Partnership dissolution and capital gains: money paid for a partner's share in assets was treated as asset distribution, not transfer.

On dissolution of a partnership firm, a partner's receipt of the money value of his share in the firm's assets was treated as a mode of distribution of those assets, even where the assets were not divided physically in specie. The third proviso to section 12B(1) of the Indian Income-tax Act, 1922 was applied to exclude such distribution from the concepts of sale, exchange or transfer. As a result, the amount received by the partner on dissolution was not liable to capital gains tax under section 12B(1), and the reference was answered in favour of the assessee.

---

---

Issues: Whether the amount received by a partner as the money value of its share in the assets of a dissolved firm was covered by the third proviso to section 12B(1) of the Indian Income-tax Act, 1922 so as to exclude the levy of capital gains tax.

Analysis: On dissolution of a partnership, distribution of the firm's assets need not always be by physical division in specie. Where one partner takes over the assets and pays the other partner the money value of that partner's share, the receipt is still a mode of distribution of the partnership assets. The proviso was understood as excluding such distribution from the concepts of sale, exchange or transfer, and the contrary view restricting the proviso only to in specie distribution was not accepted.

Conclusion: The amount of Rs. 65,000 could not be taxed as capital gains under section 12B(1), and the answer to the reference was in favour of the assessee.

Final Conclusion: The reference was answered against the Revenue, holding that money received on dissolution as the value of a partner's share in partnership assets falls within the protective proviso and does not attract capital gains tax.

Ratio Decidendi: On dissolution of a firm, receipt by a partner of the money value of his share in partnership assets is a distribution of assets within the third proviso to section 12B(1) and is not a sale, exchange or transfer.

---