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Section 47(ii) of the Income-tax Act, 1961 - Capital gains - Transactions not regarded as transfer - Payment to retiring partner of capital, proportionate share of audited profits and goodwill - Whether tribunal correct in holding that the payment was not taxable - Held, yes, as it did not involve transfer of capital within the meaning of section 47 Facts Three of the six partners, including the assessee, of a firm retired from the partnership due to differences with effect from 30-06-1969. The retirement deed dated 1-07-1969 stipulated that three partners could withdraw from the firm their capital and their proportionate share of audited profits up to the date of retirement as also their share of the goodwill. The assessee received Rs. 11,250 as his share which was taxed by the ITO as capital gains treating it as compensation received on retirement. The AAC treated the amount as taxable business receipt, holding it to be amount in lieu of profit. The Tribunal held the amount exempt under section 47(ii), observing that the said retirement deed dated 1-07-1969 did not indicate that the impugned payment for share in goodwill was compensation for surrendering the profits. On reference, the revenue, inter alia, contended that (i) as section 47(ii ) exempted distribution of capital assets only on dissolution of a firm, the Legislature obviously intended that a distribution of capital assets otherwise made should be liable to tax; and (ii) the transfer, as now defined in section 2(47), included not only sale, exchange or relinquishment but also extinguishment of any right and thus the scope of section 45 was wider than section 12B of the 1922 Act. Held 1. When a transfer took place, there was an extinguishment of right of one person, i.e., the transferor and the creation of right in another, viz., the transferee. Thus, although section 12B of the 1922 Act did not contain the word "extinguishment", it took care of such cases by applying provision in the case of transfer. Thus, section 47 must be read in the same light as section 12B of the 1922 Act, i.e., it was a provision introduced as a matter of abundant caution and the contention based on section 47, therefore,…

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