Retirement receipt from a genuine partnership firm was not taxable as capital gains where development rights belonged to the firm.

A partner's retirement receipt was held not taxable as long-term capital gains where the record showed a genuine partnership, including a written deed, capital contribution by both partners, a firm bank account, execution of development documents in the firm's name, and arbitration proceedings recognising both as partners. The claim that the firm never existed was rejected on these facts. The receipt arose on retirement from the firm and not from any individual transfer or relinquishment of rights in the development property, because those rights belonged to the firm. The capital gains addition was therefore unsustainable, and the deletion of the addition was upheld.

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Issues: Whether the amount received by a partner on retirement from a partnership firm was liable to be taxed as long-term capital gain on the footing that there was no real partnership firm or that the amount represented consideration for relinquishment of rights in the development property.

Analysis: The record showed a written partnership deed with equal profit-sharing, contribution of capital by both partners, a bank account in the firm's name, execution of the development agreement and supplementary agreement on behalf of the firm, and arbitration proceedings recognizing both as partners. The arbitration award and later proceedings also proceeded on the basis that the assessee was retiring from the firm. On these facts, the assumption that the partnership firm never existed was unsustainable. The amount was received on retirement from the firm and not for transfer or relinquishment of any individual right in the property, since the development right belonged to the firm and not to the assessee personally. In such circumstances, the receipt could not be brought to tax as capital gains.

Conclusion: The addition made by the Assessing Officer was unsustainable and the deletion by the Commissioner of Income Tax (Appeals) was upheld, resulting in dismissal of the Revenue's appeals.

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