Law:

Section:

Section 2(xii) of the Gift-tax Act, 1958-Gift-Definition of-On reconstitution of firm, three partners, to the exclusion of two others, allocated goodwill of the firm which earlier belonged to one of the excluded partners-Whether the excluded partner made a gift-Held admission to partnership involves by implied contract such obligations and liabilities as constitute consideration in money's worth for a share of the goodwill and, accordingly, transfer of goodwill cannot amount to gift within the meaning of section 2(xii) Facts J, who was carrying on a business as an individual proprietor, formed a partnership wherein his son, S, became a partner, profits being shared in the proportion of 10:6. There was a specific provision in the partnership deed under which the goodwill of the firm was to belong to J on dissolution of the firm. After some years, there was a major change in the constitution of firm with effect from 1-2-1959 in consequence of which three others, namely, M, SD and MF joined the partnership and there was a reallocation of shares of profits amongst the five. The new deed of partnership stipulated that the goodwill of the firm shall belong to S, SD and MF to the exclusion of J (who had the exclusive right to the goodwill so far) and M. The GTO held that the surrender of goodwill by J in favour of S, SD and MF represented taxable gift. The Tribunal took the view that so long as the partnership subsists and is not dissolved, there was no immediate gift of goodwill to the said three partners so as to attract liability of gift-tax. On reference : Held 1. In order that a transfer may amount to a gift, one of the essential conditions that must be fulfilled is that such transfer must be without consideration in money or money's worth. In the present case wherein a contractual relationship has been brought about by the partnership deed, dated 1-2-1959 amongst five persons, the said three partners coming into the partnership are not there merely to participate in profits and eventually to a share of the goodwill, if any, but are also to have their share in the liabilities that may be incurred by the firms, including losses, and be subject to all the…

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