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Addl. Commissioner of Income-tax Vs. Agarwal Timber and Bans Co. - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtMadhya Pradesh High Court
Decided On
Case NumberMiscellaneous Civil Case No. 365 of 1980
Judge
Reported in(1983)36CTR(MP)97; [1983]144ITR46(MP)
ActsIncome Tax Act, 1961 - Sections 41(2)
AppellantAddl. Commissioner of Income-tax
RespondentAgarwal Timber and Bans Co.
Appellant AdvocateB.K. Rawat, Adv.
Respondent AdvocateB.L. Nema, Adv.
Cases ReferredVelo Industries v. Collector
Excerpt:
.....raised, it cannot be said that onus shifts exclusively and heavily on him to prove his innocence. conviction of appellant is liable to be set aside. - the court will, however, be reluctant to order a sale except in exceptional circumstances and will direct a payment based upon the value of the retiring partner's share at the date of retirement [seelindley on partnership, 14th edn. ..there is yet another reason for rejecting the contention of the counsel for the revenue and that is that the second condition required to be satisfied for attracting section 34(3)(b) cannot be said to have been satisfied in the case......amongst the partners on dissolution, there is no sale, exchange, transfer or extinguishment of the firm's rights in the partnership assets but merely a mutual adjustment of the rights between the partners in the assets which till then were jointly owned by them. reference in this connection may be made to cit v. dewas cine corpn. : [1968]68itr240(sc) , cit v. bankey lal vaidya : [1971]79itr594(sc) and malabar fisheries co. v. cit : [1979]120itr49(sc) . in malabar fisheries co.'s case which related to section 34(3)(b), the supreme court took into account the extended meaning of the word ' transfer ' contained in section 2(27), which was not in the 1922 act. the basis for the decision of the supreme court in these cases, as explained in malabar fisheries co. v. cit : [1979]120itr49(sc) ,.....
Judgment:

G.P. Singh, C.J.

1. This is a reference made by the Income-tax Appellate Tribunal, on a direction by this court, under Section 256(2) of the I.T. Act, 1961. The question of law is as follows :

' Whether, on the facts and in the circumstances of the case, the Tribunal was justified in deleting the amount of Rs. 18,379 considered for assessment as profit under Section 41(2) of the Income-tax Act, 1961?'

2. The relevant assessment year is 1968-69 for which the account yearended on 31st July, 1967. The assessee is a partnership firm. The assessee-firm originally consisted of four partners, viz., Maya Prakash Balkishandas, Shantiswaroop and Kanchimal. Some time in 1966, the account year,two of the partners of the firm, viz., Maya Prakash and Kanchimal, retiredand formed a separate firm. The assessee-firm inducted two other personsas partners. On the retirement of Maya Prakash and Kanchimal, theassessee-firm gave them two trucks and a jeep in liquidation of Rs. 48,000,which was the amount which the two outgoing partners were to get fromthe assessee-firm. The written down value of the trucks and the jeepwas Rs. 29,621. The difference between Rs. 48,000 and Rs. 29,621, whichcame to Rs. 18,379, was taxed by the ITO as profit under Section 41(2) of theI.T. Act. The order of the ITO was maintained in appeal by the AAC. Infurther appeal, the Tribunal held that there was no sale of the vehiclesby the firm to the retiring partners and/therefore, Section 41(2) was notapplicable.

3. Section 41(2) applies only where any building, machinery, plant, etc., is sold, discarded, demolished or destroyed. In the instant case, the question is whether the assessee-firm sold the vehicles to the retiring partners. The Explanation to Section 41(2) defines the expression ' sold ' to have the same meaning as in Sub-section (1) of Section 32. ' Sold ' is defined in Section 32(1) to include a transfer by way of exchange or a compulsory acquisition under any law for the time being in force but not to include a transfer in a scheme of amalgamation of any asset by the amalgamating company to the amalgamated company where the amalgamated company is an Indian company. Section 2(47) defines ' transfer ' in relation to a capital asset to include the sale, exchange or relinquishment of an asset or the extinguishment of any rights therein or the compulsory acquisition thereof under any law.

4. The Supreme Court has consistently held that when there is a distribution of the assets of the firm amongst the partners on dissolution, there is no sale, exchange, transfer or extinguishment of the firm's rights in the partnership assets but merely a mutual adjustment of the rights between the partners in the assets which till then were jointly owned by them. Reference in this connection may be made to CIT v. Dewas Cine Corpn. : [1968]68ITR240(SC) , CIT v. Bankey Lal Vaidya : [1971]79ITR594(SC) and Malabar Fisheries Co. v. CIT : [1979]120ITR49(SC) . In Malabar Fisheries Co.'s case which related to Section 34(3)(b), the Supreme Court took into account the extended meaning of the word ' transfer ' contained in Section 2(27), which was not in the 1922 Act. The basis for the decision of the Supreme Court in these cases, as explained in Malabar Fisheries Co. v. CIT : [1979]120ITR49(SC) , is that a partnership firm has no legal existence apart from the partners constituting it and when one talks of the firm's property or the firm's assets, all that is meant is property or assets in which all the partners have a joint and common interest. Therefore, it is not correct to say that upon dissolution the rights of the firm in its assets are extinguished or transferred to the partners. As earlier stated, according to the Supreme Court, the distribution, division or allotment of assets to the partners upon dissolution is a mutual adjustment of their rights and not a transfer. In our opinion, the same principle must apply when one or more partners retire and there is no complete dissolution of the firm. The rights of a retiring partner are to be worked out on the same footing as if the firm stands dissolved. The retirement of a partner so far as he is concerned is a dissolution of the firm. He may even insist to receive his appropriate share of the assets including the goodwill by an order of sale. The court will, however, be reluctant to order a sale except in exceptional circumstances and will direct a payment based upon the value of the retiring partner's share at the date of retirement [seeLindley on Partnership, 14th Edn., p. 227 and Premchand Jain v. CED (sec p. 41 supra)]. When a partner retires, there is a mutual adjustment of rights between him and the remaining partners and there is no question of sale or transfer by the firm in favour of the retiring partner even if some asset is allocated to the retiring partner in satisfaction of the value of his share which he ought to receive. This is so because, as earlier explained, the partnership property is not held by the firm which is not a legal entity. This view is directly supported by three decisions of the Gujarat High Court with which we respectfully agree : Velo Industries v. Collector, Bhavnagar : [1971]80ITR291(Guj) , CIT v. Mohanbhai Pamabhai [1973] 91 ITR 393 and CIT v. Dilip Engineering Works : [1981]129ITR688(Guj) .

5. The learned standing counsel for the Department submitted before us that in case of dissolution the firm ceases to be in existence and, therefore, there cannot be any transfer by the firm to the partners when the assets are distributed, but when a partner retires the firm continues to exist and, therefore, there can be a transfer or sale by the firm in favour of the retiring partner when the retiring partner is allotted a particular asset in lieu of his share in the partnership assets. It is true that the decisions of the Supreme Court, to which reference has already been made, are all cases of dissolution but the law laid down in those decisions that there is no transfer of assets by the partnership in favour of the partners when the assets are distributed on dissolution but merely a mutual adjustment of the rights amongst the partners, is based essentially on the legal proposition that a firm not being a legal entity does not own the partnership assets which are owned by the partners collectively. The, fact that a firm comes to an end before, the distribution of assets in case of dissolution and, therefore, there could be no transfer by the firm was taken merely as an additional ground to support the decision in Malabar Fisheries Co.'s case : [1979]120ITR49(SC) . This additional ground is no doubt not available in a case where a retiring partner is given his share in the assets of the firm, but the main ground that the partnership is not a legal entity and does not own the assets and, therefore, the distribution of assets between the retiring partner and the remaining partners is a mutual adjustment of their rights and not a transfer by the firm is also available in the case of retirement. The learned standing counsel relied upon a decision of this court in Popular Engineering Co. v. CIT : [1983]140ITR398(MP) . In that case, it was not disputed before the High Court that if a sale in favour of one of the partners is made by the firm prior to its dissolution, Section 41(2) of the Act would be attracted. In view of this stand, the only question before the court waswhether the transfer took place before or after the dissolution of the firm. This question was concluded by the finding of fact reached by the Tribunal and so the decision of the court went against the assessee. The case is, therefore, distinguishable. There is, however, an observation that the Supreme Court in Malabar Fisheries Co.'s case : [1979]120ITR49(SC) had taken the same view which does not appear to be correct. As earlier stated by us, the decision in that case by the Supreme Court was based mainly on the ground that the assets of a firm are not held by the firm, which is not a legal entity. It was only as an additional ground that it was said that as the firm ceased to be in existence after the dissolution there can be no transfer from the firm to the partners when the assets were distributed after dissolution. The following two passages from that judgment will make the position clear (p. 59 of 120 ITR) :

' Having regard to the above discussion, it seems to us clear that a partnership firm under the Indian Partnership Act, 1932, is not a distinct legal entity apart from the partners constituting it and equally in law the firm as such has no separate rights of its own in the partnership assets and when one talks of the firm's property or firm's assets all that is meant is property or assets in which all partners have a joint or common interest. If that be the position it is difficult to accept the contention that upon dissolution the firm's rights in the partnership assets are extinguished. The firm as such has no separate rights of its own in the partnership assets but it is the partners who own jointly or in common the assets of the partnership and, therefore, the consequence of the distribution, division or allotment of assets to the partners which flows upon dissolution after discharge of liabilities is nothing but a mutual adjustment of rights between the partners and there is no question of any extinguishment of the firm's rights in the partnership assets amounting to a transfer of assets within the meaning of Section 2(47) of the Act. In our view, therefore, there is no transfer of assets involved even in the sense of any extinguishment of the firm's rights in the partnership assets when distribution takes place upon dissolution......

There is yet another reason for rejecting the contention of the counsel for the Revenue and that is that the second condition required to be satisfied for attracting Section 34(3)(b) cannot be said to have been satisfied in the case. It is necessary that the sale or transfer of assets must be by the assessee to a person, Now, every dissolution must, in point of time, be anterior to the actual distribution, division or allotment of the assets that takes place after making up accounts and discharging the debts and liabilities due by the firm. Upon dissolution the firm ceases to exist, then follows the making up of accounts, then the discharge of debts and liabilities and thereupon distribution, division or allotment of assets takesplace inter se between the erstwhile partners by way of mutual adjustment of rights between them. The distribution, division or allotment of assets to the erstwhile partners, is not done by the dissolved firm. In this sense there is no transfer of assets by the assessee (dissolved firm) to any person. '

6. Some other cases were also cited by the learned standing counsel, but they are not directly in point as they do not relate to the retirement of a partner. It is, therefore, not profitable to refer to them here.

7. For the reasons given above, we answer the question referred to us in the affirmative, in favour of the assessee and against the Department. There will be no order as to costs of this reference.


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