Capital receipt on partnership dissolution treated as non-taxable, where payment was made for surrender of partnership rights.

A payment made to a partner on dissolution of a partnership, where the amount is given in consideration of surrendering rights under the partnership deed and the business assets and liabilities are taken over by the continuing partner, is a capital receipt. The receipt is not part of ordinary trading transactions or a share of revenue profits. On these facts, the amount retained the character of capital and was not assessable as business profit under the Income-tax Act.

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

Analysis: The partnership was formed only for the purchase and sale of scrap iron, and the receipt arose when the assessee gave up all his rights in the partnership business on dissolution. The amount was paid by the surviving partner in consideration of the assessee relinquishing his congeries of rights under the deed, while the business asset and liabilities were taken over by the surviving partner. On these facts, the payment was not made as part of ordinary trading transactions nor as a share of revenue profits, but as compensation for giving up a capital asset. The receipt therefore retained the character of capital and could not be treated as taxable business profit.

Conclusion: The sum of Rs. 31,000 was not assessable as profit under the Income-tax Act; it was a capital receipt in favour of the assessee.

Ratio Decidendi: A payment made to a partner on dissolution, in consideration of the surrender of rights in the partnership business, is a capital receipt and not taxable trading profit.

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