1978 (1) TMI 20 - HC - Income Tax

Summary

Issues involved: Determination of taxability of a sum received for relinquishing interest in a partnership firm as revenue receipt or capital gains.

Summary:
The judgment pertains to a partnership firm where one partner retired and received a sum of Rs. 20,000 for relinquishing her interest in the firm. The Income Tax Officer (ITO) treated this amount as a revenue receipt and taxed it accordingly. The Assessee contended that the sum did not represent revenue receipt or capital gains. The Appellate Assistant Commissioner (AAC) held it to be a capital receipt, considering it as the Assessee's share of the goodwill of the partnership firm. The Tribunal, however, disagreed with this view and held that the amount received was not taxable either as revenue receipt or capital gains.

First Issue - Taxability as Revenue Receipt:
The Tribunal held that the sum of Rs. 20,000 received by the Assessee for relinquishing her interest in the partnership firm did not qualify as a revenue receipt. It distinguished previous court decisions and concluded that the receipt could not be classified as a revenue receipt in its true nature and character. The court ruled in favor of the Assessee on this issue.

Second Issue - Taxability as Capital Gains:
Regarding the taxability of the sum as capital gains, the Tribunal analyzed the provisions of section 45 of the Income Tax Act, which governs capital gains. It noted that for capital gains to arise, there must be a transfer of a capital asset. The Tribunal found that the retirement of a partner and the consequent payment did not amount to a transfer of any capital asset. Citing the definition of "transfer" under section 2(47) of the Act, the court held that the retirement of a partner did not constitute a transfer under the extended meaning of the term. Therefore, no capital gains were deemed to accrue from the transaction. The court ruled in favor of the Assessee on this issue as well.

In conclusion, the High Court held that the sum of Rs. 20,000 received by the Assessee for relinquishing her interest in the partnership firm was neither taxable as a revenue receipt nor as capital gains. The court answered both questions referred to it in favor of the Assessee and against the department, allowing the Assessee's claim and awarding costs of Rs. 200.