Sabyasachi Mukharji, J.
1. In this reference under Section 256(1) of the I.T. Act, 1961, we are concerned with the assessment year 1970-71, and the following question has been referred to this court:
'Whether, on the facts and in the circumstances of the case, and on a correct interpretation of Section 45 and Section 47(ii) of the Income-tax Act, 1961, the Tribunal was right in holding that no element of transfer of a capital asset was involved in the receipt of money by the assessee from the firm as a retiring partner and that no-capital gains tax was chargeable on the profit, if any, arising to the retiring partner from the receipt of such money '
2. In order to appreciate the question it is necessary to refer to certain facts. The assessee and two of his brothers along with others were partners of a firm styled as M/s. G. S. Atwal & Co. The assessee had 13% share, one of his brothers had 13% share and another brother of the assessee had 9% share in the said firm. It was under the deed of retirement and reconstitution dated 3rd of April, 1969, that the assessee and his two brothers retired from the firm with effect from 1st of October, 1968, and those three outgoing partners had been jointly paid Rs. 5 lakhs by the reconstituted firm towards their shares in the net assets of the firm. As the question would involve the rights of the parties depending upon the said retirement and reconstitution it would be necessary to refer to the terms of the said two deeds. As mentioned hereinbefore there are two deeds executed on the 3rd of April, 1969. In the first deed, after setting out the names of the partners, it was recited as follows :
' Whereas the parties have been carrying on various businesses of which two are the registered partnership firms and the other two are limited companies. They are as follows :--
G. S. Atwal & Co. (Asansol).
G. S. Atwal & Co. (Engineers) P. Ltd.
G. S. Atwal & Co. (Gua).
Surjit & Surinder Investment (P.) Ltd.
AND WHEREAS differences having arisen between the parties hereto and through the intervention of mutual friends, it has been agreed that the parties represented by G. S. Atwal group would take over the business hitherto carried on in co-partnership in the name of G. S. Atwal & Co. and the private limited company known as G. S. Atwal & Co. (Engineers) P. Ltd. and in consideration of that S. S. Atwal group would, take over the partnership firm of G. S. Atwal & Co. (Gua) and Surjit & Surinder Investment P. Ltd., one group retiring from the other so as to name the two businesses exclusive to each of the groups. '
3. Thereafter, Clause (1) provides as follows:
' That the parties have gone into the overall accounts as amongst themselves and as a result of such accounts being taken and adjustments made on an estimated basis it has been agreed by and between the parties that the total amount due and payable by the G. S. Atwal group to S. S. Atwal group after the allocation of the business to the two different groups as hereinbefore mentioned is Rs. 18,00,000 (Rupees eighteen lakhs). '
4. The other clauses are not very relevant for our present purpose. There are other clauses in the deed of retirement and reconstitution executed on the 3rd of April, 1969, which contain the terms, inter alia, as follows :
' It is recorded that the retiring partners have retired from the business of the said firm heretofore carried on under the name and style of G. S. Atwal & Co. (Asansol) under the said deed of registered partnership as from the 1st of October, 1968, and the said business have as on and from that date been carried on by the continuing partners being the G. S. Atwal group on their own account.......
In further pursuance of the agreement between the parties and in consideration of the premises and for more effectively enabling the continuing partners, their executors administrators and assigns to receive and recover and obtain the benefit of the business and other premises assigned, transferred and released the retiring partners do and each of them doth hereby irrevocably appoint the continuing partners, their executors administrators and assigns as their attorney or attorneys to demand, call in and receive from all persons liable to pay, deliver or account for the same or any part thereof. AH and singular the book and other debits, credits, moneys and effects of the said partnership and to give effectual receipts and discharges for the same respectively and to endorse and sign bills and other negotiable instruments and to use and adopt all such remedies, proceedings or means of getting in and recovering the said debits, credits, moneys and effects respectively and enforcing and obtaining the benefits of the contract of the said partnership as may be deemed expedient and for all or any of the purposes aforesaid from time to time appoint a substitute and such substitution at pleasure to revoke and generality to do whatsoever may be requisite for giving to the continuing partners their executors administrators and assigns the full benefit of the assignment transfer and release hereby made,
The retiring partners do and each of them doth hereby covenant with the continuing partners that they or any of them have not at any time heretofore contracted any debt or obligation for and on behalf of the partnership other than those appearing in the books of account of the firm or any other documents showing that the debt was contracted for the purpose of the firm which can or may discharge or affect the continuing partners their respective executors administrators or assigns of the assets or effects of the said partnership of G. S. Atwal & Co. (Asansol) or any part thereof to receive or discharge any of the said debits, credits, moneys and effects except as aforesaid.
Each of them, the continuing partners and the retiring partners, hereby releases and for ever discharge the others of them, their heirs, executors or administrators from all actions proceedings claims and demands whatsoever which such respective releasing party or his heirs, executors and administrators on account of the partnership or anything relating thereof but nevertheless that the present release shall not prejudice or affect any ' of the covenants, agreements or provisions herein contained or implied or the rights/remedies of the said respective parties their heirs executors administrators or assigns hereunder. '
5. The ITO, however, estimated the assessee's share in that sum of Rs. 5 lakhs at 13/35 thereof, viz., at Rs. 1,85,714. The assessee's account in the books of the firm as on the date of retirement showed a credit balance of Rs. 25,000 in the capital account and a debit balance of Rs. 64,633 in the current account. Adjusting these two accounts, the ITO arrived at the figure of Rs. 39,633 as the net debit balance in the assessee's account. As the assessee received Rs. 1,85,714 towards his share of the assets as against the net debit balance of Rs. 39,633 as calculated by the ITO, the ITO determined the gain to the assessee arising out of the transaction at Rs. 2,25,347 (Rs. 1.85,714+Rs. 39,633). The ITO held that the amount had obviously been paid to the assessee in consequence of transfer of valuable assets including the goodwill of the firm. He, accordingly, treated the aforesaid sum of Rs. 2,25,347 as capital gains arising out of the transfer of capital assets and included that amount in the assessment under the head of capital gains.
6. The assessee being aggrieved by the aforesaid order appealed to theAAC. The AAC reversed the decision of the ITO on this issue. He heldthat the question of levy of capital gains tax would not arise at all whenthere was no transfer of capital assets of the firm. In that view of thematter, he deleted the addition of Rs. 2,25,347 made by the ITO underthe head ' Capital gains '.
7. Being aggrieved by the said decision, the revenue preferred an appeal before the Tribunal. On behalf of the revenue, it was submitted before the Tribunal that specific provision had been made under Section 47(ii) of the I.T. Act, 1961, for exemption on distribution of capital assets on the dissolution of a firm from the operation of Section 45 which attracted the levy of tax on a capital asset and, therefore, the reconstitution of the firm on the retirement of one or more than one partner was different from the dissolution of a firm and as no provision had been made in the statute for exemption of money received by a partner on retirement from a partnership, by s. 45 the levy of tax on capital gains was justified. The Tribunal was unable to accept this contention. The Tribunal, following the principles laid down by the Gujarat High Court in the case of CIT v. Mohanbhai Pamabhai  91 ITR 393, which was followed by the same High Court in a subsequent decision in the case of Addl. CIT v. Nagindas Kilabhai & Co. : 101ITR197(Guj) , upheld the view of the AAC that in the receipt of the amount by an assessee as a retiring partner no element of transfer of a capital asset was involved and hence no tax was chargeable under s. 45 of the I.T. Act, 1961. In the premises, the question, as indicated above, has been referred to us under Section 256(1) of the I.T. Act, 1961.
8. In order to adjudicate upon the contentions, it would be necessary to remind ourselves of the provision of Section 45 of the I.T. Act, 1961, which provides that any profits or gains arising from the transfer of a capital asset effected in the previous year shall, save as otherwise provided in certain sections with which we are not concerned, be chargeable to income-tax under the head 'Capital gains'. Section 47 indicates certain transactions not to be regarded as transfer and Clause (ii) of Section 47 specifically deals with the distribution of capital assets on the dissolution of a firm, body of individuals or other association of persons. In the premises, it is necessary to consider, for the purpose of this reference, the nature of the transaction with which we are concerned. A partner in a firm has a share in the assets of the firm depending upon the proportion of his share including the capital, stock-in-trade, goodwill, etc, but has no indivisible right to any particular asset as such. In the case of dissolution, the entire partnership comes to an end and accounts are taken and the partners receive their share minus the liabilities. In case of a retirement, other partners continue. But the retiring partner instead of his right of participation in the capital assets in the business of the firm, including his obligation as to the liabilities, takes the quantified money and retires from the firm and in lieu of his receipt of the money his interest in the partnership firm goes to the other remaining partners. Therefore, when a partner retires from a partnership, the amount of his share in the partnership assets after deduction of the liabilities and prior charges are determined. On taking accounts, what he receives is his share in the partnership. There is no consideration for any transfer of his interest in the partnership to the continuing partners. His interest ceases and, therefore, he receives tangible cash in lieu of what was his intangible rights and what was his intangible rights were represented by his share in the partnership. The nature of the right of a partner in a partnership property was considered by the Supreme Court in certain decisions to which reference may be made. The Supreme Court in the case of Narayanappa v. Bhaskara Krishnappa, : 3SCR400 , had considered this aspect. The Supreme Court had also considered this aspect in the case of CIT v. Dewas Cine Corporation : 68ITR240(SC) . There, the Supreme Court had observed that during the subsistence of the partnership no partner could deal with any portion of the property on his own nor could lie assign his interest in the specific item of the partnership property to any one. His right was to obtain such profits, if any, as had fallen to his share from time to time and upon dissolution of the firm to a share of the assets of the firm which remained after satisfying liabilities under Clauses (i), (ii) and (iii) of Section 47 of the Act. The Supreme Court also quoted from Lindley on Partnership to the effect that what was meant by the share of a partner was his proportion of the partnership assets after its being realised and converted into money and all partnership debts and liabilities have been paid and discharged. There, the Supreme Court had equated the position of a retiring partner to the position of a partner's share in the dissolution of a firm. But the Supreme Court was dealing with the position of a firm not in the concept or in the context of a partner or in the context of Section 45 of the I.T. Act, 1961. More or less, the aforesaid view of the Supreme Court was again reiterated by the Supreme Court in the case of Malabar Fisheries Co. v. CIT : 120ITR49(SC) , wherein the Supreme Court held that a partnership firm under the Indian Partnership Act, 1932, was not a distinct legal entity apart from the partners constituting it and equally in law a firm as such had no separate rights of its own in the partnership assets and when one talked of a firm's property or the firm's assets all that was meant was the property or assets in Which all partners had a joint or common interest. It could not, therefore, be said that upon the dissolution of the firm the rights in the partnership assets were extinguished. 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 I.T. 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 I.T. 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 and 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 Corporation : 68ITR240(SC) , which we have referred to hereinbefore.
9. In a subsequent decision in the case of CIT v. Bankey Lal Vaidya : 79ITR594(SC) , the rights of a partner on the distribution of assets of the partnership firm on dissolution were also considered by the Supreme Court. In the case of Malabar Fisheries Co. v. CIT : 120ITR49(SC) , the Supreme Court referred to Lindley on Partnership and observed at page 59 of the report that a partnership firm under the Indian Partnership Act, 1932, was not a distinct legal entity apart from the partners constituting it and equally in law a firm as such had no separate rights of its own in the partnership assets and when one talked about the firm's property or firm's assets all that was meant was the property or assets in which all the partners had a joint or common interest. If that was the position, then, in our opinion, the share in the partnership firm represents a share in that joint interest of the properties including the assets of the firm and on retirement a partner is paid what is represented by the said share in that firm. If that is the position, then, looked at from that point of view, there cannot be any question of transfer or sale as contemplated under Section 45 of the I.T. Act, 1961. It is also to be reiterated, as we have mentioned before, that in this case, the amount that has been paid to the partner in question has been paid as a result of the accounts being taken, adjustment being made on estimate basis. That has been reiterated in the cases which we have referred to hereinbefore. It finds echo in the first document dated 3rd April, 1969, in the instant case before us as also in the first clause of the second document dated 3rd April, 1969. What the ITO took into consideration was as to what was the share of the capital of the retiring partner in the books of account of the partnership firm. But a share in the capital of the firm is not all that a partner has. In the partnership firm, he has his right in everything--in its stock-in-trade, in its business and its goodwill. If an account is taken on an estimate basis of that share and a partner is paid any amount in lieu of that then really the transaction is a payment to the partner of money in lieu of his share in the partnership assets. This question, however, is clearly covered by the decision of the Gujarat High Court in the case of CIT v. Mohanbhai Pamabhai  91 ITR 393. We are in respectful agreement on this aspect of the matter with the Gujarat High Court. We, however, do not express any opinion on the other question considered by the Gujarat High Court in the said decision, viz., whether a charging provision in Section 45 was not confined to those cases where a capital asset had cost something to the assessee in terms of money in acquiring it because that question does not call for our consideration in the instant case. The aforesaid aspect of the view of the Gujarat High Court was again reiterated by the Gujarat High Court in the case of Addl. CIT v. Nagindas Kilabhai : 101ITR197(Guj) , where the Gujarat High Court held that there was no merit in the contention that there was no transfer of capital assets by the retiring partner and the consequent acquisition thereof by the new firm. There was no new firm on the retirement of two partners. In the case of Addl. CIT v. Mahinderpal Bhasin : 117ITR26(All) , the Allahabad High Court reiterated the same view. Mr. Justice Satish Chandra, as the learned Chief Justice then was, observed that the interest of a partner was the right to obtain his share of profits from time to time during the subsistence of the partnership and on dissolution of the partnership to get the value of his share which remained after satisfying the debts and liabilities in the partnership. When a partner retired what he received was really his share in the partnership assets after deducting the liabilities. It was not a consideration for the transfer of his interest in the partnership to the continuing partners. In the transaction of the retirement of a partner, just as in the case of dissolution of a partnership, there was no element of transfer. The transaction is in law an adjustment of rights of the partners and not relinquishment or even extinguishment of interest of the retiring partner. In that case where a partner retired from a firm and received Rs. 20,000 as consideration for relinquishment of his interest in the partnership, it was held that there was no material to sustain that there was any capital gains attracted.
10. We must, however, refer to a decision of the Bombay High Court in the case of CIT v. Tribhuvandas G. Patel : 115ITR95(Bom) , 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 payment 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 considerations 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 : 115ITR255(Bom) followed the principles reiterated by it in the previous judgment.
11. Lindley on Partnership, 13th Edn., Chap. XV, has described the nature of the share of a partner in a firm in which there was dissolution. Keeping that in view in the background of the nature of the payments on the basis of the facts as found by the Tribunal in the light of the provisions of the Act in this case, as account was taken and in view of the principles that we have mentioned before, that is to say, the outgoing partner, on retirement, got his monetary value that was. represented by his share in the partnership, in our opinion, there was no element of transfer which attracted the provisions of Section 45 of the I.T. Act, 1961.
12. For the reasons mentioned aforesaid, we are of the opinion that the question referred to us must be answered in the affirmative and in favour of the assessee.
13. In the facts and circumstances of the case, each party will pay and bear its own costs.
Sudhindra Mohan Guha, J.