Selling of partnership share

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CA. Rohan Vaghasia (Querist)
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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)
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19 December 2010 taxable in the head of capital gain.

CA. Rohan Vaghasia

CA. Rohan Vaghasia (Querist)
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20 December 2010 Thank u sir,

but how can it qualify capital assets ?

can u quote some case laws..?

Aashok Kumar Sharma online

Aashok Kumar Sharma online

(Expert)
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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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