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Whether a sum of Rs. 38,305 was a receipt of capital or a receipt of profit assessable under Section 4(2) of the Indian Income Tax Act. Analysis: The case involves a dispute over the nature of a sum of Rs. 38,305 received by a Chetti partner in a moneylending business in Ceylon upon dissolution of the partnership. The main issue is whether this sum constitutes a receipt of capital or profit for tax assessment purposes. The High Court at Madras held in favor of the respondent, following principles from an English case, Inland Revenue Commissioners v. Burrell, which dealt with assets distribution in a company winding up. However, the nature of assets distribution in a partnership differs significantly from that in a company. In a partnership, profits are joint initially and then become individual interests of each partner, constituting an obligation from the firm to each partner upon declaration. The dissolution of a partnership does not change the character of profits due to partners; hence, the sum received by the respondent was considered a payment of profits and properly assessed under the Indian Income Tax Act. The judgment emphasizes the distinction between company assets distribution and partnership dissolution. In a company, shareholders have no direct right to profits until distribution upon winding up, while in a partnership, profits are considered individual interests of each partner. The assessment of tax liability in partnership dissolution is based on the nature of profits due to partners, which remain unchanged by dissolution. The court highlighted that the sum received by the respondent was in the nature of profits earned before dissolution and continued to be his share, ranking ahead of capital distribution. The judgment clarifies that the payment received by the respondent in India was rightfully assessed as profits under the Income Tax Act, rejecting the argument that dissolution changed the character of the sum due to partners. The judgment also addresses the argument raised by the respondent's counsel regarding the Commissioner's inconsistent stance in previous cases. However, the court maintained that such arguments do not influence legal determinations. Additionally, the judgment specifies that the decision does not cover scenarios where undrawn profits are reinvested with consent to increase capital or cases governed by specific partnership articles. As no such provisions were applicable in this case, the court concluded that the sum of Rs. 38,305 received by the respondent was indeed a receipt of profits assessable under Section 4(2) of the Indian Income Tax Act. Consequently, the appeal was allowed, the High Court's order was set aside, and the respondent was directed to pay the costs incurred in both courts.
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