Capital receipt for relinquishment of partnership rights: dissolution payment treated as non taxable capital consideration, not trading income.

A payment made on partnership dissolution as consideration for assignment and release of a retiring partner's entire share and exclusive business rights was treated as compensation for relinquishment of partnership rights and therefore a capital receipt rather than revenue from trading. The surviving partner assumed liabilities and exclusive sale rights; the sum did not arise from routine trading operations but from transfer of a congeries of partnership rights. The applied principle: compensation for disposal or surrender of business rights that amount to a capital asset is capital in nature; result favoured the assessee.

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Issues: Whether the sum of Rs. 31,000 received by the assessee on dissolution of the partnership was profit assessable under the Income-tax Act or compensation for relinquishment of partnership rights (a capital receipt).

Analysis: The payment arose on dissolution pursuant to a deed which assigned and released the retiring partner's entire share, right, title and interest in the partnership business that dealt solely with the purchase and sale of scrap iron. The surviving partner assumed the liabilities and the exclusive right to sell the purchased stock which was unsold due to a temporary embargo. The payment was made as consideration for surrendering the assessee's congeries of partnership rights and the exclusive business enterprise in respect of the scrap iron venture, and was not a sum derived from trading operations or routine trading contracts of the assessee's hardware business. The principle applied is that compensation received for relinquishment of rights in a business or for disposal of a congeries of rights constitutes a capital receipt where those rights amount to a capital asset.

Conclusion: The sum of Rs. 31,000 was not assessable as revenue profit but was compensation for relinquishment of partnership rights and therefore a capital receipt; issue answered in favour of the assessee.

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