1. The appeal is against the order of the Commissioner (Appeals), deleting the capital gains of Rs. 1,12,036, which had been added as capital gains by the ITO, in computing the total income of the assessee for the assessment year 1980-81.
2. The assessee was a partner in the firm of Whitefield Industrial Corporation which came into existence on 23-3-1966 for the purpose of manufacturing electronic components and steel products. There were several changes in the constitution of the firm. The firm purchased 58.22 acres of agricultural lands in Seegahalli, Roskote Taluk, in 1972 from Krishna Mining Co. Gudur. Permission was obtained from the Deputy Commissioner, Bangalore, for converting the said land for non-agricultural purposes. In order to meet the conversion fees, new partners were brought in, in April 1979. The continuing partners, of whom the assessee was one, also brought in moneys for this purpose in November 1979. The land was revalued because of its conversion for non-agricultural purposes. The revaluation was as follows :Cost of land 57,500Conversion fee paid 2,30,284Difference in revaluation 9,12,216 12,00,000 The land account was debited and the partners were credited correspondingly. Later, there were some differences of opinion regarding the type of industry that was to be carried on. It might be mentioned that it was the intention of the group to set up small industries for training students of Satya Sai College while the old group wanted to carry on electronic industry, the new group wanted to fabricate paper making machinery. Ultimately, there was a compromise, according to which the old group decided to retire from the firm taking over the amounts standing to their credit. The assessee retired on 20-2-1980. On that date, she was paid a sum of Rs. 2 lakhs, which was standing to the credit of her capital account in the books of the firm.
The ITO held that the excess of Rs. 1,12,036 received by the assessee over and above the sum of Rs. 87,964 actually contributed by her, constituted capital gains in the hands of the assessee. According to the ITO, the assessee had relinquished or extinguished her rights in the firm, on her retirement which amounted to 'transfer' within the meaning of Section 2(47) of the Income-tax Act, 1961 ('the Act').
Reliance was placed by the ITO mainly on the decision of the Bombay High Court in CIT v. Tribhuvandas G. Patel  115 ITR 95. The assessee went in appeal. The Commissioner (Appeals) held that the Bombay High Court's case was distinguishable. He relied on the decision of the Calcutta High Court in CIT v. Bhupinder Singh Atwal  128 ITR 67 and held as follows : It is significant to note from the facts reiterated above that the appellant along with others retired, taking from the firm whatever amount was due at the time of retirement. The new set of partners, who had enough financial resources, continued the business of the firm. If the facts of the appellant's case are properly understood and interpreted, the position is that the appellant lady has been paid merely the amount which was due to her at the time of retirement and there has been no relinquishment of her rights in the assets of the firm. Long before the date of retirement, revaluation of the assets was done by the first group of partners and the appreciation in the land value on account of conversion of agricultural land into non-agricultural land was credited proportionately to the respective accounts of the partners. The credit in her account was already there and the subsequent dispute was only in regard to the project that should be undertaken by the firm. Thus, in my opinion, the facts of the Bombay case are clearly distinguishable from the facts in the appellant's case. On the contrary, the submissions of the learned Commissioner (Appeals), based on the decision of the Calcutta High Court, are more appropriate. The following extract brings out the picture clearly : We must, however, refer to the decision of the Bombay High Court in the case of CIT v. Tribhuvandas G. Patel  115 ITR 95, where the assessee was a partner in a firm. In the case of retirement of a partner unlike in the case of dissolution, in the background and in the facts and circumstances of that case, the Division Bench was of the opinion that there was transfer in terms of Section 2(47) of the Act. While we would like to prefer the views on this aspect expressed by the Division Bench of the Gujarat High Court. It is not necessary for us to express categorically any preference in this case because the Bombay High Court in its decision recognised at page 115 of the report that upon the retirement of a partner his share in the net partnership assets after deduction of all liabilities and prior charges might be determined on taking accounts on the footing of notional sale of partnership assets and be paid to him but the determination and the payments of his share might not invariably be done in that manner and it was quite conceivable that, without taking accounts on the footing of notional sale, by mutual agreement, a retiring partner might be receiving an agreed lump sum amount for going out as and by way of consideration for transferring, releasing, assigning or relinquishing his interest in the partnership assets to the continuing partners and if the retirement takes this form whether payment on that basis would be exigible to tax as capital gains, as are the facts of the instant case before me, the Bombay High Court did not express any opinion.
But, as we said, it is not necessary. But, the Bombay High Court also recognised that where accounts had been gone into and the partner received while going out what was due to him in respect of his share and in lieu of assigning his interest then other consideration might be applicable and there might not be any transfer. If that is the position, as in this case, because here accounts were taken, even then on the basis of the principles reiterated by the Bombay High Court in the aforesaid decision, no capital gains could be attracted. In a subsequent decision, the Bombay High Court in the case of CIT v. H.R. Aslot  115 ITR 255 followed the principles reiterated by it in the previous judgment.
The Commissioner (Appeals) directed the ITO to delete the capital gains from the computation of total income of the assessee. The revenue is in appeal.
3. The learned departmental representative based his case on the decision of the Bombay High Court in Tribhuvandas G. Patel's case (supra). In that case, because of disputes between the partners, one of the partners retired taking Rs. 1 lakh as share of profits of the firm for the period during which he was partner in the previous year : Rs. 50,000 as his share of the value of goodwill and Rs. 4,77,941 as his share in the remaining assets of the firm. It is the last sum, which is of interest to us. The Tribunal had held that Rs. 4,77,941 was liable to be taxed under the head 'Capital gains', rejecting the assessee's contention that the said sum was received on dissolution of the firm bringing it with the provisions of Section 47(ii) of the Act. The Tribunal held that this was not a case of dissolution of the firm.
Quoting from the head-lines, the High Court held as follows : In the instant case, 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, the transaction will have to be regarded as amounting to 'transfer' within the meaning of Section 2(47) of the Act, inasmuch as the assessee could be said to have assigned, released and relinquished his interest and share in the 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. On the construction of the deed dated January 19, 1962, and the mode in which the retirement of the assessee had taken place, the transaction must be held to amount to a 'transfer' within the extended meaning of the expression as given in Section 2(47) of the Act, and the consideration received assessee, therefore, will give rise to capital gains chargeable to tax under Section 45 of the Act.
In the instant case, the land had already become an asset of the firm long back. The partners had brought in contributions to pay the conversion fees. The asset of the firm was revalued in 1979, and the partners received what was standing to their credit on the day they retired from the firm. In effect the assessee did not receive anything more than what was standing to her credit on the date of retirement.
The Calcutta High Court pointed out that even the Bombay High Court had recognised that where accounts had been gone into and the partner received, while going out, what was due to him in respect of his share, and in lieu of assigning his interest, then other considerations might be applicable and there may not be any 'transfer'. The following portions from the judgment in Bhupinder Singh Atwal's case (supra) are given below : ...It was the partners who owned, jointly or in common, the assets of the partnership and, therefore, the consequences of the distribution, division or allotment of assets to the partners which flowed upon dissolution after discharging liabilities was nothing but a mutual adjustment of rights between the partners and there was 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 Income-tax Act, 1961. There was no involvement of a transfer of assets even in the sense of any extinguishment of the firm's rights in the partnership when the distribution took place upon dissolution. In order to attract Section 34(3)(b) of the Income-tax Act, 1961, it was necessary that the sale or transfer of the assets must be by the assessee to a person. The Supreme Court held, that the dissolution of a firm must in point of time be anterior to the actual distribution, division or allotment of the assets that took place upon the taking of accounts and discharging the debts and liabilities due by the firm. Upon the dissolution, the firm ceased to exist. Then followed the making up of accounts, then the discharge of debts liabilities and thereupon distribution or division or allotment of assets took place inter se the erstwhile partners by way of mutual adjustment of rights among them. The distribution, division or allotment of assets to the erstwhile partners was not done by the dissolved firm. In that sense, in that case, it was held by the Supreme Court that there was no transfer of assets by the assessee to any person. Though that case was concerned not with the retirement of a partner of a firm, the Supreme Court was dealing with the partner's right in a partnership and as to what a share of the partner represented and in that aspect reiterated its views expressed in the case of CIT v. Dewas Cine Corpn.  68 ITR 240 (SC), which we have referred to hereinbefore.
Further, they stated at page 75 that the transaction was in law an adjustment of rights of the partners and not relinquishment or even extinguishment of interest of the retiring partner. This was based on the decision in the case of Addl. CIT v. Smt. Mahinderpal Bhasin  117 ITR 26 (All.). Accordingly, the High Court held that no capital gain was involved. Applying the decision of the Calcutta High Court, we find that no capital gain is involved in this case. The assessee received just what was due to her, There was no relinquishment by her of her rights or extinguishment of such rights by the firm. If something more than what was due to her had been paid, probably, the question of capital gains might have arisen. Having regard to the facts of the case, we agree with the Commissioner (Appeals) that no capital gains was involved in the transaction.