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Addl. Commissioner of Income-tax Vs. Smt. Mahinderpal Bhasin - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtAllahabad High Court
Decided On
Case NumberIncome-tax Reference No. 471 of 1973
Judge
Reported in[1979]117ITR26(All)
ActsIncome Tax Act, 1961 - Sections 2(47) and 45
AppellantAddl. Commissioner of Income-tax
RespondentSmt. Mahinderpal Bhasin
Appellant AdvocateAshok Gupta, Adv.
Respondent AdvocateS.B. Sriram, ;A.N. Mahajan and ;R.V. Gupta, Advs.
Excerpt:
- - against this decision, both the assessee as well as the ito filed appeals before the tribunal. it includes within it not only transactions which ordinarily constitute transfer, but also relinquishment of the capital asset as well as extinguishment of any rights in it......bhasin filed a return for the assessment year 1968-69. in it she showed receipt of rs. 20,000 as capital gains. the ito held that the sum of rs. 20,000 received by her as consideration for relinquishment of her interest in the partnership, in law, was a revenue receipt. he brought it to tax as such.3. the assessee appealed. the aac held that the sum of rs. 20,000 was in truth a capital receipt because it represented her share of the goodwill of the partnership firm. goodwill was a capital asset and so the amount received for relinquishing it was a capital receipt. against this decision, both the assessee as well as the ito filed appeals before the tribunal. the ito's contention was that the receipt was a revenue receipt and taxable as such while the assessee contended that the sum of.....
Judgment:

Satish Chandra, J.

1. Messrs. Gulab Singh Anand & Sons was a partnership firm constituted under a deed dated October 1, 1.962. It consisted of three partners, one of whom was Smt. Mahinderpal Bhasin, the assessee, in the present case. The firm carried on business of supplying various commodities to the Defence Services. The accounting period of the firm ended on September 30 each year, Smt. Mahinderpal Bhasin, one of the partners, retired from the firm with effect from October 1, 1967. The remaining two partners continued the business. A deed of retirement was executed on October 1, 1967, under which the assessee was paid her share of the capital and her share of profits up to the date of retirement and also a sum of Rs. 20,000 as consideration, for relinquishment of her interest in the partnership firm.

2. On October 3, 1968, Smt. Mahinderpal Bhasin filed a return for the assessment year 1968-69. In it she showed receipt of Rs. 20,000 as capital gains. The ITO held that the sum of Rs. 20,000 received by her as consideration for relinquishment of her interest in the partnership, in law, was a revenue receipt. He brought it to tax as such.

3. The assessee appealed. The AAC held that the sum of Rs. 20,000 was in truth a capital receipt because it represented her share of the goodwill of the partnership firm. Goodwill was a capital asset and so the amount received for relinquishing it was a capital receipt. Against this decision, both the assessee as well as the ITO filed appeals before the Tribunal. The ITO's contention was that the receipt was a revenue receipt and taxable as such while the assessee contended that the sum of Rs. 20,000 did neither represent revenue receipt nor was it taxable as capital gains.

4. The Tribunal distinguished the decision of this court in Gangadhar Baij-nath v. CIT : [1966]60ITR626(All) and repelled the contention that the sum of Rs. 20,000 represented revenue receipt. The Tribunal held that the assessee received Rs. 20,000 for relinquishment of her interest in the partnership firm and not as share of goodwill. In the alternative, it held that even assuming that she received Rs. 20,000 as consideration for parting with her share in the goodwill of the firm yet since the goodwill did not cost anything to her when she initially entered into partnership, the amount received by her cannot be treated as capital gains. For this position, reliance was placed on a decision of the Delhi High Court in Jagdev Singh Mumick v. CIT : [1971]81ITR500(Delhi) and of the Madras High Court in CIT v. Rathnam Nadar : [1969]71ITR433(Mad) and of the Calcutta High Court in CIT v. Chunilal Prabhudas & Co. : [1970]76ITR566(Cal) . It held that the sum of Rs. 20,000 was not taxable either as revenue receipt or as capital gains.

5. At the instance of the department, the Tribunal has referred the following questions of law for our opinion :

'1. Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the sum of of Rs. 20,000 received by the assessee could not be taxed as revenue receipt ?

2. Whether, on the facts and in the circumstances of the case, the Tribunal was correct in holding that the sum of Rs. 20,000 was not liable to tax even as capital gains ?'

6. On the first question, learned counsel for the department relied upon a decision of this court in Gangadhar Baijnath v. CIT : [1966]60ITR626(All) , which was affirmed by the Supreme Court in CIT v. Gangadhar Baijnath : [1972]86ITR19(SC) . This case is not at all helpful to the department. In that case, the assessee-firm carried on business of financing and entering into partnerships and retiring therefrom. Entering or retiring from a partnership was a normal trading activity in that case. In the present case, there is no material to sustain the submission that the assessee entered into this partnership as part of her trading activity. With the relinquishment of her partnership interest, her source of income Had entirely extinguished. No helpful reliance can be placed upon the previous decision of this court. The receipt of Rs. 20,000 could not be held to be revenue receipt in its true nature and character. The first question has, therefore, to be answered against the department.

7. In relation to the second question, the position is that under Section 45 taxes are chargeable on capital gains. The section provides:

'45. Capital gains.--(1) Any profits or gains arising from the transfer of a capital asset effected in the previous year shall, save as otherwise provided in Sections 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.'

8. The central and vital feature of capital gains is that a capital asset should suffer a transfer. The mode of computation of income chargeable under the head 'Capital gains' is provided under Section 48 onwards where from the full value of the consideration received, the cost of acquisition of the capital asset is deducted. The Tribunal has held that either as a share of the goodwill or as compensation for her relinquishment of the partnership interest the so-called capital asset did not cost anything initially to the assessee. Since no cost of acquisition could be deducted, no capital gains could accrue. As already stated, in support of this view, the Tribunal relied upon the decisions of Delhi, Madras and Calcutta High Courts mentioned above. We are, however, not disposed to go into that question because the controversy can satisfactorily be resolved from another view-point.

9. As already mentioned, capital gains accrue on transfer of a capital asset. The question is whether the consideration paid for retiring from a partnership firm is, in law, a 'transfer 'of any capital asset. The decision of the Gujarat High Court in CIT v. Mohanbhai Pamabkai [1973] 91 ITR 393 is directly in point. With respect we are in agreement with it. In that case, it was held that dissolution of a partnership or relinquish-ment of interest by a partner on his retirement from the firm does not amount to transfer.

10. Section 2(47) of the I.T. Act defines 'transfer' in relation to a capital asset. It includes within it not only transactions which ordinarily constitute transfer, but also relinquishment of the capital asset as well as extinguishment of any rights in it.

11. The question is whether the transaction in which a partner retires from a firm is a transfer even under the extended meaning of the word.

12. The interest of a partner in the partnership is not interest in any specific item of partnership property. As pointed out by the Supreme Court in CIT v. Dewas Cine Corporation : [1968]68ITR240(SC) and Addanki Narayanappa v. Bhaskara Krishnappa, : [1966]3SCR400 , the interest of a partner is a right to obtain his share of profits from time to time during the subsistence of the partnership, and, on the dissolution of the partnership to get the value of his share which remains after satisfying the debts and liabilities of the partnership. When a partner retires, what he receives is really his share in the partnership assets after deducting the liabilities. It is not consideration for transfer of his interest in the partnership to continuing partners. In the transaction of a retirement of a partner, just as in the case of a dissolution of partnership, there is no element of transfer. The transaction is in law an adjustment of the rights of the partners and not relinquishment or even extinguishment of interest of the retiring partner. The net position, therefore, is that on the retirement of the assessee from the partnership firm no transfer of any capital asset takes place within the meaning of Section 45. There was hence no question of any income being chargeable to tax as capital gains.

13. In the result, we answer both the questions referred to us in theaffirmative, in favour of the assessee and against the department. Theassessee will be entitled to costs which are assessed at Rs. 200 (Rupees twohundred only).


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