Partnership dissolution and capital gains: receipt of a partner's share in assets was not a sale, exchange or transfer.

Amounts received by a partner on dissolution, representing a share in distributed partnership assets, were treated as a distribution and adjustment of mutual rights rather than a sale, exchange or transfer of a capital asset. Capital gains under section 12B(1) of the Indian Income-tax Act, 1922 arise only on a qualifying sale, exchange or transfer; on these facts, the partner's receipt did not satisfy that requirement and was not taxable as capital gains. The cited authority on sale of estate assets was distinguished, and the partnership dissolution principle was that allotment of assets to one partner in satisfaction of his share is not a sale for price.

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Issues: Whether the amount received by a partner on dissolution of a firm, representing his share in the distributed assets, amounted to a sale, exchange or transfer of a capital asset so as to attract capital gains tax under section 12B(1) of the Indian Income-tax Act, 1922.

Analysis: Liability to capital gains under section 12B(1) arose only where there was a sale, exchange or transfer of a capital asset. On the facts, the partnership assets were taken over by one partner at a valuation and the other partner received money representing his share. This was treated as a distribution of partnership assets on dissolution and an adjustment of mutual rights, not as a sale or transfer of the respondent's share in the assets. The cited authority dealing with sale of estate assets did not apply, and the principle drawn from the partnership dissolution cases was that allotment of assets to one partner in satisfaction of his share is not a sale for price.

Conclusion: The receipt was not taxable as capital gains under section 12B(1); the question was answered in the negative and the assessee succeeded.

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