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TMI Blog2002 (12) TMI 33X X X X Extracts X X X X X X X X Extracts X X X X ..... eferred by the eight assessees. These assessees are the erstwhile partners of a dissolved firm which was carrying on the business of manufacturing beedies under the firm name Mangalore Ganesha Beedi Works (in short the "MGBW"). The firm was comprised of thirteen partners. It stood dissolved on December 6, 1987, by efflux of time. Thereafter, the business was carried on behalf of all the erstwhile partners as an association of persons till the affairs of the firm were finally wound up. The assets of the firm were ultimately sold under the orders of this court in winding up proceedings with effect from November 21, 1994. Before entering into the facts in detail, we find it advantageous to clarify a basic fact which has led to a certain amount of confusion at all stages of the proceedings. This confusion had arisen primarily because of the name "Mangalore Ganesha Beedi Works" successively adopted by three different taxable entities, namely, the partnership firm, an association of persons consisting of 13 members and another association of persons consisting of 3 members. For the sake of convenience, we will be referring to these taxable entities as "the firm", "AOPs-13" and "AOPs-3". ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... irm is evidenced by a partnership deed dated June 30, 1982. According to the averments made in the deed, the last reconstitution of the firm became effective from June 6, 1982. According to the deed of partnership, the firm comprised the following 13 partners: Sl. No. Name of the partners Percentage of share 1. B. Raghurarna Prabhu 14.50% 2. M. Janardhana Rao 7.65% 3. M. Ananda Rao 7.65% 4. M. Vinoda Rao 7.50% 5. M. Pushpalatha, W/o. Subraya Baliga 12.50% 6. Hemalatha, W/o. Raghunath Shenoy 12.50% 7. M. Suresh Rao 7.55% 8. M. Vishwanath Rao 7.55% 9. M. Rarnanatha Rao 2.50% 10. Jaganath Shenoy 2.50% 11. Vatsala Shenoy, D/o. M. Janardhana Rao 7.55% 12. M. Gopinath Shenoy 2.50% 13. Arathi Shenoy, D/o. M. Janardhana Rao 7.55% Clause (3) of the partnership deed provided for the duration of the firm. This clause reads as under: "3. The duration of the partnership shall be five years in the first instance; but by mutual agreement the parties hereto may extend the said duration. If during the subsistence of this partnership any of the partners desire to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... use of differences between the erstwhile partners, the affairs of the firm could not be wound up. So two of the partners of the firm filed a petition before this court under the provisions of Part X of the Companies Act, 1956, for winding up of the affairs of the firm in terms of section 583(4)(a) thereof. This petition was numbered as Co. P.No.1 of 1988. By order dated November 3/5, 1988 this court permitted the group of partners (7) having controlling interest to continue the business as an interim arrangement till the completion of winding up proceedings. Subsequently, under order dated June 14,1991, this court framed the scheme for winding up of the affairs of the firm by selling its assets as a going concern. Paragraph 29 of the order contains the scheme. Clauses (i), (iii) and (v) of this scheme are material for the present purposes and accordingly are being reproduced hereunder: "(i) The dissolved partnership firm-Mangalore Ganesh Beedi Works as a going concern shall be sold to such of its partner/s, who makes an offer of a highest price, the same not being less than the minimum (reserved) price of Rs. 30 crores (Rs. Thirty crores) within July 11, 1991, accepting further li ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s ninety two crores together with actual profits earned from December 6, 1987 till March 31, 1994 and proportionate profit from April 1, 1994, till the date of deposit in terms of the orders of this court earlier issued in C.A. No. 313 of 1994." At the instance of the three partners offering the highest bid, clause (1) of the order dated September 21, 1994 was amended by a subsequent order dated September 19, 1994. The modified clause (1) of the order dated September 21, 1994 reads as under: "The highest bid amount of rupees ninety two crores is accepted and the group of partners offering the said amount are directed to deposit that part of the bid amount of rupees ninety two crores which is proportionate to the spares held by the out-going partners together with profits on the same basis from December 6, 1987, till the date of deposit, within a period of 60 days from September 29, 1994, in any of the nationalised banks in the name of the official liquidator. The rest of our order dated September 21, 1994, remains intact." Pursuant to the above order, the AOPs-3 deposited the bid amount on November 17, 1994 with the official liquidator. As per the order passed by this court, the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ation of persons (i.e., AOPs-13) comprised of all the erstwhile partners of the dissolved firm, as well. Assessment of business income: The income of the business for the period subsequent to dissolution of the firm from December 19, 1987, till up to the assessment year 1994-95 was all through returned as income of the AOPs-13 and was accepted as such by the Department. Despite this fact, the Assessing Officer took the view that (i) the assessees were liable to pay capital gains tax on their respective shares in the sale price of the assets of the firm being Rs. 92 crores, and (ii) they were also liable to be assessed on their shares in the proportionate/notional profit for the period during which the business was run for and on behalf of the AOPs-13. While dealing with the contentions of the assessee, the Assessing Officer rejected their objections regarding chargeability of the capital gains based on the pleas that (i) the sale was slump in nature, and (ii) the transaction amounted to their retirement from the firm/AOPs or relinquishment of their shares. The first appellate authority and the Tribunal also shared the same view. But the Vice-President of the Tribunal in his sepa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... held that "association of persons" as used under the Income-tax Act means an association in which two or more persons join in a common purpose or common action, and as the words occur in a section which imposes a tax on income, the association must be one, the object of which is to produce income, profits or gains. Now the questions that arise are (i) whether the partnership can own properties? and if so, then (ii) whether on its dissolution it ceases to hold the said properties and the partners become owners thereof in specie to the extent of their shares, or (iii) whether despite dissolution the firm by fiction of law it continues to be the owner of the properties till the affairs of the firm are finally wound up? So far as the right of the firm to own properties is concerned, section 14 of the Partnership Act clearly admits this proposition. This section reads as under: "The property of the firm.--Subject to contract between the partners, the property of the firm includes all property and rights and interests in property originally brought into the stock of the firm, or acquired, by purchase or otherwise, by or for the firm, or for the purposes and in the course of the busine ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ity of each partner to bind the firm, and other mutual rights and obligations of the partners, continue notwithstanding the dissolution, so far as may be necessary to wind up the affairs of the firm and to complete transactions begun but unfinished at the time of the dissolution but not otherwise. The word 'transaction' in section 47 refers not merely to commercial transaction of purchase and sale but would include also all other matters relating to the affairs of the partnership. The completion of a transaction would cover also the taking of necessary steps in connection with the adjudication of a dispute to which a firm before its dissolution is a party...." In Saligram RupIal Khanna's case, AIR 1974 SC 1094, the Supreme Court has further held that: "The proposition, in our opinion, cannot be disputed that after dissolution, the partnership subsists merely for the purpose of completing pending transactions, winding up the business, and adjusting the rights of the partners; and for these purposes, and these only, the authority, rights, and obligations of the partners continue...." The Diviston Bench of the Kerala High Court in the case of Paulson Constructions v. CIT [1990] 181 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a distinct assessable entity. Section 3 of the Indian Income-tax Act, 1922 treats it as such, and the entire process of computation of the income of a firm proceeds on the basis that it is a distinct assessable entity. In that respect it is distinct even from its partners: CIT v. A.W. Figgies and Co. [1953] 24 ITR 405 (SC)." In the above view of the matter, we are of the considered opinion that the capital gains can be assessed only in the hands of the firm, which is a distinct taxable entity from the partners who have constituted the firm. Re: Question No. 1a: The assessees numbering 9 being the non-purchasing partners had raised the contention before the Tribunal that the sale was effected by an association of persons comprised of them to another association of persons comprised of the purchasing partners, namely, AOPs-3 and therefore capital gains can be taxed only in the hands of the AOPs of 9 persons. The Vice-President as well as the Judicial Members had rejected the plea by holding that there is no evidence to show the existence of the AOPs of 9 persons as claimed by the appellants which could be said to have transferred any business of the erstwhile firm to the purchasin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1988, was not strictly in accordance with clause (16) of the partnership deed though care was taken that the right to purchase the assets of the dissolved firm should go to the partners on priority basis. But, clause (3) of the scheme very clearly provided that if the partners' offers are not found to be acceptable then the court may invite offers from the public as well by making publicity in the newspaper. From the scheme framed by this court, it was quite clear that the assets of the firm were to be sold to any intending buyer including persons who may be the partners of the firm and realisation in terms of money and distribution of sale proceeds among the partners was as per their share in the dissolved firm. In winding up proceedings of a dissolved firm, the method adopted by this court is always permissible. Even otherwise, the partners of the firm can also agree that in the event of dissolution, partners will not be entitled to distribution of assets of the firm and will be entitled only to the sale proceeds realised on actual sale of the assets of the firm. The Supreme Court, in the case of Dewas Cine Corporation [1968] 68 ITR 240, by referring to Lindley on Partnership an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dicially accepted sense the transaction can be said to be a slump sale. But, neither the Income-tax Act nor any judicial pronouncement declares that where sale of the assets is made for a lump sum consideration, it cannot be subject to tax under the heading "Capital gains". The law is that if individual assets can be reasonably valued for ascertaining their respective cost of acquisition, then by resorting to statutory parameters and mode of calculation devised under the head "Capital gains" in Chapter IV, the gains so computed can always be brought to tax. This aspect of law has been considered and declared to this effect by the Supreme Court in the case of CIT v. Artex Manufacturing Co. [1997] 227 ITR 260. Keeping in view the law declared by the Supreme Court in Artex Manufacturing Co.'s case [1997] 227 ITR 260, the Tribunal has rightly rejected the contention of the assessee that the transaction in question cannot be assessed for resultant capital gains by holding that all the assets sold were capable of being appropriately valued for the purpose of computation. Re: Question No.5: This question has been raised in the appeal of the Department because of certain directions give ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o predicate the moment of its birth. The benefit to the business varies with the nature of the business and also from one business to another. No business commenced for the first time possesses goodwill from the start. It is generated. as the business is carried on and may be augmented with the passage of time." In the above case, the Supreme Court after closely analysing the provisions of the then existing provisions in the Act for computation of capital gains, came to the conclusion that since the cost of acquisition of goodwill of a business was not possible of being determined because of gradual accretion with no definite date when it can be said to have come into existence, therefore, it cannot be subjected to tax under the heading "Income from capital gains". In order to overcome the above judicial interpretation of the apex court, by the Finance Act, 1987, which came into force with effect from April 1, 1988, section 55(2)(a) of the Act was amended providing that cost of acquisition in the case of self-generated goodwill will be taken to be nil, see Notes on Clauses of the Amendment Bill). The section so amended reads as under: "55. (2) For the purposes of sections 48 an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... i Udaya Holla, the learned senior advocate, appearing for the interveners, has submitted that the firm was employing specially blended tobacco in manufacturing its beedies and this know-how was an asset of the firm. In our opinion, even if it be taken to be so, this know-how can be presumed to be known to all the partners and the employees assigned with the job of blending of the raw materials. Nothing has been placed before us to show that others could not have sold beedies rolled with similarly blended tobacco. Therefore, the purchasing group of the erstwhile partners as well as the employees who continued to be in service of the purchasing group are supposed to have the full knowledge about raw materials and the preparation in which those are to be used in rolling the beedies which were to be marketed under the registered trademarks. In this view of the matter, the concept of sale and purchase of know-how for manufacturing of beedies which were being marketed by the erstwhile partnership firm is to be held as totally alien to the transfer in question. It appears to have been set up merely as a device to reduce the tax liability without having any real basis for the same. It can ..... X X X X Extracts X X X X X X X X Extracts X X X X
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