Skip to content


Commissioner of Income-tax Vs. Madan Lal Bhargava - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtAllahabad High Court
Decided On
Case NumberIncome-tax Reference No. 514 of 1976
Judge
Reported in[1980]122ITR545(All)
ActsIncome Tax Act, 1922 - Sections 12B; Income Tax Act, 1961 - Sections 2(47), 45 and 47
AppellantCommissioner of Income-tax
RespondentMadan Lal Bhargava
Appellant AdvocateR.K. Gulati and ;A. Gupta, Advs.
Respondent AdvocateS.B.L. Srivastava, Adv.
Excerpt:
.....now by the present act in very wide terms, while section 12b of the old act did not embrace cases of the type which now fall within the purview of section 2(47). it will be useful to read section i2b(1) of the old act along with its first proviso: (1) the tax shall be payable by an assessee under the head 'capital gains 'in respect of any profits or gains arising from the safe, exchange, relinquishment or transfer of a capital asset effected after the 31st day of march, 1956, and such profits and gains shall be deemed to be income of the previous year in which the sale, exchange, relinquishment or transfer took place: 2) act of 1956 with effect from april 1, 1957. when one compares the language of the third proviso to section 126(1) with section 47(ii) there is no difference, for,..........section 47(ii) of the act.3. counsel for the department urged that the goodwill of a firm is its capital asset, and the amount of money paid to a retiring partner for his share in the goodwill is a transfer of a capital asset as defined in section 2(47). this being so, as the case of retirement of partner from a firm is not exempt under section 47(ii), the amount received by the partner for his share in the goodwill is liable to tax under section 45. cases of payment made to a retiring partner for goodwill have been considered by the gujarat high court in the case of cit v. mohanbhai pamabhai [1973] 91 itr 393 and our own court in the case of addl. cit v. smt. mahinderpal bhasin : [1979]117itr26(all) . in mohanbhai's case two questions were considered, one whether the goodwill of a.....
Judgment:

C.S.P. Singh, J.

1. The Tribunal has referred the following question for opinion of this court:

' Whether, on the facts and in the circumstances of the case, the Tribunal was correct in holding that the amount of Rs. 11,250 received by the assessee from M/s. G.W. Lawrie and Co. was not liable to tax '

2. The assessee was a partner in a firm, M/s. G. W. Lawrie & Co. Madan Lal Bhargava, the assessee, and two others, Kishan Lal Bhargava and Vishwanath Bhargava, who were three out of the six partners withdrew from the firm with effect from 30th June, 1969, by an agreement dated July 1, 1969. The reason for their withdrawing, from their firm was that differences and disputes had arisen between the partners, which was standing in the way of effective running of the business. However, as it was not feasible to dissolve the firm owing to its business commitments and involvements, the three partners decided to retire. Under para. 4, of the retirement deed, the partners were allowed to withdraw their capital and their proportionate share of audited profits for nine months up to the 30th June, 1969. In addition the three retiring partners were given certain amounts, as the value of their share of the goodwill of the firm. Madan Lal Bhargava was given an amount of Rs. 11,250. The ITO brought this amount to tax as a capital gain treating it as compensation received on retirement from the firm. He was obviously relying on Section 28(2) of the Act for including this amount. The assessee appealed. The AAC relying on the case, CIT v. Gangadhar Baijnath : [1972]86ITR19(SC) , treated the amount as a taxable business receipt. He was of the view that the amount had been received in lieu of profits which the assessee had got on retirement from the firm. On further appeal to the Tribunal, the Tribunal found that the agreement dated 1st July, 1969, on the basis of which the payment was received, did not indicate that the amount paid to the assessee for his share in the goodwill was compensation for surrendering his profits. Relying upon the decision of the Gujarat High Court in the case of CIT v. Mohanbhai Pamabhai [1973] 91 ITR 393 and the decision of the Supreme Court in the case of CIT v. Bankey Lal Vaidya : [1971]79ITR594(SC) , the Tribunal held that the amount was exempt under Section 47(ii) of the Act.

3. Counsel for the department urged that the goodwill of a firm is its capital asset, and the amount of money paid to a retiring partner for his share in the goodwill is a transfer of a capital asset as defined in Section 2(47). This being so, as the case of retirement of partner from a firm is not exempt under Section 47(ii), the amount received by the partner for his share in the goodwill is liable to tax under Section 45. Cases of payment made to a retiring partner for goodwill have been considered by the Gujarat High Court in the case of CIT v. Mohanbhai Pamabhai [1973] 91 ITR 393 and our own court in the case of Addl. CIT v. Smt. Mahinderpal Bhasin : [1979]117ITR26(All) . In Mohanbhai's case two questions were considered, one whether the goodwill of a firm is a capital asset and, secondly, whether compensation received by a retiring partner amounts to a transfer as defined in Section 2(47) of the Act. The Gujarat High Court, disagreeing with the view of the Madras High Court in CIT v. Rathnam Nadar [1979] 71 ITR 433 and the decision of the Calcutta High Court in the case of CIT v. Chunilal Prabhudas & Co. : [1970]76ITR566(Cal) , held that the goodwill of a firm is a capital asset. The Madras and the Calcutta High Courts have held that the goodwill of a firm is not a capital asset as contemplated by Section 45, for the capital asset contemplated by Section 45 is one the acquisition of which had cost the transferor something in terms of money, and as growth of goodwill does not cost anything in terms of money to the firm it is not a capital asset as contemplated by Section 45, although it may be so under the general Act. The decisions of the Madras High Court and the Calcutta High Court were given while interpreting the provisions of the Indian I.T. Act, 1922. This view of the Madras High Court and the Calcutta High Court has been followed by the Delhi High Court in the case of Jagdev Singh Mumick v. CIT : [1971]81ITR500(Delhi) and the Kerala High Court in the case of CIT v. E. C. Jacob : [1973]89ITR88(Ker) and the Karnataka High Court in the case of CIT v. B.C. Snnivasa Setty : [1974]96ITR667(KAR) . The word 'capital asset' had been defined in Section 2(4A) of the Indian I.T. Act, 1922, and is now defined in Section 2(14) in the present Act. The definition of the word ' capital asset' in the present Act so far as it is relevant for this case is in pari materia with the definition contained in the old Act. The Gujarat High Court, however, went on to hold that when a partner retires all that he receives is his share of the partnership asset, and as no consideration is received as a result of the extinguishment of his interest in the partnership asset. The amount received would not be chargeable under Section 44. In the case of Addl. CIT v. Smt. Mahinderpal Bhasin : [1979]117ITR26(All) , it has been held that the goodwill of a firm is a capital asset, but the provisions of Section 45 are not attracted in case a partner retires, as what he receives is his share of the partnership assets and not compensation for goodwill.

4. Mr. Gulati contends on behalf of the department that these decisions require reconsideration. The reasons set forth are these. It is urged that Section 2(47) defines transfer in very wide terms, and where a partner retires -from a firm there is an extinguishment of his rights, and the asset which he receives in consideration for this extinguishment would be a transfer as contemplated by Section 2(47). It was also urged that, as Section 47(ii) exempts distribution of capital assets only on dissolution of a firm, it is obvious that the legislature intended that a distribution of capital assets otherwise made should be liable to tax. Section 47, on a first reading, creates an impression that distribution of capital asset on dissolution of a firm is a transfer, but when one has a look at the other clauses, specially Section 47(i), it appears that this provision was put in by way of abundant caution as has been observed by their Lordships of the Supreme Court in the case of CIT v. Madurai Mitts Co. Ltd. : [1973]89ITR45(SC) . It is, however, urged that the decision of the Supreme Court in Madurai Mills' case no longer holds good, as the word ' transfer ' has been defined now by the present Act in very wide terms, while Section 12B of the old Act did not embrace cases of the type which now fall within the purview of Section 2(47). It will be useful to read Section I2B(1) of the old Act along with its first proviso:

'12B. (1) The tax shall be payable by an assessee under the head ' Capital gains ' in respect of any profits or gains arising from the safe, exchange, relinquishment or transfer of a capital asset effected after the 31st day of March, 1956, and such profits and gains shall be deemed to be income of the previous year in which the sale, exchange, relinquishment or transfer took place:

Provided that any distribution of capital assets on the total or partial partition of a Hindu undivided family or under a deed of gift, bequest or will shall not for the purposes of this section be treated as a sale, exchange, relinquishment or transfer of the capital assets...... '

5. It will be noticed that Section 12B also referred to cases of sale, exchange, relinquishment and transfer, and the third proviso also provided that the distribution of capital assets of a firm on its dissolution shall not be treated as a sale, exchange or transfer of capital assets. This proviso was thereafter deleted by the Finance (No. 2) Act of 1956 with effect from April 1, 1957. When one compares the language of the third proviso to Section 126(1) with Section 47(ii) there is no difference, for, like Section 47(ii), which treats such distribution as not amounting to a transfer, the third proviso to Section 12B(1) did likewise. The Supreme Court expressly considered this provision and observed as under (p. 51):

' This contention, in our opinion, is not well founded. It appears to us that the cases of the distribution of capital assets on dissolution of a firm or other association of persons of liquidation of a company were mentioned in the third proviso under the earlier Act, as a matter of clarification to allay fears even though the language of Sub-section (1) of Section 12B was not intended to apply to such cases. Provisos, as mentioned on page 221 of Craies on Statute Law, sixth edition, are often inserted to allay fears. A proviso is inserted to guard against the particular case of which a particular person is apprehensive, although the enactment was never intended to apply to his case or to any other similar case at all.'

6. It is, however, suggested that the transfer as now defined in Section 2(47) includes not only sale, exchange or relinquishment but also extinguishment of any right and, thus, the scope of Section 45 is wider than Section 12B. This argument omits from consideration the fact that Section 12B applies not only to cases of sale, exchange and relinquishment but 'also to cases of transfer. The word 'transfer' was not defined in the Act. When a transfer takes place there is an extinguishment of the right of one person, i. e., the transferor and the creation of right in another, viz., the transferee. Thus, although Section 12B did not contain the word ' extinguishment' it took care of such cases by making the provision applicable in the cases of transfer. This being so, the decision of the Supreme Court cannot be distinguished on the ground suggested. We must, in view of these considerations, read Section 47 in the same light as Section 12B of the old Act, i.e., it is a provision introduced as a matter of abundant caution. This being so, the contention based on Section 47 fails.

7. We may now examine as to whether Section 2(47) applies to a case where a retiring partner is given a particular amount of money or part of the assets of the firm on his retiring from the partnership.

8. This provision runs as under:

' 2. (47) ' Transfer ', in relation to a capital asset, includes the sale, exchange or relinquishment of the asset or the extinguishment of any right therein or the compulsory acquisition thereof under any law.'

9. It will be noticed that in order to attract this provision there must be a capital asset, and a sale, exchange or relinquishment of that asset or the extinguishment of any right therein or its compulsory acquisition under any law. We have already noticed the decisions of the Madras High Court, the Calcutta High Court, the Delhi High Court and the Kerala High Court where the view has been taken that the goodwill of a firm is not a capital asset for purposes of Section 45 of the Act although under the general law it may constitute a capital asset. The Gujarat High Court has taken a contrary view in Mohanbhai Pamabhai's case [1973] 91 ITR 393. Our court in the case of Smt. Mahinderpal Bhasin : [1979]117ITR26(All) has followed the Gujarat decision. On the view that we propose to take it is not necessary to consider in this case as to whether the goodwill of a firm is a capital asset as contemplated by Section 45. We are of the opinion that when a partner on retirement received an amount of money or any particular asset representing his share in the partnership there is no element of sale, exchange, relinquishment or extinguishment of his rights in his asset, inasmuch as he takes away the asset representing his interest in the partnership. We are fortified in the view that we take by the decision of our own court in Smt. Mahinderpal Bhasin : [1979]117ITR26(All) and that of the Gujarat High Court in Mohanbhai Pamabhai [1973] 91 ITR 393 already referred to. Sri R.K. Gulati appearing for the department, however, urged that the view taken in these cases is not correct, and the corre'ct law has been laid down by the Kerala High Court in the case of Abdul Rahim, Travancore Confectionery Works v. CIT [1911] 110 ITR 595 . The decision of the Kerala High Court is, however, distinguishable, for, in that case, what had happened was that a partner had brought in his own property for the purpose of business of the firm, with the result that he could not claim or exercise any exclusive right in that property. It was, as such, a case of influx of fresh assets, and on the assets being brought in the common funds of the firm, the exclusive rights of the partner had come to an end. It was in these circumstances that the Kerala High Court held, and with due respect, we think rightly that the interest of the partner in the assets brought by him in the firm had been extinguished. The present case is of a reverse type. Here the partner has retired, and has taken away his share of assets. Thus, while in the first case, the partner received consideration by way of increase in his share in the firm, in a case of retiring partner there is neither any increase nor decrease of his share, for all that he takes is his existing share in the business of the firm. The decision of the Karnataka High Court in the case of A.S. Krishna Setty and Sons v. Addl. C1T : [1975]100ITR587(KAR) is also distinguishable, for, in that case, the oil mills and coir factory, which were being run by seven partners and two minors, who were admitted to the benefits of the partnership, were transferred exclusively in favour of some of the partners. Thereafter, the two sets of the partners entered into separate deeds of partnership amongst themselves, and some new persons, in respect of these items of business. It was in these circumstances that it was held that a transfer of machinery and plant had been made by the assessee-firm in favour of its two sets of partners. Here no transfer of any asset of the firm has been made to the assessee, as all that has happened is that he has been given his share in the partnership asset including the value of his share in the goodwill.

10.Two decisions of the Bombay High Court now require consideration. One, CIT v. Tribuvandas G. Patel : [1978]115ITR95(Bom) and the other, CIT v. H. R. Aslot : [1978]115ITR255(Bom) . In Tribuvandas's case a lump sum amount was paid to the retiring partner, and the question arose as to whether it amounted to a transfer under Section 2(47). The Bombay High Court drew a distinction between a case where a retiring partner gets his share of asset after deduction of liabilities and prior charges and taking of accounts on the footing of notional sale of partnership assets, and where a lump sum payment is made in consideration of the partner retiring without any accounting being done. It was held that in a case where the partner is paid a particular amount of money, as his share, in the partnership asset after accounting, it would not amount to a transfer, but where a lump sum amount is paid in consideration for his retirement from the partnership, and assignment of his interest to the other partners, it would be transfer as defined in Section 2(47). The Bench followed an earlier decision of its own court in the case of CIT v. Home Industries and Co. : [1977]107ITR609(Bom) , where it was held that the goodwill of a firm, which was a self-generated asset, was not a capital asset, the transfer of which would be chargeable to capital gains under Section 45 of the Act. Referring, however, to the terms of the retirement deed it was held that it was a transfer as defined by Section 2(47) and liable to tax under Section 45 of the Act. In the present case, the assessee took away his capital as shown in the books, and also his share in the audited profits for the period ending 30th June, 1969. Apart from this, he was given his share in the goodwill, which was valued at Rs. 11,250. The deed of retirement did not give him a lump amount without any reference to the accounts of the firm. This fact distinguishes the case from that of Tribuvandas : [1978]115ITR95(Bom) . The other decision of the Bombay High Court, namely, Aslot's case : [1978]115ITR255(Bom) , turned on the interpretation of the retirement deed, and the view that the assignment of the interest of the retiring partner amounted to a transfer was based on the principle laid down in the case of Tribuvandas : [1978]115ITR95(Bom) . We are of the view that none of these cases can apply to the facts of the present case as all that the assessee received on his retirement from the firm in respect of his share in the goodwill was its value to which he was all along entitled. The case did not fall within the purview of Section 2(47) of the Act and a fortiori Section 45 becomes inapplicable.

11. We, accordingly, answer the question in the affirmative, in favour of the assessee and against the department. The assessee is entitled to its costs, which is assessed at Rs. 200. Counsel's fee is assessed at the same figure.


Save Judgments// Add Notes // Store Search Result sets // Organizer Client Files //