TMI Blog1980 (6) TMI 12X X X X Extracts X X X X X X X X Extracts X X X X ..... d 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... truments 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 generally 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 discharg ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n of capital assets on the dissolution of a firm from the operation of s. 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 [1973] 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. [1975] 101 ITR 197, 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 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 s. 256(1) of the I.T. Act, 1961. In order to adjudicate upon the contentions, it would be necessary to remind ourselves ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... during the subsistence of the partnership no partner could deal with any portion of the property on his own nor could he 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 share of the assets of the firm which remained after satisfying liabilities under cls. (i), (ii) and (iii) of s. 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 s. 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 [1979] 120 ITR 4 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s expressed in the case of CIT v. Dewas Cine Corporation [1968] 68 ITR 240 (SC), which we have referred to hereinbefore. In a subsequent decision in the case of CIT v. Bankey Lal Vaidya [1971] 79 ITR 594 (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 [1979] 120 ITR 49, 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f 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 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. We must, however, refer to a decision of the Bombay High Court in the case of CIT v. Tribhuvandas G. Patel [1978] 115 ITR 95, where the assessee was a partner in a firm. In the case of ..... X X X X Extracts X X X X X X X X Extracts X X X X
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