Capital gains under dissolution require actual distribution of firm assets; dissolution alone does not create a taxable transfer.

Section 45(4) applies only where capital assets are actually transferred by way of distribution on dissolution of a firm. Dissolution by operation of law, without any corresponding transfer of the firm's assets, is not enough to trigger capital gains tax because dissolution and transfer are distinct events. As no transfer occurred in the relevant year, no capital gains arose and the reference was answered in favour of the assessee.

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Issues: Whether capital gains tax could be levied under section 45(4) of the Income-tax Act, 1961 when the firm stood dissolved by operation of law but no transfer of capital assets by way of distribution on dissolution had taken place.

Analysis: Section 45(4) applies only to profits or gains arising from the transfer of a capital asset by way of distribution of capital assets on the dissolution of a firm. Dissolution and transfer are distinct events, and the section does not deem the date of dissolution itself to be the date of transfer. Where the Tribunal has found that no transfer of the firm's assets occurred in the relevant year, no occasion arises to levy capital gains tax merely because dissolution had taken place by operation of law.

Conclusion: Capital gains did not arise in the relevant assessment year, and the answer to the reference was in favour of the assessee and against the Revenue.

Ratio Decidendi: Capital gains under section 45(4) arise only when there is an actual transfer of capital assets by way of distribution on dissolution of the firm, and dissolution by itself does not create a taxable transfer.

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