tax treatment of the reallocation.

A partner's surrender of 27% of profit share on reconstitution of a firm was not a gratuitous transfer attracting gift-tax where the incoming and continuing partners contributed capital, agreed to share losses, and rendered services. The reallocation of partnership shares could not, by itself, establish a deemed gift; the decisive question was whether the arrangement was supported by real and sufficient consideration. On the stated facts, adequate consideration existed, so the transaction fell outside gift-tax liability.

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Issues: Whether the surrender of 27 per cent share of profits by a partner on reconstitution of the firm amounted to a deemed gift liable to gift-tax, or whether the transaction was supported by adequate consideration so as to fall outside gift-tax liability.

Analysis: The authorities had proceeded on the footing that the reduction in the assessee's profit share itself constituted a transfer attracting gift-tax. The record, however, showed that the incoming and continuing partners had contributed capital, undertaken to share losses, and rendered services to the firm. The principles governing such partnership rearrangements required examination of whether there was real and sufficient consideration for the surrender of share. On those facts, the transaction could not be treated as a gratuitous relinquishment merely because the profit-sharing ratio was altered on reconstitution.

Conclusion: The surrender of share of profits was not chargeable to gift-tax, as there was adequate consideration for the change in partnership shares.

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