Retirement from partnership firm treated as transfer of partner's interest, attracting capital gains tax liability.

Retirement from a partnership firm that conveys an assignable interest in partnership assets by deed constitutes a transfer of the retiring partner's interest under the statutory definition, triggering capital gains liability. The lump-sum payment characterized as consideration for assigning or relinquishing the partner's share and rights in the partnership and its assets effects a transfer of capital asset; consequently the payment is chargeable to tax as capital gain.

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Issues: (i) Whether the amount received by the assessee on retirement from the partnership firm gave rise to capital gain chargeable to tax under the Income-tax Act, 1961.

Analysis: Applicable statutory provisions include the definitions of capital asset and transfer (Sections 2(14) and 2(47)), the charging provision for capital gains (Section 45(1)), the deeming provisions addressing transfers between partners and firms (Sections 45(3) and 45(4)), and the computation rules (Section 48 and Section 47 exclusions). Precedent establishes two conflicting lines: decisions holding that settlement of retiring partner's account by quantification of his capital account does not constitute transfer, and decisions holding that where a retiring partner assigns, releases or relinquishes his interest by deed or receives a lump-sum in consideration of such assignment, there is a transfer within the meaning of section 2(47). The factual matrix shows revaluation credited to partners' capital accounts, large revaluation surplus increasing the assessee's capital account, and a retirement deed containing express clauses extinguishing the retiring partner's rights and assigning his share and interest in firm assets to continuing partners, together with lump-sum payment arrangements. The mode of retirement thus falls within the category where the retiring partner has assigned/relinquished his interest rather than merely taking the quantified capital-account balance; earlier decisions of the jurisdictional High Court treating such deeds and lump-sum payments as transfers were applied and distinguished from authorities where simple account settlement without assignment was involved.

Conclusion: (i) The amount received on retirement involved assignment/relinquishment of the retiring partner's interest in the partnership and its assets and therefore constituted a "transfer" within the meaning of section 2(47), giving rise to capital gain taxable under section 45. The appellate challenge is dismissed and the CIT(A)'s order assessing the sum as short-term capital gain is confirmed.

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