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Issues Involved:
1. Whether the reconstitution of a partnership firm involving minors' admission and capital contribution constitutes a gift. 2. Whether the capital contributed by minors should be treated as consideration for the gift of interest surrendered in favor of the minors. 3. Whether the reconstitution of a firm in the regular course of business exempts the transaction from gift-tax liability. 4. Evaluation of the gift and the adequacy of consideration in the context of the Gift-tax Act, 1958. Summary: Issue 1: Reconstitution and Gift The primary question was whether the reconstitution of a partnership firm, where minors are admitted with capital contributions, constitutes a gift. The Gift-tax Officer initially considered the surrender of 20% interest by the assessee in favor of his minor sons as a taxable gift u/s 4 of the Gift-tax Act, 1958. The Tribunal upheld that there was a gift exigible to gift-tax but directed a re-evaluation of the interest forgone by the assessee, considering the capital contribution by the minors. Issue 2: Capital Contribution as Consideration The Tribunal held that the capital contribution of Rs. 10,000 by the minors should be treated as consideration for the gift of interest surrendered by the assessee. The Tribunal directed the Gift-tax Officer to adjust this amount against the value of the property transferred. The High Court affirmed this view, stating that the capital contributed by the minors should be treated as consideration for the gift of interest surrendered in favor of the minors. Issue 3: Regular Course of Business and Exemption In the original petitions, the assessee contended that the reconstitution of the firms was in the regular course of business and thus exempt from gift-tax u/s 5(1)(xiv) of the Gift-tax Act, 1958. However, the authorities rejected this contention, holding that the relinquishment of interest was without consideration and thus taxable. Issue 4: Evaluation of Gift and Adequacy of Consideration The High Court referred to several precedents, including the Supreme Court's decision in CGT v. Chhotalal Mohanlal, which held that admitting minors to the benefits of a partnership involves a gift of goodwill. However, the High Court noted that in cases where there is capital contribution by the minors, there can be no gift in respect of the goodwill. The court emphasized that the burden of proving a transfer as a gift lies with the Revenue, which must show that the transfer was without consideration. Conclusion: The High Court answered the reference in the affirmative, holding that the capital contributed by the minors should be treated as consideration for the gift of interest surrendered in favor of the minors. The court quashed the impugned orders in the original petitions and directed the Gift-tax Officer to pass fresh assessment orders according to law and in light of this judgment.
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