Law:

Section:

Section 4 of the Gift-tax Act, 1958 - Deemed gifts - Assessee retired as partner from a partnership firm without receiving any amount on account of his right to share in firm's profits - His accounts were settled without any stipulation as to existence or valuation of goodwill - Firm was reconstituted with a new partner coming in his place - Whether assessee could be deemed to have gifted his share of goodwill in favour of incoming partner or remaining partners - Held, no Facts The assessee, an individual, was partner with a 25 per cent share in a certain firm. After his retirement from partnership, the firm was reconstituted, substituting another partner in his place. The assessee was not paid any amount on account of his right to share in the firm's profits. The GTO, however, held that the assessee surrendered the value of his right to share profits in the partnership in favour of the incoming partner and, accordingly, computed the value of the deemed gift. The AAC and the Tribunal upheld the GTO's orders. On reference, the assessee raised the question as to whether after settling his accounts on retirement from the partnership without any stipulation as to the existence or valuation of goodwill, he could be deemed to have made a gift of his share of goodwill in favour of the incoming partner or the remaining partners. Held The GTO computed the value of the deemed gift on the basis of the share of profits for five years but had not taken into calculation whether the value of the assets of the earlier firm, including the goodwill, exceeded the total liability of the earlier firm and whether the incoming partner had brought any capital. Unless such questions were determined, it would not be possible to lay down as a general rule that there had been a gift in respect of the goodwill whenever a firm was reconstituted and the share in the goodwill of one of the partners was reduced. Where the partners of a firm retired from a firm after receiving in full the amounts of their capital invested along with profits and shares to their credit, and the firm was reconstituted with the remaining partners and others, there was no gift by the retiring partners liable to…

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