INCOME TAX ACT, 1961

Section 45(1) Section 2(47)

Capital gain - Transfer - Re-adjustment of profit sharing ratio inter se between partners of firm -

Assessee-company was one of the seven partners in a firm M/s. Mahakosh Property Developers. During the year, there was a change in constitution of the firm while assessee M/s. Anik Industries Ltd. reduced share from 30 to 25% and other partners increased their share as. The rights of the existing partners M/s. Anik Industries, i.e., assessee company were reduced and rights were created in favour of other existing partners of the firm. The rights of existing partners M/s. Anik Industries, i.e., assessee company were reduced and rights were created in favour of other existing partners of the firm. The other partners paid Rs. 4 crore to assessee for relinquishing its rights in partnership of its share being reduced from 30% to 25%. AO brought to tax Rs. 4 crore as capital gain under section 45(1) holding that sum of Rs. 4 crore was received by assessee company on account of relinquishment of its right in share to the extent of 5%.Held: Since there was only a re-adjustment of profit-sharing ratio inter se between existing partners and one partner i.e. assessee had not released and relinquished its interest in favour of other partners, there was, no transfer of interest in assets of partnership within meaning of section 2(47) and thus, compensation received by assessee from existing partners for reduction in profit sharing ratio could not be taxed under section 45(1).

REFERRED :

FAVOUR : In assessee's favour.

A.Y. :

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