Partner's share on dissolution of a two-partner firm fell within the capital gains exemption under section 47(ii).

A partner's receipt on relinquishment of his share in a two-partner firm was treated as falling within section 47(ii) of the Income-tax Act, 1961 because the firm could not continue after one partner exited and the transaction amounted to dissolution. The agreed payment represented the value of the partner's share in the partnership, and an actual division or separate valuation of the firm's assets was not required for the exemption to apply. The receipt was therefore covered by the dissolution exception and exempt from capital gains tax.

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Issues: Whether the amount received by a partner on relinquishment of his share in a two-partner firm, which resulted in dissolution of the firm, was exempt from capital gains under section 47(ii) of the Income-tax Act, 1961.

Analysis: With only two partners, the firm could not subsist after one partner relinquished his share. The transaction therefore amounted to dissolution of the firm. The amount of Rs. 15,000 was paid as the agreed value of the assessee's share in the partnership, and it was not necessary that there should be an actual division or valuation of the partnership assets. The exception in section 47(ii) applied to a distribution of capital assets on dissolution of a firm.

Conclusion: The receipt was covered by section 47(ii) of the Income-tax Act, 1961 and was exempt from capital gains tax. The question was answered in favour of the assessee and against the Revenue.

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