Selling of partnership share

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This query is : Resolved

CA. Rohan Vaghasia (Querist)

17 December 2010 Whether partner liable for tax in case where said partner sell his/her share in partnership firm? if yes, in which head it is taxable?

CA. R. B. SAH

CA. R. B. SAH (Expert)

19 December 2010 taxable in the head of capital gain.

CA. Rohan Vaghasia

CA. Rohan Vaghasia (Querist)

20 December 2010 Thank u sir,

but how can it qualify capital assets ?

can u quote some case laws..?

Aashok Kumar Sharma

Aashok Kumar Sharma

(Expert)

23 July 2025 Yes, when a **partner sells or transfers his/her share in a partnership firm**, the amount received is **taxable under the head "Capital Gains"**.

Here’s a detailed explanation:

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### ✅ **Why It Qualifies as a Capital Asset**

Under **Section 2(14)** of the Income Tax Act, a **capital asset** includes property of any kind held by an assessee, whether or not connected with their business or profession.

A **partner’s interest in a partnership firm** (including rights to share in assets, profits, and goodwill) is a **capital asset**. Therefore, selling such an interest qualifies as a **transfer of capital asset** under **Section 2(47)**.

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### 🔍 **Relevant Case Laws**

Here are some notable rulings:

#### 1. **Addl. CIT v. Mohanbhai Pamabhai** (SC) \[(1987) 165 ITR 166 (SC)]

The Supreme Court held that:

> “When a partner retires and receives his share of partnership assets after deduction of liabilities and prior charges, there is **no transfer** and hence **no capital gains**.”
> ✅ *Applies only to retirement cases where the partner merely receives their share.*

#### 2. **CIT v. Lingmallu Raghukumar** \[(2001) 247 ITR 801 (SC)]

Confirmed that:

> “A partner receiving amount for goodwill or assets at retirement does not attract capital gains if there is no transfer.”

❗ But this applies **only when a partner retires** — not when selling their share to another person.

#### 3. **CIT v. H.R. Aslot** \[(1978) 115 ITR 255 (Bom)]

Where a partner **assigns or sells** their partnership interest to another person, the court held:

> “It is a transfer of capital asset and taxable under the head capital gains.”

#### 4. **A.N. Naik Associates & Ors v. CIT** \[(2004) 265 ITR 346 (Bom)]

The Bombay HC held:

> “Assignment of partnership rights amounts to a transfer under Section 2(47), taxable as capital gains.”

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### 📌 Tax Treatment Summary

* **If a partner sells their share to another person** (including to an existing or new partner):
🔹 It is a **transfer** under **Section 2(47)**
🔹 Taxable under **Capital Gains**
🔹 Indexation benefit allowed if held for more than 2 years

* **If a partner retires and receives money from firm**:
🔹 No transfer → **Not taxable** under capital gains (based on judicial precedents)

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### 📎 Practical Implications:

To compute capital gains:

* Consider the **amount received** as sale consideration.
* Deduct the **cost of acquisition**, which is usually the **initial capital contribution plus accumulated share in reserves**, if ascertainable.
* Long-term or short-term depends on **how long the interest was held**.

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Let me know if you’d like a sample computation or draft format for documenting such a transaction.

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