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Commissioner of Income-tax Vs. P. Ganesa Chettiar - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtChennai High Court
Decided On
Case NumberTax Case No. 277 of 1975 (Reference No. 235 of 1975)
Judge
Reported in[1982]133ITR103(Mad)
ActsIncome Tax Act, 1961 - Sections 86
AppellantCommissioner of Income-tax
RespondentP. Ganesa Chettiar
Appellant AdvocateJ. Jayaraman and ;Nalini Chidambaram, Advs.
Respondent AdvocateK. Srinivasan, Adv.
Cases ReferredBritish Mexican Petroleum Co. Ltd. v. Jackson
Excerpt:
direct taxation - classification - section 86 of income tax act, 1961 - assessee was partner in firm - had debit balance in capital account of certain amount and was paid certain amount on leaving firm - received lump sum in lieu of shares of profits and interest in partnership firm - whether aforesaid amount was capital receipt or revenue receipt - amount paid on account of capital account cannot constitute income - under section 86 (iii) amount taken by partner out of his share of profits from firm cannot be taxed - held, aforesaid amount was capital receipt. - - but the modification is subject to certain conditions which are not satisfied in the present case......the tribunal held that a lump sum payment made to the assessee, a partner, in lieu of his share of profits and interest in the partnership firm, is not getting any sum of a revenue nature. it, therefore, held that the sum of rs. 79,130.56 received by the assessee did not have any revenue character. it is this order of the tribunal that has given rise to the question extracted earlier.6. from the facts stated above, it would be clear that there are two sums in effect which are brought to tax in the assessment under reference. the first sum is rs. 53,130.56. it is clear that this sum was a debit balance in the books of the firm as against the assessee, a partner. as to how the debit balance arose is not clear from the statement of the case. however, mr. jayaraman, the learned.....
Judgment:

Sethuraman, J.

1. In this reference under Section 256(1) of the I.T. Act, 1961, the following question was referred :

'Whether, on the facts and in the circumstances of the case, it has been rightly held that what was received by the assessee on leaving the firm represented capital receipt and not revenue receipt ?'

2. There was a firm known as 'Dhanalakshrni Pictures' in which the assessee was a partner. This firm was constituted under a patnership deed dated 24th April, 1964, with four partners, including the assessee. On 11th October, 1969, the assessee retired from the firm and the assets and liabilities were liable to be taken over by two of the partners who would carry on the distribution of films thereafter. A dissolution deed was drawn up on llth October, 1969, in which it was stated that the parties had mutually agreed to dissolve the partnership as and from llth October, 1969. Clause 6 of the dissolution deed ran as follows :

'The party of the 3rd part hereto (the assessee) shall receive and be paid a sum of Rs. 26,000 (rupees twenty-six thousand only) by the parties Nos. 1 and 2 (the two partners who took over the assets and liabilities) in full and complete settlement of all his claims in the partnership businesstowards his share of capital, accrued profits or losses till 11th October, 1969, his drawings and all other withdrawals till that date.'

3. The manner of discharge of the sum of Rs. 26,000 payable under Clause 6 was provided for in Clause 7.

4. The ITO noticed that as on 10th October, 1960, the capital account of the assessee in the firm stood at a debit balance of Rs. 53,130.56 and he had been paid a sum of Rs. 26,000 on leaving the firm. The ITO, therefore, took the view that in essence the assessee had been credited with a sum of Rs. 79,130.56 and that this sum was liable to tax in the assessee's hands as his income. The assessee filed an appeal to the AAC, who confirmed the assessment.

5. When the matter was taken on appeal to the Tribunal, the Tribunal held that a lump sum payment made to the assessee, a partner, in lieu of his share of profits and interest in the partnership firm, is not getting any sum of a revenue nature. It, therefore, held that the sum of Rs. 79,130.56 received by the assessee did not have any revenue character. It is this order of the Tribunal that has given rise to the question extracted earlier.

6. From the facts stated above, it would be clear that there are two sums in effect which are brought to tax in the assessment under reference. The first sum is Rs. 53,130.56. It is clear that this sum was a debit balance in the books of the firm as against the assessee, a partner. As to how the debit balance arose is not clear from the statement of the case. However, Mr. Jayaraman, the learned standing counsel for the Commissioner, stated that this sum represented the share of losses debited to the partners in the respective years in which the losses arose. The entry in the books of the firm would only go to show that the assessee owed to the firm a sum of Rs. 53,130.56. Ordinarily, he should have discharged this debt due to the firm. The question is whether the remission of this amount by the firm can be treated as income in the assessee's hands.

7. It is settled law that a debt forgiven cannot be treated as income. The question as to whether a remission of debt would constitute income was considered in British Mexican Petroleum Co. Ltd. v. Jackson [1932] 16 TC 570 . The assessee in that case entered into a contract with an oil producing company for the purchase of petroleum over a period of years. The unpaid price of the oil supplied was debited in the accounts. In view of the adverse effect of a business slump on the asscssee-company, the petroleum producing company accepted payment of a part of the debt and released the assessee-company from its liability to pay the balance which was due. The House of Lords held that the amount remitted could not be included as a revenue receipt. Lord Macmillan observed (p. 593):

'I cannot see how the extent to which the debt is forgiven can become a credit item in the trading account for the period within which the concession is made.'

8. This case has been followed by the courts in India in several cases which can be found collected in footnote No. 3 at page 92 of Kanga and Palkhivala's The Law and Practice of Income Tax, 7th Edn., Vol. 1.

9. There is a statutory modification to this principle by the enactment of Section 41(1) of the Act. But the modification is subject to certain conditions which are not satisfied in the present case. That is perhaps the reason why the I.T. authorities did not seek to apply Section 41(1) in the present case. Applying the general principle that the waiver of a debt cannot constitute income, it is manifest that the assessee cannot be taxed on the sum of Rs. 53,130.56.

10. We shall now discuss the assessability of the sum of Rs. 26,000. This sum was paid to the assessee in full and complete settlement of all his claims in the partnership business towards his share of capital, accrued profits or losses, etc. The I.T. authorities have not gone into the question as to how this sum of Rs. 26,000 was arrived at. This sum of Rs. 26,000 can fall only into one of two categories. Either it is a payment in respect of profits earned by the firm which was due to him or it is returned to him as his share of capital. In either event, it is not taxable. If it is only the share of profits credited to his account, then when it is paid to him it is not liable to be taxed in his hands. It is common knowledge that in the case of a registered firm, the firm is nominally taxed and the amount due in respect of the share of a particular partner is apportioned among the partners in accordance with the share of each partner in the firm and is brought to tax in the hands of the partner. The resultant amount of the profit earned by the firm is actually taxed in the hands of the partner. If the partner receives his share of the profits, which has already suffered tax, he cannot be taxed again as this will go against the basic principle of taxation, namely, the same amount cannot be taxed twice in the same assessee's hands. If the firm was an unregistered firm, even then, the amount taken by a partner out of his share of profits from the firm cannot be taxed in view of the provisions of Section 86(iii) of the Act. The return of a partner's capital cannot constitute his income. In any event, therefore, the amount of Rs. 26,000 cannot also be brought to tax.

11. The learned standing counsel drew our attention to two decisions. The first, is CIT v. P. R. A. L. Muthu Karuppan Chettiar [1935] 3 ITR 208 . That case dealt with the question of the assessability of the profits remitted from abroad. At the relevant time the foreign profits were not taxed in India on the basis of accrual but only on the basis of remittances.

12. The assessee contended that the remittance was effected only after the dissolution, that the profits had become capital and that, therefore, the amount cannot be taxed as a remittance of profits. This contention was negatived by the Privy Council. We do not find that this case has any scope of application to the present one, as the only principle decided in that case was that what is received out of profits continue to be profits in the hands of partners notwithstanding dissolution of the firm. In this case, in one view, such profits (if any) having borne tax cannot again be taxed.

13. The second case cited by the learned counsel for the revenue is the one in CIT v. S. rM. Sathappa Chettiar : [1951]20ITR393(Mad) . In that case, there was a firm brought into existence for erecting and establishing a spinning mill between two persons, of whom the assessee was one. The assessee erected a building and the other partner purchased machinery of the value of Rs. 79,155. The factory was completed but did not start the business for want of supply of electricity. The machinery was used by the assessee, one of the partners, for the purpose of the business of a mill of which he was the managing agent. Disputes arose between the partners and they were referred to an arbitrator. There was an award by the arbitrator which provided that the assessee should receive from the mill a sum of Rs. 75,000 in full settlement of his claim for compensation for the use of the machinery by the mill. The question was whether this sum of Rs. 75,000 can be taxed in the hands of the assessee as his income. It was held that it was so liable to tax. That was only because the sum represented a revenue receipt in respect of the user of the machinery, or it was in the nature of the rent payable for the use of the machinery. In either event, it was a revenue receipt. This case also is not of assistance to the problem before us.

14. The result is that the question referred to us is answered in the affirmative and against the revenue. The assessee will be entitled to his costs. Counsel's fee Rs. 500.


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