ORDER Per Shri T. C. A. Ramanujam, Accountant Member - The appellant is aggrieved at the order of the Appellate Assistant Commissioner confirming the assessment to gift-tax in respect of what the Gift-tax Officer claimed to be surrender of goodwill consequent to the retirement of one partner from the firm. Shri C. Kochunni Nair, Advocate, appeared for the appellant and Shri Anil Kumar, Departmental Representative for the department. 2. Late Mr. Ronald Ferns was a partner in M/s. Madras Pack Marine, a registered firm assessed in the Karikudi Income-tax Circle-I (4) since its inception in 1973. He had 60% share in the firm and contributed a capital of Rs. 36,000. He retired from the firm w. e. f. 31-3-1976. The firm had only two major partners. On his retirement, the remaining partner Mr. Cleetus admitted Mrs. Irene Mary as partner with 40% share in the business. The incoming partner brought in Rs. 1,20,000 towards her share of capital. The G. T. O. considered that taxable gift arose in the transaction by which Mr. Ronald Ferns retired and new partner was taken in. He issued a notice under sec. 16(1) and a nil return was filed in response. The G. T. O. considered that there was surrender of share of goodwill to the remaining partner when Mr. Ronbald Ferns retired from the firm and to that extend there was a deemed gift. He rejected the submission that the retirement was on his own volition and no gift was involved in the transfer. He valued the average profit taking the profits from 1974-75 to 1976-77 and worked out the taxable gift as Rs. 1,21,530. The assessment was upheld in appeal and the A. A. C. relied on the ruling in the case of M. K. Kuppuraj v. CGT [1985] 153 ITR 481 (Mad.) wherein it was held that relinquishment of share in favour of minor was a gift. 3. In the appeal before us Shri C. Kochunni Nair, learned counsel for the appellant, contended that the firm had no goodwill and that the incoming partner had brought in sufficient capital as consideration for the transfer of interest. The retirement of the partner and the induction of the new partner, all happened in the course of normal business and there was no element of gift involved. The retirement of the partner and the induction of the new partner, all happened in the course of normal business and there was no element of gift involved. It was a bona fide transaction and the element of gift could arise only in the provisions of sec. 4(1) (c) of the Gift-tax Act were invoked. The G. T. O. has not invoked this provision and the bona fides of the transaction were established by the fact that the retiring partner had nothing to do with the firm and went away pursuing his higher studies and later had died. On the other hand, the incoming partner brought a capital of Rs. 1,20,000 and this amount was almost equal to the average profits for three years worked out by the G. T. O. The learned counsel also brought out a fallacy in the assessment order in as much as the entire value of three years average profits has been brought to tax even though the surrender was only to the extend of 70% of the share in the profits Shri Kochunni Nair invited attention to the Boards Circular dated 27-2-1959 considered by the Rajasthan High Court in Smt. Vidyawati Devi Rathi v. CGT [1988] 169 ITR 708 and argued that there was no element of gift involved in the retirement of the partner. What has happened was only a settlement of accounts amount the partners and this did not attract the provisions of the Gift-tax Act as per the ruling in CIT v. T. M. Porinchu [1989] 178 ITR 677/44 Taxman 343 (Ker.) and CGT v. T. M. Luiz Kannamally [1989] 180 ITR 257/47 Taxman 17 (Ker.). The firm had a heavy sales tax liability and if this is also taken into account, it will be seen that the incoming partner was being saddled with further responsibilities and liabilities. A firm comprising of two major partners can be dissolved when one of them retires and there can be no question of gift involved in such dissolution. Shri Kochunni Nair also referred to the provisions of sec. 48 of the Partnership Act in this regard. He filed the current account of Mr. Ronald Ferns for the accounting year 1975-76 and the loan account for 1976-77 and in support of his submissions. Copies of partnership deed and the deed of retirement were also filed. 4. Shri Kochunni Nair also referred to the provisions of sec. 48 of the Partnership Act in this regard. He filed the current account of Mr. Ronald Ferns for the accounting year 1975-76 and the loan account for 1976-77 and in support of his submissions. Copies of partnership deed and the deed of retirement were also filed. 4. On the other hand, the Departmental Representative argued that as per the ruling in K. K. Shah v. Goatewallah surviving heir of a deceased partner were entitled to a share in the goodwill of the firm and the ruling in M. K. Kuppurajs case (supra) supported the action of the G. T. O. He met the argument about consideration having flown from the incoming partner by the plea that the retiring partner did not get the consideration. This was replied to by Shri C. Kochunni Nair, who stated that it was not necessary that consideration should always flow to the promissor. It is enough if such consideration moved to a third party. Shri Anil Kumar, however, referred to the Andhra Pradesh High Court judgment in CIT v. Jagatram Ahuja [1988] 172 ITR 632 wherein it was held that even in a case of dissolution if the distribution of assets between the partners was unequal and it appeared from the relevant facts that one partner received assets of value less than the value of assets to which he was entitled, then the transfer would amount to a gift within the meaning of the Gift-tax Act. Shri Anil Kumar pointed out that in coming to this conclusion the Andhra Pradesh High Court was relying on the ruling of the Madras High Court in CIT v. Bharani Pictures [1981] 129 ITR 244. 5. After hearing the arguments from both sides we find that the matter does not rest in elaborate illustration of the legal issue at all. There can be no quarrel with the submission of the Departmental Representative that there is an element of gift to be considered, whether it is a case of dissolution of partnership or a reconstitution of the firm. The principles laid down by the Andhra Pradesh High Court in Jagatram Ahujas case (supra) are unexceptionable. The High Court considered the provisions of sec. The principles laid down by the Andhra Pradesh High Court in Jagatram Ahujas case (supra) are unexceptionable. The High Court considered the provisions of sec. 4(1) (a) to 4(1) (d) of the Gift-tax Act and had held that the allocation of surplus amongst the partners corresponding or approximate to their shares on the dissolution of a firm does not amount to transfer of property, whether in ordinary law or for the purpose of the Gift-tax Act. The element of gift arises only in case of unequal distribution of assets on dissolution. In the case considered by the High Court the firm was owning immovable properties and was running a restaurant in Abids Road, Hyderabad. As against the sum of Rs. 3 lakhs given to the retiring partner, the G. T. O. valued his share in the partnership asset at Rs. 12.67 lakhs. In the case now in appeal, before us the value placed on the 100% share in the firm as per the assessment order is Rs. 1,21,530. As pointed out by the learned counsel, the G. T. O. should have considered only 60% of such profits for purposes of assessment. This will mean the share of the retiring partner of outgoing partner would be 60% of the sum of Rs. 1,21,530. The incoming partner, on the other hand, brought in a capital of Rs. 1,20,000 and has agreed to share the losses. The firm did not cease its business activity and the two events of retirement and reconstitution have to be considered as part of an integrated whole of an individual transaction. The learned counsel had also invited our attention to the ruling of the Kerala High Court in Luiz Kannamally (supra) holding that when a partner retires from a firm there can only be a readjustment of the rights between the retiring partners and the continuing partners in the assets of the firm and there was no element of transfer. The High Court had referred to the observations of the Supreme Court in Addl. CIT v. Mohanbhai Pamabhai [1987] 165 ITR 166 to the effect that when a partner retired from the firm and received his share of an amount equivalent on the value of net partnership assets including goodwill of the firm, there was no transfer of interest of the partner in the goodwill. CIT v. Mohanbhai Pamabhai [1987] 165 ITR 166 to the effect that when a partner retired from the firm and received his share of an amount equivalent on the value of net partnership assets including goodwill of the firm, there was no transfer of interest of the partner in the goodwill. The Kerala High Court was following the principles enunciated by the Madras High Court in Addl. CGT v. P. Krishnamoorthy [1977] 110 ITR 212. In yet another ruling cited by the counsel in T. M. Porinchus (supra) the Kerala High Court observed that when the assessee form the firm and has no right to nominate or assign his rights in the partnership, there could not be any gift on the induction of the new partner. We find that the Karnataka High Court had also considered a similar issue in CGT v. C. S. Patil [1989] 180 ITR 97/46 Taxman 199 and held that reduction in shares of erstwhile partners in allotment of shares to new partners in the course of reconstitution of the firm will not give rise to taxable gift if the new partners contributed capital to the firm. Such contribution of capital amounted to adequate consideration. It was the goodwill of the firm itself which attracted new capital and therefore, capital contributed by the new partner constituted adequate consideration not only in respect of the right to share future profits but also in respect of the property in the goodwill. In Addl. CGT v. A. A. Annamalai Nadar [1978] 113 ITR 574 the Madras High Court held that when there was capital contribution by the new partners inducted into the partnership firm, there was no element of gift. 6. We consider that the assessment to gift-tax is not justified in the facts and circumstances of the case. The same is annulled. The appeal is allowed.