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Amount received for dilution of partnership share in favour of new partner is not taxable at all
Where new partners were admitted to the firm and they introduced a handsome amount as their capital contribution which was withdrawn as drawings equally by the existing partners whose shares were reduced as a result of admission of new partners, the amount so received by existing partners is not taxable in the hands of the existing partners.
The HC held that it is not correct to say that the existing partners relinquished any share in the landed property of the firm in favour of new partners since :-
(i) the firm and the partners are recognized as separate entities by the Income-tax Act although not so recognized by the Indian Partnership Act,1932;
(ii) since the Act treats a firm and its partners as separate entities, the landed property of the firm is that of the firm and not of its partners, there is no question of existing partners relinquishing any share therein to the new partners admitted. One can relinquish only what belongs to him and;
(iii) the existing partners did not retire from firm on admission of new partners but continued as partners albeit with reduced shares, – CIT v. SHRI P.N. PANJWANI –  21
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