TMI Blog1981 (8) TMI 13X X X X Extracts X X X X X X X X Extracts X X X X ..... ere to be valued as on June 30, 1960, and one-fourth share of the net value of the assets referable to the assessee's share should be paid over to him. Working on this basis the total assets of the firm were valued in the sum of Rs. 4,65,250. The total liabilities stood at Rs. 2,76,437. The net value of the assets was arrived at in the sum of Rs. 1,88,813. One-fourth part of the value of the firm's net assets referable to the assessee's share came to Rs. 47,203.25. This amount of Rs. 47,203, among others, was received by the assessee on retirement, from the remaining partners of the firm, in the account year ended March 31, 1961. In the course of the assessment proceedings for the relevant assessment year 1961-62, the ITO took the view that the amount of Rs. 47,203, which simply represented the difference between the book value of the assets and their market value as on June 30, 1960, was assessable in the hands of the assessee as capital gains exigible to tax under s. 12B of the Indian I.T. Act, 1922. Before the ITO, the contention of the assessee was that the mere surplus of the firm's assets over the firm's liabilities referable to his share cannot be treated as capital gains ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arose under the Indian I.T. Act is CIT v. Dewas Cine Corporation [1968] 68 ITR 240 (SC). In this case the Supreme Court reiterated their view that on the dissolution of a firm, the only right of a partner is to have the property of the firm realised and the proceeds applied in payment of the debts and liabilities of the firm and to have the surplus distributed among the partners or their representatives according to their rights. The court further observed that this distribution of surplus was only for the purpose of adjustment of the rights of partners in the assets of the partnership. They made it, quite clear that this process does not amount to any transfer of assets. Although the Supreme Court made these observations pertinently in the context of what happens at the dissolution of a partnership firm, the case earlier cited in Narayanappa v. Bhaskara Krishnappa, AIR 1966 SC 1300, was case where there was a retirement and mutual settlement of accounts between the retiring partner and the partners who remained in the firm. It was, therefore, observed by the Supreme Court that there was no difference in the legal position of a partner obtaining a share from the partnership, be it ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... two Supreme Court decisions on which they placed reliance, they also referred to an earlier Full Bench decision of their own High Court in Velo Industries v. Collector, Bhavnagar [1971] 80 ITR 291. This case arose under the Bombay Stamp Act, 1958. The question in that case was, what the character of the transaction is when a partner retires from the partnership and the amount of his share in the net partnership assets, after deduction of liabilities and prior charges, is determined oil taking accounts on the footing of a notional sale of the partnership assets and the share, so determined, is given to him. It was contended for the Revenue authority that the transaction must be held to be a conveyance or sale and liable as such to stamp duty. The Full Bench of the Gujarat High Court, however, held that the retirement of a partner in those circumstances and the receipt by him of his share Of the net surplus assets of the partnership did not involve any element of sale. The principle behind this Full-Bench decision was also adopted by the learned judges in deciding the case under s. 45 of the I.T. Act. A Bench of this court has had occasion to touch upon a question of this kind in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... however, the disputes between the parties were settled out of court. Under a deed of settlement the partner, who filed the suit for dissolution, agreed to retire from the firm with effect from a given date, allowing the other partners to continue the business of the firm. On the occasion of such retirement he was paid certain lump sums as well as certain other agreed sums. One of the items of payment made by the other partners to the retiring partner was Rs. 4,77,941 as and towards his share in the assets of the firm, other than goodwill. The question was whether this amount was susceptible to assessment as capital gains. The learned judges of the Bombay High Court held that the transaction in question amounted to a transfer in .9 the sense of relinquishment by the partner of his rights in the partnership and hence any gains resulting from that relinquishment was liable to be charged to tax on capital gains. The following observations at p. II 6 may be quoted as the basis of the decision : " ...a retiring partner while going out and while receiving what is due to him in respect of his share, may assign his interest by a deed or he may, instead of assigning his interest, take the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Corporation [1968] 68 ITR 240. They also referred to the decision of the Gujarat High Court in CIT v. Mohanbhai Pamabhai [1973] 91 ITR 393. As for the decisions of the Supreme Court, the learned judges were inclined to restrict the principles decided therein as applicable in strictness only to cases of general dissolution of partnership which involves the taking of accounts and the receipt by a partner of his share in, the assets of the partnership on the basis of that accounting. They were inclined to hold that the Supreme Court's decisions cannot be applied to a case where, on retirement, a partner agrees to take a lump sum from the other partners without valuation of the assets of the partnership and without arriving at his share of the net assets. Referring to the basis of the Gujarat decision in CIT v. Mohanbhai Pamabhai [1973] 91 ITR 393, the learned judges observed that the decision in Narayanappa v. Bhaskara Krishnappa, AIR 1966 SC 1300, could not be applied straightaway to cases arising under the provisions relating to capital gains taxation under the I.T. Act. According to the learned judges, the Supreme Court was dealing in Narayanappa's case only with the question as to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... transfer or assignment or extinguishment or relinquishment of his share in favour of the other partners. We hold that even in a case where some kind of a lump sum is received by the retiring partner, it must be regarded as referable only to the share of the retiring partner. This being so, no relinquishment at all is involved. What he receives is what he has already put in by way of his share capital or by way of his exertions as a partner. In a true sense, therefore, whether it is dissolution or a retirement and whether in the latter case, the retirement is on the basis of a general taking of accounts or on the basis of an ad hoc payment to the retiring partner, what the partner obtains is nothing more and nothing less than his own share in the partnership. A transaction of this kind is more fittingly described as a mutual release or a mutual relinquishment. In the very case deal with by the Bombay High Court, the particular amount paid by the remaining partners in favour of the retiring partner was only a payment in consideration of which there was a mutual release, a release by the retiring partner in favour of the remaining partners and a release by the remaining partners in fa ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
