Circular No. 219

1456. Realignment of profit sharing ratio among partners - Method of determination of value of gift arising thereby in the case of partner who has right to share in assets of firm

What this is

Circular No. 219 was issued by the Central Board of Direct Taxes on 30 May 1977. Its subject is 1456. Realignment of profit sharing ratio among partners - Method of determination of value of gift arising thereby in the case of partner who has right to share in assets of firm.

This is a clarification. The Board is stating how it reads a provision. That reading binds the department; it does not bind a court, and where the section says otherwise the section wins.

What it does

Directs how a partner's right to share the profits of a firm, unaccompanied by a right to share its assets, is to be valued. Exercising the power in rule 10(4) of the Gift-tax Rules, 1958 as amended by the Gift-tax (Second Amendment) Rules, 1976, the Board directs that this value be calculated in the manner set out in the Annexure to the circular. The point matters where partners realign their profit sharing ratio and a gift is said to arise in consequence.

Why it was issued

Rule 10(4), as amended in 1976, left the manner of valuation to be specified by the Board, and this direction supplies it.

Who it reaches

Partners who realign profit sharing ratios in a firm
Retiring and incoming partners with no right in the firm's assets
Gift-tax Officers valuing the gift said to arise on such a realignment

The instrument, as the Board published it

The words below are the department’s own, reproduced from its published text. Where the department’s copy carried a publisher’s notes after the instrument, those are not reproduced.

1456. Realignment of profit sharing ratio among partners - Method of determination of value of gift arising thereby in the case of partner who has right to share in assets of firm
In exercise of the powers conferred by rule 10(4) of the Gift-tax Rules, 1958 [as amended by the Gift-tax (Second Amendment) Rules, 1976], the Central Board of Direct Taxes hereby direct that the value of a partner’s right to share the profits of the firm without the right to share the assets shall be calculated in the manner specified in the Annexure to this Circular.
Circular : No. 219 [F. No. 333/1/76-GT], dated 30-5-1977.
ANNEX - REFERRED TO IN CLARIFICATION
[Not printed here. The Annexure is the same as given in the Notification No. 301, dated 20-7-1977 (supra)]

What to watch

This is a Gift-tax circular made under the Gift-tax Rules, 1958, not a circular under the Income-tax Act.
The whole method is in the Annexure, which is not reproduced in the text before you; the note records only that it is the same as the Annexure to Notification No. 301 dated 20 July 1977.
It applies to the right to share profits without a right in the assets; where the partner also has a right in the assets, a different exercise arises.
So the circular cannot be worked from this extract alone; the Annexure has to be obtained.

Where you meet it

In an old gift-tax assessment on a change in the profit sharing ratio of a firm, where the valuation of the surrendered share is in issue.

What it names

Rules it names. Rule 10 of the Income-tax Rules, 1962. The 1962 Rules were replaced by the Income-tax Rules, 2026, which renumbered nearly everything: a rule number quoted here almost never means the same rule today.

← Circular No. 220 · Circular No. 218 →

A circular binds the department, not you and not a court. The Board issues a circular to its own officers. An assessee may hold the department to a circular that helps him; the department cannot hold an assessee to one that hurts him, and the Tribunal and the courts decide the law for themselves.

Source: the Income Tax Department’s own published text — its page for this instrument.