Going-concern transfer for shares did not create a deemed gift where consideration was valued by net wealth and share issuance.

Transfer of a business as a going concern to a company in exchange for shares of equal value did not create a deemed gift under section 4(1)(a) of the Gift-tax Act. The transaction was treated as a continuation of the partners' interest in the same property through shareholding, and the consideration in kind had to be valued by the break-up method with reference to the company's net wealth and shares issued. On that basis, any increase in asset value, including closing stock, was reflected in the share value, so no real inadequacy of consideration arose. The addition was therefore annulled in favour of the assessee.

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Issues: Whether the transfer of the business as a going concern in exchange for shares of equal value gave rise to a deemed gift under section 4(1)(a) of the Gift-tax Act.

Analysis: The business of the firm was transferred to a company in which the partners themselves became shareholders, so the substance of the transaction was a continuation of their interest in the same property through shares. The consideration was in kind and had to be valued by the break-up method by reference to the company's net wealth and the number of shares issued. On that basis, any enhancement in the value of an asset such as closing stock would be reflected correspondingly in the value of the shares, leaving no real shortfall in consideration. The transfer of a going concern on this footing did not justify splitting out embedded profits or treating the difference between book value and market value of stock as a separate transfer without consideration.

Conclusion: The consideration was not shown to be inadequate and no deemed gift arose under section 4(1)(a) of the Gift-tax Act. The addition was rightly annulled in favour of the assessee.

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