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Commissioner of Income-tax, Bombay City-iii, Bombay Vs. Tribhuvandas G. Patel - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtMumbai High Court
Decided On
Case NumberIncome-tax Reference No. 188 of 1973
Judge
Reported in[1978]115ITR95(Bom)
ActsIncome Tax Act, 1961 - Sections 2(47) and 45
AppellantCommissioner of Income-tax, Bombay City-iii, Bombay
RespondentTribhuvandas G. Patel
Appellant AdvocateR.J. Joshi, Adv.
Respondent AdvocateS.E. Dastur, Adv.
Excerpt:
direct taxation - capital gain - sections 47 (ii) and 45 of income tax act, 1961 - having regard to particular mode employed by assessee and continuing partners to effect and bring about retirement of assessee from partnership transaction have to be regarded as amounting to 'transfer' within meaning of section 2 (47) - assessee said to have assigned, released and relinquished his interest and share in partnership and its assets in favour of continuing partners - this cannot be regarded as amounting to any distribution of capital assets upon dissolution of firm - consideration received by assessee and capital gains are taxable. - - the tribunal, however, held that share or interest of a partner in the firm was property and payment received by a partner for surrendering the said.....tulzapurkar, j. 1. in this reference made to this court by the appellate tribunal at the instance of the commissioner of income-tax, bombay city iii, bombay, under section 256(1) of the income-tax act, 1961, the following three questions have been referred to us for our opinion : '(1) whether, on the facts and in the circumstances of the case, rs. 1,72,182 or rs. 1,00,000 were liable to be included in the total income of the assessee as his share of profit from the firm of kumar engineering works (2) whether on the facts and in the circumstances of the case, sum of rs. 50,000 received by the assessee as his share of the value of the goodwill or any part thereof was liable to tax as capital gain (3) whether, on the facts and in the circumstances of the case, the sum of rs. 4,77,941 or.....
Judgment:

Tulzapurkar, J.

1. In this reference made to this court by the Appellate Tribunal at the instance of the Commissioner of Income-tax, Bombay City III, Bombay, under section 256(1) of the Income-tax Act, 1961, the following three questions have been referred to us for our opinion :

'(1) Whether, on the facts and in the circumstances of the case, Rs. 1,72,182 or Rs. 1,00,000 were liable to be included in the total income of the assessee as his share of profit from the firm of Kumar Engineering Works

(2) Whether on the facts and in the circumstances of the case, sum of Rs. 50,000 received by the assessee as his share of the value of the goodwill or any part thereof was liable to tax as capital gain

(3) Whether, on the facts and in the circumstances of the case, the sum of Rs. 4,77,941 or any part thereof was liable to tax as capital gain by reason of section 47(ii) of the Act ?'

2. The questions relate to the assessment year 1962-63 and arise out of the assessment proceeding of the assessee Tribhuvandas G. Patel, a retired partner of the firm Kumar Engineering Works, Bombay. The facts giving rise to the questions may be stated : the assessee was a partner in the firm of Kumar Engineering Works up to August 31, 1961, whereafter he retired therefrom. It appears that on December 5, 1960, he served on the remaining partners a notice of his intention to dissolve the firm with effect from december 31, 1960, but as the remaining partners opposed the move of the assessee to dissolve the firm and contended that the firm continued to exist notwithstanding the notices served on them by the assessee, the assessee filed Suit No. 72 of 1961 on the original side of this court on March 8, 1961, for a declaration that the firm was dissolved with effect from December 31, 1960, and for accounts and other reliefs. The dispute was ultimately settled by the partners out of court and under a deed dated January 19, 1962, the assessee retired from the firm with effect from August 31, 1961, and the remaining partners continued to carry on the business of the firm. on the occasion of such retirement the assessee was paid in all Rs. 9 lakhs which, inter alia, comprised three items, viz., (a) Rs. 1 lakh as his share of profit of the firm for the broken period ended August 31, 1961, (b) Rs. 50,000 as his share of the value of goodwill, and, (c) Rs. 4,77,941 as his share in the remaining assets of the firm (by appreciation of assets, etc.). The entire break-up has been set out by the Tribunal in the statement of case but the other items received by the assessee which were included in the total amount of Rs. 9 lakhs are not material for the purpose of this reference. It appears that the assessment of the firm, Kumar Engineering Works, as a registered firm for the assessment year 1962-63 was completed by the 1st Income-tax Officer (A-IV Ward) and on apportionment a sum of Rs. 1,72,155 was allocated to the assessee as his share of profit under section 158 and an intimation thereof was given to the Income-tax Officer (8th I.T.O.,BSD(W), Bombay) dealing with the case of the assessee as an individual. During the course of his individual assessment the assessee raised three contentions. In the first place, he urged that only a sum of Rs. 1 lakh and not Rs. 1,72,155 was liable to be included as his share or profit from the business in the total income on the basis of the theory of real income received by him. Secondly, he contended that the sum of Rs. 50,000 received by him as his share of the value of goodwill was not liable to capital gains tax on the ground that the goodwill was self-generating asset. Thirdly, it was contended that no portion of Rs. 4,77,941 was liable to be charged under the head 'Capital gains' on the ground that it was distribution of capital assets on the dissolution of the firm and was immune from the operation of section 45 by reason of section 47(ii) of the Act. The Income-tax Officer rejected all the contentions of the assessee. He included in the assessee's total income the sum of Rs. 1,72,155 as 'share from the firm of Kumar Engineering Works now assessed by 1st ITO, A-IV Ward, taken as intimated by the ITO' without much discussion on the point. He further held that this was not a case of dissolution of the firm but a case where the assessee had retired from the firm and the remaining partners had continued the partnership business and as such section 47(ii) did not apply and the entire amount or Rs. 4,77,941 was chargeable to capital gains tax as all the assets other than the land at Kalina were purchased after January 1, 1954, and as the land at Kalina had not appreciated in value by January 1, 1954. He also included the sum of Rs. 50,000 in the total income as an item being liable for capital gains tax. In the appeal that was preferred by the assessee, the Appellate Assistant Commissioner substantially confirmed the ITO's order in regard to the said three items. He confirmed the inclusion of Rs. 1,72,155 in the total income of the assessee on the ground that the partner in his personal assessment could not challenge the allocation of profit made under section 158 of the Act and that if he were aggrieved by the said allocation he should have preferred an appeal on behalf of the firm. He also supported the inclusion of the said amount on the ground that the assessee was liable to tax not merely on the income received by him but on income which accrued or was deemed to accrue to him. As regards the entire amount of Rs. 4,77,941 which was held liable to capital gains tax by the ITO he took a different view on the point of valuation of certain assets and held that the sum of Rs. 4,27,108 only was liable to capital gains tax. As regards the assessee's share in the value of goodwill amounting to Rs. 50,000 he upheld the ITO's order.

3. The assessee carried the matter in second appeal to the Tribunal and urged the self-same contentions in regard to three items which he had received on the occasion of his retirement. On the first question as to whether the sum of Rs. 1 lakh or Rs.1,72,155 should be included in the total income of the assessee, the Tribunal in the first place noticed that the assessment order made by the concerned ITO against the firm had been set aside by the AAC in appeal which had been preferred by the firm and the AAC had given directions to make a fresh assessment and no fresh assessment had been made till the Tribunal heard the matter and, therefore, the Tribunal held that there would be no basis for including Rs. 1,72,155 in the total income of the assessee. The Tribunal further went on to consider the question whether the sum of Rs. 1 lakh actually received by the assessee or his share of profit that may ultimately be determined in the assessment of the firm would be includible and, relying upon the decision of this court in the case of Commissioner of Income-tax v. N. M. Raiji [1949] 17 ITR 180 , it held that the theory of real income would be applicable to the facts of the case and that a sum of Rs. 1 lakh only was liable to be included in the assessee's total income. The Tribunal observed that the instant case would be converse of the facts which obtained in Commissioner of Income-tax v. N. M. Raiji [1949] 17 ITR 180 , but on identical process of reasoning only Rs. 1 lakh would be includible. As regards the sum of Rs. 50,000 being the assessee's share in the value of the goodwill, the Tribunal, following the decision of the Madras High Court in K. Rathnam Nadar's case : [1969]71ITR433(Mad) , held that no part of the said sum was liable to capital gains tax. As regards the item of Rs. 4,77,941, on behalf of the assessee reliance was placed upon the decision of the Allahabad High Court in the case of Bankey Lal Vaidya v. Commissioner of Income-tax : [1965]55ITR400(All) , in support of the contention that no portion of the said amount was liable to be charged under the head 'Capital gains' inasmuch as the said sum was received by the assessee by way of distribution of capital asset on the dissolution of the firm and as such the case was covered by section 47(ii) of the Act. The Tribunal, however, held that share or interest of a partner in the firm was property and payment received by a partner for surrendering the said property or his rights therein would attract the provisions of section 45 provided other relevant conditions were satisfied. The Tribunal then pointed out that there was a distinction between retirement of a partner from the firm and dissolution of a firm, and on an examination on facts record, it held that the assessee had received a Rs. 4,77,941 on retirement from the firm and not upon its dissolution and the case was, therefore, not saved by section 47(ii) and was not covered by the decision in the Bankey Lal Vaidya : [1965]55ITR400(All) . The Tribunal on a consideration of the material record valued the land at Rs. 10 per sq. yard as on January 1, 1954, and directed the ITO to work out the capital gain on that basis. At the instance of the Commissioner of Income-tax, Bombay, the three questions set out at the commencement of the judgment have been referred to us for our opinion.

4. At the outset we may state that out of the three questions that have been referred to us, question No. 2 which pertains to the sum of Rs. 50,000 received by the assessee as his share of the value of goodwill is, in our view, completely covered by the latest decision rendered by this court in the case of Commissioner of Income-tax v. Home Industries Co. : [1977]107ITR609(Bom) and, therefore, it will not be necessary to discuss and deal with the same in any detail. Admittedly, on the occasion of retirement from the firm, the assessee had received this sum of Rs. 50,000 as his share in the goodwill of the firm of Messrs. Kumar Engineering Works under the deed dated January 19, 1962. There was no dispute before us that the firm of Kumar Engineering Works commenced its business afresh from Kartik Sud 1st, S.Y. 2004, November 13, 1947, and it was commence by the assessee and two other partners, and it was during the course of working of the said partnership business that the goodwill grew. In other words, the goodwill of the firm in the instant case was admittedly a self-generated asset which had cost nothing to the partners of the firm in terms of money. In the case of such goodwill this court in Home Industries and Co.'s case : [1977]107ITR609(Bom) (Bom) has taken the view that the same will not be a capital asset the transfer of which will give rise to chargeable capital either under section 12B(1) of the 1922 Act or under section 45 of the 1961 Act. In view of this position, Mr. Joshi appearing for the revenue started before us that so far as this court is concerned the answer to question No. 2 will be covered by that decision. Question No. 2 is, therefore, answered in the negative and in favour of the assessee.

5. Turning to question No. 1 we have already set out the facts pertaining thereto in the earlier part of our judgment, which we may briefly recapitulate. The assessee had served on the other two partners a notice of dissolution of the firm with effect from December 31, 1960, which was not accepted by the other partners. The assessee, therefore, filed a suit for dissolution and accounts, but ultimately the disputes between the parties were amicably settled out of court and under a deed dated January 19, 1962, the assessee retired from the firm with effect from August 31, 1961, and the remaining partners continued to carry on the business of the firm. On the occasion of such retirement the assessee was, inter alia, paid a sum of Rs. 1 lakh as his share of profit of the firm for the broken period ended August 31, 1961. By the time the assessee's individual assessment came up for consideration the assessment of the firm as a registered firm had been completed by the Income-tax Officer, A-IV Ward, and on apportionment a sum of Rs. 1,78,155 was allocated by the ITO to the assessee as his share of profit under section 158 of the Act. The question is Whether in the individual assessment of the assessee a sum of Rs. 1 lakh actually received by him on his retirement from the firm his share of profit that may ultimately be determined in the assessment of the firm is liable to be included in the total income of the assessee. We are deliberately indicating two alternatives in the aforesaid form because the Tribunal has observed while disposing of the appeal preferred by the assessee that till then no assessment of the firm had been made or had come into existence. In this behalf, we may refer to the actual state of affairs as it existed at the time of passing of the order by the Tribunal which was sought to be put before us by Mr. Joshi appearing for the revenue. Joshi pointed out that it was true that the assessment had been completed by the ITO, A-IV Ward, against the registered firm and the sum of Rs. 1,72,155 had been allocated to the assessee as his share of profit of the firm under section 158, which was set aside by the Appellate Assistant Commissioner in appeal preferred by the firm and the AAC had directed the ITO to make a fresh assessment. But according to Mr. Joshi the Tribunal appears to have made a statement in its order to the effect : 'no fresh assessment has been made till now' through some inadvertence because long before the Tribunal had heard the appeal and disposed it of by its order dated December 23, 1970, fresh assessment as directed by the AAC had been made by the ITO, A-IV Ward, on December 30, 1969, where in the ITO had after completing the assessment against the firm allocated in sum of Rs. 1,36,930 to the assessee as his share of profit for the period ended August 31, 1961, and according to Joshi, it was possible that this fresh assessment order might not have been brought to the notice of the Tribunal and therefore, the mistaken statement might have crept in the order. Joshi, therefore, urged that in place of Rs. 1,72,155 the figure of Rs. 1,36,930 will have to be substituted and the question would be whether this higher amount or only Rs. 1 lakh is liable to be included in the total income of the assessee as his share of profit from the firm. Joshi even produce a copy of the said fresh assessment order passed by the ITO, A-IV Word, on December 30, 1969, for our perusal. Dastur appearing for the assessee, however, objected to the copy of the said fresh assessment order going on record on the ground that in its advisory jurisdiction which this court will be exercising in this behalf this court must accept facts stated by the Tribunal to be the correct facts and this court must proceed on the assumption that no fresh assessment has been made in the case of register firm as directed by the AAC and as if none was in existence. We think Mr. Dastur is right and we would, therefore, proceed on the basis of facts as have been stated by the Tribunal in the statement of case. We will with the question as if no fresh assessment has been made in the case of the registered firm. That is why we have stated above that the real question that arises for our determination is whether the sum of Rs. 1 lakh actually received by the assessee on his retirement from the firm or his share of profit that may ultimately be determined in the assessment of the firm is liable to be included in his total income.

6. On the above question relying upon the provisions of sections 67, 158 and 182 of the Act, Joshi contended that once the assessment of a registered firm was completed by the ITO and the partner's share is allocated or apportioned, then statutorily it was incumbent upon the ITO to deal with, in the individual assessment of a partner, and assess such allocated share of a partner as his share of profit of the firm and include the same in his total assessable income and in such a case in view of the said statutory provisions the theory of real income could not be resorted to and, therefore, in the instant case not the amount of Rs. 1 lakh which was actually received by the assessee on his retirement as his share of profit from the firm for the broken period ending August 31, 1961, but his share of profit that may ultimately be determined in the assessment of the firm could be includible in the total income of the assessee. On the other hand Dastur appearing for the assessee contended that the principle of bringing to tax only the real income actually received would be applicable to the facts of the present case and strongly relying upon the decision of this court in N. M. Raiji's case [1949] 17 ITR 180 he urged that it would be the sum of Rs. 1 lakh which was actually received by the assessee as his share of profit from the firm for the broken period ended August 31, 1961, that would be includible in the total income of the assessee. He fairly stated that the facts of the instant case were exactly converse of the facts which obtained in N. M. Raiji's case [1949] 17 ITR 180, but, according to him, the ratio or the principle enunciated by this court in that case should be applied to the instant case. As regards statutory provisions that are to be found in section 67(1) and section 158 and 182, he raised a two-fold contention. In the first place, he contended that section 67(1) was not attracted to the facts of the present case for two or three reasons and if that were so, the general law will apply and the principle of real income should be applied. Alternatively, he contended that even if section 67(1) were to apply, clause (a) of section 67(1) merely directed that apportionment among the partners be made and there was no direction contained therein as to how and in what manner such apportionment should be made, much less that such apportionment should be or must be in accordance with the profit-sharing proportion specified in the deed of partnership and, therefore, in the absence of such statutory directions the real share of income actually received by the partner would be includible in his total income.

7. Dealing first with the statutory provisions we may at once observe that we are unable to accept the submission of Dastur made in connection with these provisions. The material provisions required to be considered are sections 182(1), 158 and 67(1) of the Act. Section 182 deals with assessment of registered firms and sub-section (1) of section 182 provides that notwithstanding anything contained in section 143 and 144 and subject to the provisions of sub-section (3), in the case of a registered firm, after assessing the total income of the firm, (i) the income-tax payable by the firm itself shall be determined; (ii) the share of each partner in the income of the firm shall be included in his total income and assessed to tax accordingly. Section 158 so far as is material provides that whenever a registered firm is assessed the Income-tax Officer shall notify to the firm by an order in writing the amount of its total income assessed and the apportionment thereof between the several partners. But before the benefit or advantage of the provisions of these sections can be availed of by the partnership firm and its partners, the firm must obtain registration under section 185(1)(a) of the Act and for that purpose an application in the prescribed form under the Rules is required to be made under section 184(6) and the requisite procedure is required to be gone through. Sub-section (6) of section 184 states that the application shall be made in the prescribed form and shall contain the prescribed particulars, while sub-section (5) states that the application shall be accompanied by the original instrument evidencing the partnership together with a copy thereof. Rule 22 of the Income-tax Rules, 1962, deals with how, when and in what form such application should be made and, inter alia, provides that the application shall be in Form No. 11. In Form No. 11 among the prescribed particulars that are required to be mentioned are particulars regarding name, address of each partner, date of his admittance to partnership and percentage of his share in profit and loss of the firm. Moreover, any change either in the constitution of the firm or any profit-sharing proportion is also required to be duly intimated. Regarding the provisions of section 182 along with relevant rules and the prescribed form it seems quite clear that when section 182(1)(ii) speaks of 'the share of each partner in the income of the firm' being included in his total income and further speaks of assessing the same to tax, it is that share as has been specified in the prescribed form while furnishing the prescribed particulars. In other words, it is clear to us that the apportionment of share in profit or income of the firm between the partners that is contemplated by section 158 and section 67(1) must be in accordance with the profit-sharing proportion that has been specified or indicated by the partners while obtaining registration of the firm. Such being the statutory provision, in our view, the principle of general law based on the theory of real income would not be applicable. Moreover, if the assessed income of the registered firm happens to be more than the returned income and consequently the allocated share of the individual partner also happens to be more than the actual share of such partner upon distribution of the 'returned income', it would ordinarily be due to either some additions made in respect of items of income from undisclosed source or disallowance of some expenditure claimed by the firm and, therefore, it would not be reasonable or inequitable to include in the total income or the individual partner such higher amount that would be allocated to him while apportioning such 'assessed income' of the firm under section 158.

8. It would be convenient at this stage to deal with the alternative contentions of Dastur, which were principally based upon the provisions contained in section 67(1) of the Act. Section 67 deals with the method of computing a partner's share in the income of the firm and sub-section 67 runs thus :

'67. (1) In computing the total income of an assessee who is a partner of a firm, whether the net result of the computation of total income of the firm is a profit or loss, his share (whether a net profit or a net loss) shall be computed as follows :

(a) any interest, salary, commission or other remuneration paid to any partner in respect of the previous year, and, where the firm is a registered firm an unregistered firm assessed as a registered firm under clause (b) of section 183, the income-tax, if any, payable by it in respect of the total income of th previous year, shall be deducted from the total income of the firm and the balance ascertained and apportioned among the partners :

(b) where the amount apportioned to the partner under clause (a) is a profit, any salary, interest, commission or other remuneration paid to the partner to the firm in respect of the previous year shall be added to that amount, and the result shall be treated as the partner's share in the income of the firm; (c) where the amount apportioned to the partner under clause (a) is a loss, any salary, interest, commission or other remuneration paid to the partner by the firm in respect of the previous year shall be adjusted against that amount, and the result shall be treated as the partner's share in the income of the firm.'

9. In the first place, Dastur contended that section 67(1) was not attracted to the facts of the present case for three reasons : (a) Because the assessment of the firm has not been completed and the firm; s total income is yet to be computed, (b) the provisions of section 67(1) implied that the same firm is continuing throughout the year, (c) the assessee must be a partner, which he was not, at the relevant time, for the opening part of sub-section (1) of section 67 runs thus : 'In computing the total income of an assessee who is a partner of a firm.' For these three reasons, he contended, section 67(1) was not attracted to the facts of the present case and, therefore, the general law will apply and the principle of real income would be applicable, and as such only the sum of Rs. 1 lakh that was actually received by the assessee as his share of profit would be includible in the total income and not more. Alternatively, he contended even that if section 67(1) were to apply, clause (a) of section 67(1) merely speaks of 'apportionment among the partners' being made and there is nothing to indicate as to how and in what manner such apportionment should be made and in the absence of such directions the principle of real income would apply and even on this basis Rs. 1 lakh and no more would be includible in the total income of the assessee. It is not possible to accept either of these contentions. In our view, the provisions of section 67(1) would apply to the assessment of the assessee as an individual assessee who was a partner of the registered firm of Kumar Engineering Works up to a certain period which fell within the previous year relevant to the assessment year 1962-63. Section 67 prescribes or lays down the matter of computing a partner's share in the income of the firm and surely it can never be accepted that if a partner were to retire in the midst of the previous year relevant to assessment to the assessment year, the method of computing his share in the income of the firm as prescribed in section 67 would not apply or cannot be invoked. In fact whether a partner has retired from a registered firm exactly at the end of the accounting period or in the midst of the accounting period, it would be this method prescribed by section 67 that would be applicable for computing his share in the income of the firm. There is nothing in the section which warrants the proposition that the method prescribed by that section cannot be restored to unless the firm's assessment is completed first or its total income is computed first or that the same firm must continue throughout the year or that the assessee must be a partner of the firm throughout the relevant previous year or must be a partner at the time when the firm's assessment is being completed. In our view, section 67(1) merely lays down the method of computing a partner's share in the income of the firm and how the same should be ascertained and that method will have to be applied and can be applied irrespective of the aspects mentioned by Dastur. It is, therefore, not possible to accept the contention of Dastur that section 67(1) was not attracted to the facts of the case. Even the alternative contention put forward by him must be rejected. As we have stated above the provisions of sections 182, 158 and section 67(1) read with the relevant rule and the form prescribed for obtaining registration of the firm clearly lay down statutorily how the apportionment of the profits of the firm to each of the partner is to be made and the same has got to be in the same profit-sharing proportion as has been specified in the form of application that is required to be submitted for obtaining registration of the firm. In view of such statutory provisions contained in the Act ant the Rules there will be no scope for invoking the principle or theory of real income and it will be the assessee's share of profit that may ultimately be determined in the assessment of the firm that will be includible in his total income. Turning to the decision of this court in N. M. Raiji's case [1949] 17 ITR 180 on which strong reliance was placed by Dastur, it may be stated that the facts of that case were just the reverse of those obtaining in the instant case. Assessee, Raiji, was a partner in the firm of Messrs. S. B. Billimoria & Co., from 1928 onwards. The partnership was dissolved as a result of consent decree passed by the High Court of Bombay as from October 9, 1942, and Raiji ceased to be a partner from that date. As a result of the consent decree the share of the assessee in the firm from January 1, 1942, to October 9, 1942, was determined at Rs. 41,000 and he actually received that amount, though as per the partnership accounts his share amounted to Rs.28,686 only. The question was which of the amounts are includible in the total income of the assessee for the purpose of super-tax assessment. The assessee contended that he was liable to pay super-tax only on Rs. 28,686. This court rejected the contention and upheld the inclusion of Rs. 41,000 observing that it was difficult to understand how the sum of Rs. 28,686 was in any way material or relevant when in fact and as his share in the partnership the assessee received Rs. 41,000. It was argued by Dastur that although as per the profit-sharing proportion the assessee was entitled to receive only Rs. 28,686, this court took the view that the higher amount of Rs. 41,000 which the assessee had actually received under the consent decree for dissolution was liable to be included in the total income of the assessee for super-tax purposes and he suggested that it was so held on the basis of acceptance of the theory or principle of receipt of real income which should be the criterion for laying tax. He urged that the facts in the instant case were exactly opposite but even so the principle should be applied and it should be held that the sum of Rs. 1 lakh only would be includible in the total income of the assessee. In our view, the principle or theory of real income would undoubtedly apply to a situation as obtained in N. M. Raiji's case [1949] 17 ITR 180 , but it would not necessarily apply to a converse case like the present one, more especially when to such a converse case the statutory provision is applicable. In the view of above discussion, the first question is answered thus. On the facts and in the circumstances of the case not Rs. 1 lakh but the assessee's share of profit that may ultimately be determined in the assessment of the firm as his share of profit is liable to be included in his total income.

10. Turning next to the last question whether the sum of Rs. 4,77,941 or any part thereof is liable to tax as capital gain the rival contentions were these : Dastur for the assessee contended that the retirement of the assessee as a partner from the firm of Kumar Engineering Works and quantification of his share or antitrust therein and payment thereof to him does not result in any transfer of capital asset within the meaning of section 45 of the Act, inasmuch as upon retirement there is merely an adjustment of his rights and, according to him, retirement of a partner and quantification of his share and payment thereof to him stands on the same footing as adjustment of rights that results upon of a firm and, therefore, since there was no transfer of any capital asset in the instant case, the sum of Rs. 4,77,941 or any portion thereof was not liable to be charged under the head 'Capital gains'. In support of this contention in addition to two Supreme Court decisions in Dewas Cine Corporation's case : [1968]68ITR240(SC) and Bankey Lal Vaidya's case : [1971]79ITR594(SC) (both of which dealt with dissolution of the firm), Dastur strongly relied upon the decision of the Gujrat High Court in Mohanbhai Pamabhai's case [1973] 91 ITR 393 - a decision directly on the point of retirement of a partner. Alternatively, he contended that section 47(iii), though in terms refers to dissolution of a firm, would cover a case of retirement of a partner and, therefore, on either of these grounds the sum of Rs. 4,77,941 was not liable to capital gains tax. On the other hand, Joshi for the revenue contended that there was a clear distinction between retirement of a partner from the firm and dissolution of the firm, that different provisions of the Partnership Act were applicable to these two concepts and since in the instant case the assessee had received Rs. 4,77,941 on retirement from the firm and not on dissolution of the firm, the case was not saved by section 47(ii) nor was it covered by the two decisions of the Supreme Court, viz., Dewas Cine Corporation's case : [1968]68ITR240(SC) and Vaidya's case : [1971]79ITR594(SC) . He further urged that the case of Mohanbhai Pamabhai [1973] 91 ITR 393 was not correctly decided and the same need not be followed by this court. He urged that the share or interest of a partner in the partnership was property and, therefore, a capital asset, and whenever a partner retired from the firm he invariably relinquishes his said share or right in the partnership and its assets in favour of the continuing partners, who are permitted to carry on business of the firm and as such the transaction must be regarded as amounting to transfer giving rise to capital gain within the meaning of section 45 of the Act read with section 2(47) of the Act. In support of his contention that upon retirement from a firm the retiring partner transfers or assigns or releases his share or interest in the partnership and its assets to the continuing partners, who are permitted to use such partnership assets including the retiring partner's erstwhile interest therein for the purpose of carrying on partnership business, he relied upon certain passages from Lindley on Partnership and decided cases in which an instrument executed by an retiring partner in favour of the continuing partners has been regarded as a conveyance chargeable to stamp duty as such. He also placed strong reliance upon the recitals and operative parts of the deed dated January 19, 1962, whereunder the assessee retired from the firm and was paid several amounts including the sum of Rs. 4,77,941. In substance his contention was that upon retirement of a partner the retired partner's share or interest in the partnership and the partnership assets, which is a capital asset, is relinquished, assigned, released and transferred to the continuing partners and as such whatever price or consideration he receives, therefore, would become chargeable to capital gains under section 45 of the Act.

11. At the outset it will be desirable to set out the material provisions of the Act, which deal with the capital gains. Section 2(14) defines the expression 'capital asset' as meaning 'property of any kind held by an assessee, whether or not connected with his business or profession, but does not include, (i) any stock-in-trade, consumable stores or profession; (ii) personal effects, that is to say, movable property (including wearing apparel and furniture, but excluding jewellery) held for personal use by the assessee or any member of his family dependant on him'. This definition is very wide since property of any kind held by an assessee, whether or not connected with his business or profession, barring stock-in-trade and personal effects, is included in it and it was not disputed by Mr. Dastur before us that the share or interest of a partner in the partnership and its assets would be property and, therefore, a capital asset within the meaning of the aforesaid definition. Section 2(47) defines the expression 'transfer' and it says that 'transfer in relation to a capital asset, includes the sale, exchange or relinquishment of the asset or extinguishing of any rights therein or the compulsory acquisition thereof under any law.' This definition gives an artificial extended meaning to the term 'transfer' by including within its scope two types of transactions which would not ordinarily constitute 'transfer' in the accepted connotation of that word, namely, relinquishment of capital asset and extinguishment of any rights in it and the question is whether when a partner retires from the partnership within this artificial extended meaning. Section 45, which is the material provision, runs thus :

'45. Capital gains. - Any profits or gains arising from the transfer of a capital asset effected in the previous year shall, save as otherwise provided in section 53,54,54B and 54D, be chargeable to income-tax under the head 'Capital gains', and shall be deemed to be the income of the previous year in which the transfer took place.'

12. In order that section 45 should be attracted there must be a transfer as defined in section 2(47) of a capital asset as defined in section 2(14) effected in the previous year and some profit or gain must arise from such transfer and if these conditions are fulfilled the section provides that such profit or gain is chargeable to income-tax under the head 'Capital gains' and the transfer has taken place. Then follows sections 46 and 47 which except certain types of transactions from the purview of section 45. Section 46 provides thus :

'46.(1) Notwithstanding anything contained in section 45, where the assets of a company are distributed to its shareholders on its liquidation, such distribution shall not be regarded as a transfer by the company for the purposes of section 45.'

13. We are not concerned with this provision in the instant case but we are concerned with section 47 which provides that nothing contained in section 45 shall apply to certain transfers specified therein and one of the transactions specified in clause (ii) is 'any distribution of capital assets on the dissolution of a firm'. The question in the instant case is whether when the assessee retired from the firm of Kumar Engineering Works and upon such retirement received the sum of Rs. 4,77,941 as his share in the remaining assets of the firm, the transaction amounted to 'transfer' within the meaning of section 2(47) so as to attract section 45 or whether the said transaction amounted to 'distribution of capital assets on the dissolution of the firm' so as to fall within the section 47(ii) of the Act. The main question is what is the real nature of the transaction when a partner retires from the partnership Does the transaction amount to any relinquishment of his share or interest in the partnership in favour of continuing partners or does it stand on the same footing as adjustment of his rights that results upon dissolution of a firm

14. Dastur for the assessee has contended that though the two decisions of the Supreme Court viz., Dewas Cine Corporation's case : [1968]68ITR240(SC) and Bankey Lal Vaidya's case : [1971]79ITR594(SC) dealt with the case of dissolution of a firm, (which squarely falls within the clause (ii) of section 47), on principle there could be no difference between the position of a partner retiring from the firm and that of a partner upon dissolution of a firm, inasmuch as, according to him, whether a partner retired from the firm or there was general dissolution of the firm, the nature of the erstwhile partner's share or interest in the partnership and its assets, the quantification and payment thereof to him amounts to mere adjustment of rights and the transaction does not result in any transfer of any capital asset, and in support of this proposition strong reliance was placed by him upon certain observations made by the Supreme Court in Addanki Narayanappa Bhaskara Krishnappa, : [1966]3SCR400 and Commissioner of Income-tax v. Mohanbhai Pamabhai [1973] 91 ITR 393, the latter of which, according to him, was directly on the point at issue before us. He pointed out that in Addanki Narayanappa's case, after consideration the relevant provisions of the Partnership Act including the provisions contained in Chapter V and Chapter VI, the Supreme Court has made certain observations during the course of which the court could be said to have equated the position of the retiring partner with that of a partner upon general dissolution of the firm so far as the aspect of true nature of the erstwhile partner's right to receive his share or interest in the partnership and its assets is concerned. In the first place, in the context of partner's rights during the subsistence as well as upon dissolution of the firm, the Supreme Court has observed thus (page 400) :

'During the subsistence of the partnership, however, no partner can deal with any portion of the property as his own. Nor can he assign his interest in any specific item of the partnership property to any one. His right is to obtain such profits, if any, as fall to his share from time to time and upon dissolution of the firm to a share in the assets of the firm which remain after satisfying the liabilities set out in clause (a) and sub-clauses (i), (ii) and (iii) of clause (b) of section 48.'

15. The Supreme Court then quoted with approval the following statement of law from Lindely on Partnership, 12th edition at page 375 :

''What is meant by the share of a partner in his proportion of the partnership assets after they have been a realised and converted into money, and all the partnership debts and liabilities have been paid and discharged. This is it, and this is only, which on the death of a partner passes to his representatives, or to a legatee of his share;..... and which on his bankruptcy passes to his trustee.'

16. Dastur then pointed out that in a latter portion of the judgment the Supreme Court has summarised the position by stating in clear and specific terms thus (page 401) :

'... his right during the subsistence of the partnership is to get his share of profits from time to time as may be agreed upon among the partners and after the dissolution of the partnership or with his retirement from partnership of the value of his share in the net partnership assets as on the date of dissolution or retirement after a deduction of liabilities and prior charges.'

17. Dastur pointed out that in the aforesaid passage the Supreme Court could be said to have equated the position of a partner retiring from the firm as being the same as that of a partner upon dissolution so far as his right to receive his share or interest in the partnership and its assets upon his ceasing to be a partner is concerned. In other words, according to Dastur, if what a partner receives in a distribution of assets upon dissolution of the firm is mere adjustment of his rights and transaction does not amount to transfer of capital asset, then, the same result must follow when a partner receives what is due to him upon his retirement from the firm. In this context he urged that though there may be a different between the two concepts, the concept of retirement of a partner from a firm and the concept of general dissolution, in that in the former case the partnership business continues at the instance of the continuing partners while in the latter case the business of a firm as such concepts comes to an end, that differences has no bearing and is immaterial from the point of view of the real nature of the transaction under which the erstwhile partner receives what is due to him. In other words, he urged that when a partner ceases to be a partner of a firm upon his retirement therefrom there is a partial or pro tanto dissolution of the firm qua him and looked at from this angle in the case of retirement of a partner of his right to receive what is due to him being the same as that of a partner upon dissolution would fall within the purview of section 47(ii) of the Act. He pointed out that the aforesaid position in law which was summarised by the Supreme Court in Addanki Narayanappa's case, : [1966]3SCR400 , was the basis of the Gujarat High Court decision in Mohanbhai Pamabhai's case [1973] 91 ITR 393. According to him, the Gujarat High Court in that decision was dealing with a case of a retired partner and, in terms, the Gujarat High Court has taken the view that when partner retires from the partnership firm and the amount of his share in the net partnership asset after deductions of liabilities and prior charges is determined on taking accounts on the footing of notional sale of partnership assets and given to him, what he receives in his share in the partnership and not any consideration for the transfer of his interest in the partnership to the continuing partners that his share in the partnership is worked out by taking accounts in the manner prescribed by the relevant provisions of law and it is this, namely, his share in the partnership which he receives in terms of money, and that there is in this transaction no element of transfer of interest in the partnership assets by the retiring partner to the continuing partners. he further pointed out that the Gujarat High Court has in terms held that when a partner retires from the partnership what he receives is his share in the partnership which is worked out and realised and does not represent consideration received by him as a result of extinguishment of his interest in the partnership assets. Relying upon this decision he strongly urged that in the instant case also the sum of Rs. 4,77,941 could be said to have been received by the assessee by way of adjustment of his rights upon retirement from the firm and the transaction could not be regarded as transfer within the meaning of section 2(47) of the Act so as to attract the provisions of section 45. As regards the several other decisions of the court in In re Hiralal Nevalram [1908] 10 Bom LR 730; ILR 32 Bom 505 , the Mysore High Court in M. A. Venkatachalapathi v. State of Mysore, AIR 1966 Mys 323 , the Madras High Court in Board of Revenue v. Murugesa Mudaliar, : AIR1955Mad641 , and the two English cases, Christie v. Commissioner of Inland Revenue [1867] 2 Ex. 46 and Phillips v. Commissioner of Inland Revenue [1867] 2 Ex. 399, on which Joshi relied, he urged that this would be of no avail to the revenue. According to him, the decision of the Mysore High Court has not been accepted by the Gujarat High Court in Mohanbhai Pamabhai's case [1973] 91 ITR 393, and if the Supreme Court decision in Addanki Narayanappa's case, : [1966]3SCR400 , was carefully scrutinised it would appear that the two English decisions have also not been approved by the Supreme Court.

18. It may be stated that the Gujarat decision in Mohanbhai Pamabhai's case [1973] 91 ITR 393 is the only decision directly on the point at issue before us but the question is whether the position of retiring partner could be equated with that of a partner upon the general dissolution of capital gains tax purposes The equating of the two done by the Supreme Court in Addanki Narayanappa's case, : [1966]3SCR400 , was not for capital gains tax purposes but for consideration the question whether the instrument executed on such occasion between the parties inter se required registration and could be admitted in evidence for want of registration. For capital gains purposes the question assumes significance in view of of the fact that under section 47(ii) any distribution of assets upon dissolution of a firm has been expressly expected from the purview of section 45 while the case of a retirement of a partner from a firm is not so expected and hence the question arises whether the retirement of a partner stands on the same footing as that upon a dissolution of the firm. In our view, a clear distinction between the two concepts, inasmuch as the consequences flowing from each are entirely different. In the case of retirement of a partner from the firm it is only that partner who goes out of the firm and the remaining partners continue to carry on the business of the partnership as a firm, while in the latter case the firm as such no more exists and the dissolution is between all the partners of the firm. In the Partnership Act the two concepts are separately dealt with. Section 31 to 38 which occur in Chapter V deals with the incoming and outgoing partners and some of the consequences of retirement of a partner are dealt with in sub-sections (2) and (3) of section 32 while some others are dealt with in sections 36 and 37. Under section 37, the outgoing partner or the estate of the deceased partner, in the absence of a contract to the contrary, would be entitled at the option of himself or his representatives to such share of the profits made since he ceased to be a partner as may be attributable to the property of the firm or to interest at 6 per cent. per annum on the amount of his share in the property of the firm. The subject of dissolution of a firm and the consequences are dealt with in Chapter VI - sections 39 to 55. Section 48 deals with the mode of settlement of accounts between partners upon dissolution and the rules of settlement of accounts between the partners mentioned therein are subject to agreement by the partners, in other words, in the absence of any agreement made in that behalf, the rules mentioned in the section would apply. It would be interesting to mention that the Partnership Act nowhere contemplates or deals with the concept of any partial dissolution or a dissolution qua an individual partner; the concept indicated in section 39 appearing in Chapter VI is a total dissolution between all the partners of the firm. Further, under section 32, which occurs in Chapter V, retirement of a partner may take any form as may be agreed upon between the partners and can occur in three situations contemplated by clauses (a), (b) and (c) of sub-section (1) of section 32. It may be stated that upon retirement of a partner his share in the net partnership assets after deductions of liabilities and prior changes may be determined on taking accounts on the footing of notional sale of partnership assets and may be paid to him but the determination and payment of his share may not invariably be done in that manner and it is quiet conceivable that, without taking accounts on the footing of notional sale, by mutual agreement, a retiring partner may receive an agreed lump sum for going out and as by way of consideration of transferring or releasing or assigning or relinquishing his interest in the partnership assets to the continuing partners and if the retirement takes this form and the deed in that behalf is executed, it will be difficult to say that there would be no element of 'transfer' involved in the transaction. In our view, it will depend upon the manner in which the retirement takes place. What usually happens when a partner retires from a firm has been clearly stated in the following statement of law, which occurs in Lindley on Partnership, 13th edition, at page 474 :

'24. Assignment of share, etc., by retiring partner. - When a partner retires or dies, and he or his executors are paid what is due in respect of his share, it is customary for him or them formally to assign and release his interest in the partnership, and for the continuing or surviving partners to take upon themselves the payment of the outstanding debts of the firm, and to indemnify their late partner or his estate from all such debts, and it is useful to the partnership agreement specifically so to provide.'

19. At page 475, under the sub-heading 'stamping on assignment by outgoing partner', the following statement of law occurs :

'An assignment by a partner of his share and interest in the firm to his co-partners, in consideration of the payment by them of what is due to him from the firm, is regarded as a sale of the property within the meaning of the Stamps Acts; and consequently the deed of assignment, or the agreement for the assignment, requires an ad valorem stamp. But if the retiring partner, instead of assigning his interest, takes the amount due to him from the firm, gives a receipt for the money, and acknowledges that he has no more claims on his co-partners, they will practically obtain all they want; but such a transaction, even if carried out by deed, could hardly be held to amount a sale; and no ad valorem stamp, it is apprehended, would be payable.'

20. A couple of things emerge clearly from the aforesaid passages. In the first place, a retiring partner while going out and while receiving what is due to him in respect of his share, may assign his interest by a deed or he may, instead of assigning his interest, that the amount due to him from the firm and give a receipt for the money and acknowledge that he has no more claim on his co-partners. The former type of transaction will be regarded as sale or release or assignment of his interest by a deed attracting stamp duty while the latter type of transaction would not. In other words, it is clear, the retirement of a partner can take either of two forms, and apart from the question of stamp duty, with which we are not concerned, the question whether the transaction would amount to assignment or release of his interest in favour of the continuing partners or would not depend upon what particular mode of retirement is employed and as indicated earlier, if instead of quantifying his share by taking accounts on the footing of notional sale, parties agree to pay a lump sum in consideration of the retiring partner assigning or relinquishing his share or right in the partnership and its assets in favour of the continuing partners, the transaction would amount to a transfer within the meaning of section 2(47) of the Income-tax Act. It was in this context that Joshi laid considerable stress upon the contents of the deed dated January 19, 1962, executed by and between the assessee on the one hand and the continuing partners on the other. In particular, he relied upon the following recitals and operative parts of the deed.

'AND WHEREAS the said sums of Rs. 1,00,000, Rs. 50,000 and Rs. 7,50,000 in all aggregating to a total sum of Rs. 9,00,000 thus became payable by the continuing partners to the retiring partner in full and final satisfaction of all his claims in respect of his undivided half share in the business of said partnership firm of Kumar Engineering Works and all assets thereof. AND WHEREAS the continuing partners have taken over the said business carried on by the said old firm of Kumar Engineering Works constituted up to August 31, 1961, as the entire business as a GOING CONCERN together with all its assets, liabilities and goodwill, benefits of trade-name, tenancy rights, import licences and/or quota rights..... AND THIS INDENTURE FURTHER WITNESSETH that is in consideration of the premises aforesaid they the continuing partners do and each of them doth hereby release the retiring partner AND the retiring partner doth hereby release the continuing partners and each of them from all covenants, agreements, matters and things in the here before recited partnership dated the January 8, 1951, and the supplementary agreement dated August 24, 1957, contained AND IN further pursuance of the said agreement and in consideration of the premises aforesaid and without making any further payment of any amount to him the retiring partner as beneficial owner doth hereby assign and release up to the continuing partners and each of them all that his right, title interest and undivided half share in the said partnership firm and all his share and interest on said prices of land, hereditament and premises, structures and buildings standing thereon....... and machinery, plant, equipment, etc..... TO HOLD the same unto the continuing partners absolutely in equal shares as tenants-in-common....... AND THIS INDENTURE FURTHER WITNESSETH that in pursuance of the said agreement and in consideration of the premises aforesaid the retiring partner doth hereby release, grant, convey and transfer and assure all that his individual half share in all the several pieces or parcels of land-hereditaments..... TO HAVE AND TO HOLD the said undivided half share and the premises hereby granted as expressed so as to be UNTO AND TO THE USE of the continuing partners absolutely as tenants-in-common in equal shares for ever....'

21. Having regard to the particular mode employed by the assessee and the continuing partners to effect and bring about retirement of the assessee from the partnership, we fell that the transaction will have to be regarded as amounting to 'transfer' within the meaning of section 2(47) of the Income-tax Act, inasmuch as the assessee could be said to have assigned, released and relinquished his interest and share in partnership and its assets in favour of the continuing partners and the transaction cannot be regarded as amounting to any distribution of capital assets upon dissolution of a firm. In this view of the matter, it is unnecessary for us to deal with or discuss the other decisions relied upon by Joshi, namely, the decisions of this court, the Mysore and the Madras High Courts as also the two English decisions. Moreover, Joshi fairly stated that these decisions help him only indirectly in the sense that the instrument executed by and between the partners inter se upon retirement has been held to be amounting to either a conveyance on sale or release and as such chargeable to stamp duty accordingly. On the construction of the deed dated January 19, 1962, in the instant case and the mode in which the retirement of the assessee has taken place we have to come to a conclusion that the transaction amounts to a 'transfer' within the extended meaning of the expression as given in section 2(47) of the Act and the consideration received by he assessee, therefore, will give rise to capital gains chargeable to tax under section 45 of the Act. The basis of valuation adopted by the Tribunal in this behalf was not disputed before us by Dastur. The petition is accordingly answered against the assessee.

22. The assessee will pay the cost of the reference to the department.


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