Capital gains on sale of partnership assets by receivers were taxable where the sale was not distribution on dissolution.

Sale of partnership assets by receivers after dissolution was not a distribution of capital assets on dissolution, so the third proviso to section 12B of the Income-tax Act, 1922 did not exclude capital gains tax. The proviso applied only where the transfer itself occurred as part of distribution on dissolution; a prior sale by receivers, even if the proceeds were later to be divided among partners, fell outside it. The firm was assessable on the gain because section 41(2) allowed direct assessment of income received on its behalf, and the receivers had realised the amount for the partnership. Section 48 of the Partnership Act did not require assets to be sold on dissolution.

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Issues: Whether the sale of partnership assets by receivers after dissolution of the firm fell within the third proviso to section 12B of the Income-tax Act, 1922 so as to exclude capital gains tax, and whether the firm could be assessed on the gain received by the receivers.

Analysis: The third proviso to section 12B applied only where there was a transfer on the dissolution of a firm and the transfer was in the nature of distribution of capital assets. A sale by receivers before any distribution to the partners was not such a distribution. The fact that the assets were later to be distributed after sale proceeds were realised did not bring the case within the proviso. Section 41(2) of the Income-tax Act, 1922 permitted direct assessment of the person on whose behalf the income, profits or gains were received, and the receivers had received the amount on behalf of the partnership firm. Section 48 of the Indian Partnership Act, 1932 did not require partnership assets to be sold on every dissolution, as the assets could also be divided in specie.

Conclusion: The third proviso to section 12B had no application, and the capital gain was assessable in the hands of the firm through the receivers.

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