TMI Blog1998 (7) TMI 83X X X X Extracts X X X X X X X X Extracts X X X X ..... Court in the case of Gowri Tile Works v. CIT [1957] 31 ITR 250 ? 3. Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was justified in law in holding that the provisions of section 47(ii) of the Act applied to the case and that the assessee-firm was entitled to have the capital gains excluded from it hands, especially in view of the decision of the Supreme Court in the case of James Anderson v. CIT [1960] 39 ITR 123 ?" Brief facts:---A partnership firm was formed under the name and style of "Saraswati Talkies" at Jaggaiahpet in the year 1949 to do the business of exhibition of films. The firm started its business from October 20, 1950, onwards. After four years, disputes arose between the partners. One of the groups filed a suit---O. S. No. 52 of 1954---before a civil court for rendition of accounts and for dissolution of the partnership firm. Later on, the partners compromised the matter at the intervention of elders and entered into a compromise. As per the terms of the compromise, the possession of the theatre was to be given to one of the partners, viz., M. Nageswara Rao, who should take possession of the theatre on the expiry of the then e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... plication under section 256(2), this court directed the Tribunal to state the case and refer the abovementioned questions for the opinion of this court, Hence, this reference. Question No. 1.---The contention of the assessee on this point is that the firm stood dissolved with effect from the date on which auction of the partnership property was held, i.e., with effect from August 21, 1973. While so, it is the contention of the Revenue that the transfer took place long after the dissolution. The Appellate Tribunal, however, recorded a finding of fact that the assessee-firm stood dissolved by virtue of the court's compromise decree. This finding is now under challenge. Under section 44 of the Partnership Act, the court may dissolve the partnership on any of the following grounds---(a) that a partner has become of unsound mind ; (b) that any of the partners has become in any way permanently incapable of performing his duties as partner ; (c) that any of the partners is guilty of conduct which affects the carrying on of the business ; (d) that any of the partners commits breach of agreements relating to the management of the affairs of the firm ; (e) that any of the partners has tran ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the said compromise decree, all the partners authorised Mr. Nageswara Rao, a co-partner, to sell away the partnership property by holding an auction. Auction was held on August 21, 1973, and the property was purchased by one of the partners, G. Venkateswarulu, for a valuable consideration of Rs. 3,10,000. The above sequence of events would per se suggest, without any inference, that pursuant to the compromise, there was a court decree for dissolution and on the dissolution of the firm pursuant to the court decree, the partnership property was sold away in auction in final settlement of accounts among the partners. The Tribunal also recorded a similar finding on this aspect, which, in our opinion, is based on undisputed facts. Therefore, the findings of the Appellate Tribunal in this regard cannot be said to be wholly assumptive in nature. There is clear distinction in the factual position that is obtaining in this case and in the case reported in E. M. Muthappa Chettiar v. ITO [1961] 41 ITR 1 (SC). In the above cited case, there were disputes between the two existing partners. One of the partners (Tyagarajan) announced in a newspaper that the firm stood dissolved with effect from a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nsaction. It is, therefore, contended that the exemption claimed under section 47(ii) of the Act cannot be extended to the assessee. No doubt, under section 45, all the profits or gains arising from the transfer of a capital asset effected in the previous year shall be chargeable to income-tax under the head "Capital gains". But, the statute provided certain exemptions in section 47 to the above provision. Clause (ii) of section 47 is relevant for our present purpose, which is extracted hereunder : "47. Transactions not regarded as transfer.---Nothing contained in section 45 shall apply to the following transfers : (i) any distribution of capital assets on the total or partial partition of a Hindu undivided family ; (ii) any distribution of capital assets on the dissolution of a firm, body of individuals or other association of persons;..." As has been held by us, the transaction took place after the dissolution of the partnership firm. The general power of attorney holder conducted an auction on that day to dispose of the partnership firm's asset and in that auction, the highest bidder was one G. Venkateswarlu, who was one of the partners of the dissolved firm. He purcha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , we hold that the transaction was an outright sale transaction which was made only with a view to realise the sale proceeds of the property so that the said amount can be distributed among all the partners on the dissolution of the firm. Another contention is raised on behalf of the assessee that relinquishment of right over the property does not amount to either sale or any other alienation. It is contended that what actually transpired under the deed was the relinquishment of the right and title of the dissolved partnership firm over the property in favour of one of the partners of the firm and such a transaction cannot be called a sale transaction for the purpose of realisation of its value. It is submitted that the auction was conducted only with a view to ascertain the value of the property as on that day. It is, therefore, contended that the transaction that took place under the relinquishment deed does amount to distribution of capital asset and not otherwise. But, we are not in agreement with this contention. As per section 2(47) of the Act, relinquishment of rights over a capital asset shall be treated as a "transfer". As per the above provision, a sale, exchange or "reli ..... 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