Partnership goodwill transfer on reconstitution may amount to a gift when profit shares are realigned with incoming partners.

Redistribution of a partner's profit-sharing ratio on admitting new partners can constitute a gift where the transaction, viewed as an integrated whole, transfers a proportionate interest in partnership goodwill. The analysis treats goodwill as an asset of the firm and notes that, even if the partnership deed does not expressly deal with goodwill, the incoming partners may acquire a share in that asset through reconstitution and realignment of the partnership structure. On these facts, the arrangement was distinguished from the Supreme Court decision relied on by the assessee, because the transfer was not confined to goodwill alone but formed part of a broader transfer of interest in property. The conclusion was that the assessee had made a gift of part of his share in the firm's goodwill.

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Issues: Whether the redistribution of the profit-sharing ratio on the admission of two new partners amounted to a gift by the assessee of a portion of his share in the goodwill of the firm.

Analysis: The assessee had taken his children into the partnership, transferred share capital to them, and reconstituted the firm by realigning the shares in the business and the profit-sharing arrangement. The partnership deed did not specifically deal with goodwill, but goodwill is an asset of a partnership and, on the relevant facts, the donees became entitled to a proportionate share in that asset. The Court distinguished the Supreme Court decision relied on by the assessee because, in that case, the department had impermissibly picked out goodwill alone, whereas here the transaction as a whole involved transfer of an interest in property and a redistribution of the assessee's share in the firm. The Court also treated the admission of the new partners and the accompanying adjustments as one integrated transaction.

Conclusion: The redistribution of the profit-sharing ratio on the admission of the two new partners did amount to a gift by the assessee of a portion of his share in the goodwill of the firm, and the answer was in favour of the Revenue.

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