TMI Blog2004 (10) TMI 290X X X X Extracts X X X X X X X X Extracts X X X X ..... land as co-owners. The three sisters formed a partnership firm vide partnership deed dated 31-5-1984 for carrying on business of exhibition of feature films. The firm constructed three theatres by name Odeon 70 mm, Odeon Deluxe and Odeon Mini, together with canteen and some shops (mulgies). All the theatres, canteen and shops were constructed by the firm over a period on the land belonging to the three sisters. The land was not contributed into the partnership firm by the sisters and thus it was not a partnership asset. All the constructed structures appeared in the books of the firm and are the assets of the firm (refer to paragraph 4.2 of the assessment order). Thus, only the theaters and commercial complexes are the assets of the partnership firm. 3. Disputes arose among the partners and the assessee filed a suit in the Court of the V Senior Civil Judge, City Civil Court, Hyderabad, vide O.S. No. 2140 of 1988, wherein she claimed 1/3rd share of the land as well as her 1/3rd share in the partnership assets. The partnership is at Will. The assessee issued a notice for dissolution of the partnership on 21-1-1989. The other two sisters of the assessee also filed a suit for dissol ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or not and for the purpose of deciding this issue, to examine whether it is a receipt consequent to a dissolution of the firm or consequent to the retirement of a partner and also whether only a share in the value of partnership assets were received by the assessee or whether the assessee had received much more than the share in the value of partnership assets. 5. The assessee's contention was that the amount of Rs. 1.82 crores was not liable to tax in her hands, as it represented her share of the firm's assets received on its dissolution. He contends that the fixed assets were revalued and she received 1/3rd of the value which is her share in the partnership assets. Alternatively, it was contended that even if the amount represented her share in the firm's assets received on retirement, it was not liable to tax. The Assessing Officer, on the ground that the assessee had not invested any money in the construction of the theatres, commercial complex and other structures, held that it was a transfer and the amount was liable to be brought to tax in the block assessment. The first appellate authority upheld the order of the Assessing Officer by observing that though in a case of di ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Indian Partnership Act. The deed mentions that it is effective from 31-3-1999 and nothing happened on that date and the firm stood dissolved from 21-1-1989 itself. He submitted that the joint compromise petition was filed on 13-4-1999 and the compromise decree was passed on 16-4-1999. He referred to page 3 of the retirement deed dated 30-9-1999 and submitted that the parties had agreed to settle the dispute on the basis of settlement in O.S. No. 2140 of 1988 and retiring partner agreed to retire. He vehemently contended that this deed cannot have the effect of overriding the dissolution of the firm, which is acknowledged in the compromise deed. Thus, he submits that this is a case of dissolution of the firm and that in the case of dissolution of firm, section 45(4) of the Income-tax Act is applicable and the assessee is not liable to any capital gains tax as the liability is fastened on the firm only, by virtue of the section. 7. Alternatively, the learned counsel for the assessee contended that if the Tribunal takes a view that it is a case of retirement of a partner from the firm and not a case of dissolution, then also, what the assessee received was only a share in the asset ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at in the suit filed by the sisters, they asked for rendition of accounts only up to 15-9-1987 and that the assessee asked for partition of the assets in the suit filed in O.S. No. 2140 of 1989, after issuing notice of dissolution on 21-1-1989. He drew the attention of this Bench to the compromise settlement at para 1, (a) and (b), and submitted that it was mutually agreed to pay Rs. 1.82 crores to the assessee towards her 1/3rd share and in para 2 the other two sisters were allotted the theatres, canteen, mulgies etc. As regards liabilities, he submitted that the assessee was kept away from the firm for nearly 12 years and the litigation was going on in the court and that the other two partners were carrying on the business of the firm and that the assessee had no role whatsoever in either assets and liabilities or profits of the firm, consequent to her filing a suit. He submitted that the other two sisters were allotted the theatres, canteen, mulgies etc. and they continued to carry on the business as before and it was mutually agreed in paragraphs 3 and 4 of the compromise deed that assessee is indemnified. He submitted that even going by the retirement deed, it is stated therei ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y agreed among the partners that the partnership shall not be dissolved on the death or retirement of a partner and that the remaining partner shall continue the business. From a conjoint reading of these clauses along with the recitals in the retirement deed dated 30-9-1999, there was no dissolution of the firm and it was a case of retirement of one of the partners, i.e. the assessee, from the partnership firm. (4) Under section 39 of the Indian Partnership Act, 1939, the dissolution of partnership is between all the partners of the firm and in the present case only one partner retired and the remaining partners continued to carry on the business of the firm. (5) The assessee was herself not sure as to whether it was a case of dissolution or retirement as is evident from ground No. 2 of the revised grounds of appeal filed on 14-9-2004. The learned DR submitted that sections 45 to 55 of the Indian Partnership Act, 1939, occur in the same Chapter VI of the Act, and all the sections pertain to dissolution of firm and section 45 provides for liability for acts of the partner done after dissolution; section 46 provides for right for continuing authority of partners for purposes o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is evident from paragraph 13 of the compromise deed. He submitted that there was no settlement of accounts furnished to the partner in accordance with the provisions of the Partnership Act as is evident from the observations of the CIT(A) in paragraph 11 of his order. 13. The learned DR vehemently contended that the amount received by the assessee was in excess of her debit-or credit-balance in the partnership firm and that this excess receipt was only in consideration of her assigning or releasing her interest or title in the partnership assets in favour of the continuing partners. Thus, he submitted that it is a transfer within the meaning of section 2(47) of the Income-tax Act. He placed reliance on the following decisions: CIT v. H.R. Aslot [1978] 115 ITR 255 (Bom.). N.A. Mody v. CIT [1986] 162 ITR 420 (Bom.). Bishan Lal Kanodia v. CIT [2002] 257 ITR 449 (Delhi). Referring to the case laws relied upon by the learned counsel for the assessee, the learned DR submitted that they are distinguishable on facts as in all those cases the amount was received by a partner towards his share in the partnership assets, which means after deduction of liabilities and prior charges i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he filing of the suit. The said suit had been dismissed for default. The defendant Nos. 1 2 had filed a restoration petition in the said suit which petition the Defendant Nos. 1 2 shall withdraw." Clauses 9 and 10 of the same order, which are relied upon by the learned DR., do not suggest that it is a case of retirement, as mutation of name and signing of the form for the same was required for partitioning the joint property, i.e. land, between the three sisters who are co-owners. The learned DR's argument that there is a relinquishment is not correct as the matter was fought in a civil court for over 11 years and the assessee received through court the value of her 1/3rd share in the firm's assets, which could not be physically divided. The assessee did not give any concession. In the case of dissolution, the liability is fastened on the firm only and the assessee has no liability [Refer to Kanga and Palkhivala's Income-tax Law, 8th edition, Vol. I, under section 45(4)]. 16. If it is to be held, that this is a case of retirement and not a case of dissolution, the amount paid to the partner on retirement, as her share in the assets of the partnership firm, cannot be held be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ri Rao [l995] 213 ITR 304. The case of R. Lingmallu Raghukumar was explained by the Division Bench as follows at pages 306 307:- "In Raghukumar's case [1983] 141 ITR 674 (AP), the assessee was the Karta of a Hindu undivided family. He was a partner of two firms. He retired from the said two firms with effect from January 1, 1971. On the date of retirement, his capital account was credited with a sum of Rs. 46,500 which was in excess of the amount due to him towards his capital and profits. The Income-tax Officer treated the additional amount of Rs. 46,500 as capital gains in the hands of the assessee. The assessee carried the matter in appeal but the appeal was dismissed upholding the order of the Income-tax Officer. The assessee then went up in further appeal to the Appellate Tribunal. Before the Tribunal, he contended that there was no transfer of any capital asset within the meaning of section 2(47) of the Act. It was held by this court that when the share of a partner in the partnership was worked out by taking accounts in the manner prescribed by the relevant provisions of the partnership law, there was no element of transfer of interest in the partnership assets by the re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t also with cases of transfer by a body of individuals and other association of persons. That apart, section 2, clause (47) has to be interpreted with reference to the language employed therein. Merely because section 47(ii) excludes the application of section 45 in case of dissolution of firms on the ground that no transfer is involved, it cannot be implied that a transfer is involved in the case of retirement. The converse or the opposite does not follow." Thus, the binding judgment of the Hon'ble jurisdictional High Court, which is approved by the Hon'ble Supreme Court, holds the field and that the amount received by a partner from the partnership firm in excess of the capital and profit standing to the credit of the partner at the time of retirement cannot be construed as capital gain under section 45 of the Income-tax Act inasmuch as there is no transfer within the meaning of section 2(47) of the Act and such excess is not exigible to tax on capital gain and thus, for the purpose of section 45, no distinction can be drawn between the amount received by a partner on dissolution of the firm and that received on his retirement. 18. The contention of the Revenue that the asses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... something more than what is actually due to her on the rendition of accounts, the same cannot be brought to tax as already stated by us and also in view of the judgment of the Hon'ble Supreme Court in the case of Tribhuvandas G. Patel v. CIT [1999] 236 ITR 515, as well as the judgment reported in CIT v. R. Lingmallu Raghukumar [2001] 247 ITR 801 (SC). These judgments declare that when the assessee received her share in the value of assets of the partnership firm, or in excess of the same, it cannot be brought to tax as there is no transfer. In case of Tribhuvandas G. Patel, the Hon'ble Supreme Court answered question No. 3 as follows:- Question: "Whether, on the facts and in the circumstances of the case, the sum of Rs. 4,77,941 or any part thereof was liable to tax as capital gain by reason of section 47(ii) of the Act?" Answer: "So far as question No. 3 is concerned the assessee invoked clause (ii) of section 47 to contend that the said sum of Rs. 4,47,941 does not represent a capital gain. Mr. Sharma, learned counsel for the appellant-assessee, has brought to our notice the decision of this court in CIT (Addl) v. Mohanbhai Pamabhai [1985] 165 ITR 166 where it has been held, ..... X X X X Extracts X X X X X X X X Extracts X X X X
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