Capital receipt on retirement from partnership: compensation for surrender of share was held not to be trading income.

Compensation paid to a retiring partner for surrendering his share in a partnership was treated as a capital receipt because it represented consideration for loss of an income-producing source, not a mere incident of trading profits. The governing test is whether the payment ends a trading arrangement while leaving the recipient's income structure intact, in which case it is revenue, or whether it impairs the source of income or trading structure, in which case it is capital. Applying that principle and the binding precedent relied on, the amount paid on retirement did not constitute trading income and was therefore assessable as capital in nature.

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Issues: Whether the sum received by a partner on retirement from the partnership in consideration of relinquishing his share was a capital receipt or a revenue receipt.

Analysis: A receipt on cancellation or termination is revenue where the arrangement merely ends a trading contract and leaves the recipient free to continue his business without impairment of the underlying income-producing structure. It is capital where the payment compensates for loss of the source of income or impairs the trading structure. Applying that test, and following the binding precedent relied upon, the amount paid to the retiring partner for relinquishing his share did not constitute trading income.

Conclusion: The receipt was a capital receipt and not a revenue receipt; the question was answered in the affirmative in favour of the assessee and against the Revenue.

Ratio Decidendi: Compensation paid for surrender of a partnership share on retirement is capital in nature where it represents consideration for loss of an income-producing source and not a mere incident of trading profits.

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