Sharadha Terry Products Ltd. v. Asstt. CIT

INCOME TAX ACT, 1961

--Capital gains--ChargeabilityAmount received on retirement from partnership firm--Assessee company was partner in a firm. It held 99 percent interest in the firm. During the year, it relinquished its right of 99 per cent vide retirement deed and received consideration, which it claimed as capital receipt. AO held that assessee had relinquished its right in partnership firm and, therefore, consideration received was taxable as capital gains. Assessee contended that there was no transfer of any property by the assessee at the time of retirement and so, no capital gain tax could be levied. Held: On retirement, share was determined after taking into account of notional sale of partnership assets. What assessee received was his share in the partnership and not any consideration for transfer of its interest in the partnership to the continuing partners. There was no element of transfer of interest in partnership assets by the retiring partners to the continuing partner as also no extinguishment of its interest in partnership assets. Further, there was no transfer of its interest in the goodwill of the firm. Thus, no capital gains was chargeable under section 45.