Law:

Section:

Section 2(xii) of the gift-tax act, 1958-Gift-Whether retirement of partner from firm would result in any gift by way of surrender of share of future profits, or relinquishment of share of goodwill in favour of other partner-held, no Facts The assessee, a partner in a firm, relinquished his share in the firm in favour of the other partner and allowed him to take over the entire business. The balance standing to the assessee's credit in the firm's books was treated as his investment in the new firm, constituted by the surviving partner and another person, and the assessee was paid interest thereon. The assessee claimed that as he continued to receive interest on the balance standing to his credit in the new firm's books and there was no material alteration in his financial position, the transaction of relinquishment of his share of profit could not be subjected to gift-tax. The GTO, however, held that the surrender by the assessee of his share of profits resulted in the increase of the share of the other partner and, therefore, the impugned transaction was subjected to gift-tax. On appeal, the AAC affirmed the GTO's order on the ground that the assessee had parted with his share of goodwill in favour of the surviving partner and that this amounted to a transfer of goodwill. On reference: Held Surrender of future profits cannot be treated as a gift. Future profits is not property because once a person ceases to be a partner, there is no question of his receiving any profits, thereafter. Similarly, by such alleged surrender, there is no diminution in the value of one's property nor is there any increase in the value of the property of the other person. The moment a partner retires from a firm, he will have no right to receive any future profits in the firm and, hence, there is no question of his giving up any such right. In the case of a transfer of a partner's interest, what is transferred is his interest in the partnership firm and not any particular share in any particular asset of the partnership firm. Goodwill is only one of the assets of a partnership firm and it is not possible to say that a retiring partner has relinquished his share in that particular…

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