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Assessment of capital gains on the dissolution of a partnership firm under section 12B of the Income-tax Act. Analysis: The case involved the assessment of capital gains on the dissolution of a partnership firm under section 12B of the Income-tax Act. The assessee, a Hindu undivided family, was assessed for the gains upon the value of its karta's share in the assets of the firm, which included goodwill, machineries, furniture, medicines, a library, and copyright in publications. The Income-tax Officer estimated the value of capital assets at &8377; 1,70,000, resulting in a capital gain of &8377; 1,40,000. The Appellate Tribunal reduced the quantum of capital gains to &8377; 65,000 but rejected the contention that no capital gains accrued due to the distribution of assets on dissolution. The main issue was the interpretation of the third proviso to section 12B(1) regarding the treatment of distributed assets as capital gains. The key argument was whether the distribution of assets in money value on dissolution constituted a sale, exchange, or transfer of capital assets. The assessee contended that the proviso applied as it received the value of its share in assets, not the assets themselves. The Commissioner argued that the proviso applied only when assets were distributed in specie, citing a previous case where the Supreme Court held that capital assets must be distributed in specie to escape capital gains tax under section 12B. The court analyzed the nature of asset distribution on firm dissolution, emphasizing that assets like goodwill or intangible property cannot be physically divided. Referring to legal precedents, the court highlighted that the distribution of assets can involve selling them and dividing the proceeds, which still constitutes distribution. The court disagreed with previous judgments that restricted the proviso's application to specie distribution and held that the assessee's case fell under the proviso, concluding that the &8377; 65,000 could not be taxed as capital gains. In conclusion, the court ruled in favor of the assessee, holding that the distributed share in assets on dissolution did not amount to a sale, exchange, or transfer of capital assets under section 12B. The court directed the Appellate Tribunal to receive a copy of the judgment and awarded costs to the assessee.
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