Retiring partner's share in partnership assets is not capital gains when it is merely settlement on retirement.

A retiring partner's receipt representing his share in the difference between the book value and market value of the firm's net assets was held not taxable as capital gains. The Court treated retirement as akin to dissolution for this purpose and found that the amount was only the working out and settlement of the partner's existing share in partnership assets. No sale, exchange, transfer, relinquishment or extinguishment of rights in favour of the continuing partners was involved, and the legal character of the receipt did not change merely because accounts were fully valued or the amount was paid in a lump sum. The reference was answered against the Revenue and in favour of the assessee.

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Issues: Whether the sum received by a retiring partner, representing his share in the difference between the book value and market value of the firm's net assets, was assessable as capital gains.

Analysis: The amount received on retirement was held to be merely the working out of the partner's own share in the partnership assets after valuation and settlement of accounts. Retirement of a partner was treated as akin to dissolution for this purpose, and the receipt did not involve any sale, exchange, transfer, relinquishment, or extinguishment of rights in favour of the continuing partners. The Court declined to adopt the distinction that capital gains would arise only where a lump sum was paid without formal valuation, holding instead that the legal character of the receipt remained the same whether accounts were fully taken or the payment was made in a lump sum.

Conclusion: The receipt was not chargeable as capital gains and the reference was answered against the Revenue and in favour of the assessee.

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