Retiring partner settlement receipts treated as capital in nature, with no business income or capital gains charge on the stated facts.

A retiring partner's settlement amount was treated as capital in nature when received in lieu of partnership rights on discontinuance of the business source. The additional payment made by continuing partners towards the retiring partner's tax liability was not taxable as business income in the later year, because it arose only under an arbitration settlement after cessation of the business connection. On the stated facts, the receipt did not amount to a taxable transfer and was not chargeable as capital gains. The earlier year's treatment of share-of-profit amounts was confined to the facts accepted there, and the cited contrary reasoning was found inapplicable.

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Issues: Whether amounts received by a retiring partner from a firm on settlement of accounts, including compensation for surrender of partnership rights and related adjustments, were taxable as business income or capital gains.

Analysis: The receipt attributable to the share of profit already earned and credited was held taxable for the earlier assessment year only to the extent accepted on the facts. The additional amount paid by the continuing partners towards the retiring partner's share of tax liability was not treated as business income for the later year, because the business source had ceased and the receipt arose only from the arbitration settlement after discontinuance. The Court also held that the amount received on retirement in lieu of partnership rights was a capital receipt. On the facts, there was no taxable transfer attracting capital gains, and the reasoning in the relied-upon decision treating such receipts as business income was found inapplicable.

Conclusion: The compensation received on retirement from the firm was not taxable as business income or as capital gains, and the assessee succeeded on the substantive issue for the later assessment year.

Final Conclusion: The common receipt was held to be of capital nature on retirement from the partnership, with the later-year additions deleted and the Revenue's challenge rejected.

Ratio Decidendi: A retiring partner's receipt in settlement of partnership rights is a capital receipt, and unless the statute specifically brings such post-discontinuance receipt to charge, it cannot be taxed as business income or as capital gains merely because it represents money paid in adjustment of partnership accounts.

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