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Gift-tax liability on reduction of shares in a partnership firm. Analysis: The judgment pertains to a reference under section 26(1) of the Gift-tax Act, 1958, regarding the liability of two partners in a partnership firm to pay gift-tax due to the reduction of their shares. The partners, Vinod Kumar Agrawal and Ramlal Agrawal, had their shares reduced from 40% to 20% and from 60% to 40% respectively, due to the admission of two new partners with 20% each in the profits and losses of the firm. The Gift-tax Officer imposed gift-tax on the partners, considering the reduction of shares as a gift to the new partners. However, the Appellate Assistant Commissioner of Gift-tax allowed the appeal by the partners, stating that the reduction of sharing ratios did not amount to a gift, citing decisions from the Bombay and Karnataka High Courts. The Revenue's second appeal was dismissed by the Tribunal, which favored the decisions of the Bombay and Karnataka High Courts over that of the Madras High Court. The question of law referred to the High Court was whether the partners were liable to pay gift-tax. The High Court considered the contributions made by the new partners towards the partnership capital and the services to be rendered by one of them as a working partner as valid considerations for their shares in the firm. The definition of "gift" under the Gift-tax Act includes the transfer of property made voluntarily and without consideration. In this case, since consideration was provided by the new partners for their shares, the transfer cannot be considered as a gift. The High Court emphasized that the transfer of shares was not made voluntarily and without consideration, as required by the Act. The court also distinguished the case from contrary decisions of the Madras High Court where relinquishment of shares was found to be without consideration. Ultimately, the High Court ruled in favor of the partners, stating that they were not liable to pay gift-tax as the transfer of shares to the new partners was not a gift under the Act. The judgment highlighted the importance of consideration in determining the applicability of gift-tax and concluded that the partners were not obligated to pay gift-tax in this scenario. No costs were awarded in the reference. This judgment clarifies the legal position regarding the liability to pay gift-tax in cases of reduction of shares in a partnership firm and underscores the significance of consideration in determining whether a transfer constitutes a gift under the Gift-tax Act.
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