Re-alignment of profit sharing ratio among the partners of a firm. - Income Tax - 942/CBDT

INSTRUCTION NO. 942/CBDT Dated : March 26, 1976 The provisions of the Gift-tax Act, 1958 may be attracted when there is a re-alignment of profit sharing ratio among the partners of a firm. The question of levy of gift-tax may arise in the following circumstances:- (i) When new partners are admitted to an existing firm and consequent upon the allotment of a specified share to them in profit/loss of the firm, the shares of the existing partners are reduced and the shares given to the new partners are without adequate consideration in money or money's worth. (ii) When there are changes in the profit sharing ratio of the existing partners of a firm and the allotment of higher shares to one or more partners is without adequate consideration in money or money's worth; (iii) When a sole proprietary concern is converted into a partnership and the shares in income allotted to the partners other than the one who was the sole proprietor of the business prior to its conversion into partnership are without adequate consideration in money or money's worth; (iv) When a firm is floated and the allotment of shares to one or more partners is without adequate consideration in money or money's worth. 2. Rule 10(3) of the Gift-tax Rules, 1958 prescribes the method of determination of the value of the interest in a firm or association of persons. While valuing the gift arising under the above-mentioned circumstances in the case of a partner who has a right to share in the assets of the firm the Gift-tax Officer should in accordance with rule 10(3) of the Gift-tax Rules add the value of the good-will intangible asset to the market value of the other assets of the firm, in case it possessed good-will, irrespective of the fact whether it was reflected in the balance sheet or not. The Board are of the view that when the value of a partner's interest is determined in this manner, there is no need to add any amounts separately towards the value of the partner's right to share in the profits of the firm. 3. The Board are further of the view that the value of the interest of those partners who have no right to share in the assets of the firm but have only a right to share in the profits of the firm, may be determined by following the method of capitalisation of income. 4. The above instructions may please be brought to the notice of the officers working in your charge.