TMI Blog2000 (7) TMI 207X X X X Extracts X X X X X X X X Extracts X X X X ..... sue that is involved in all these appeals concern itself with the amounts that were received by them in accordance with the provision of clause 16 of the partnership deed of the firm M/s. Mangalore Ganesh Beedi Works [MGBW for short]. These persons had received the amount in pursuance to the provisions of clause 16 of the partnership deed for allowing the remaining partners to continue to carry on the business of the firm as it used before some of the partners invoked the plea of dissolution of the firm MGBW, i.e., as a going concern. 3. One other partner of the firm MGBW, Mr. Ramanatha Shenoy had received similar amounts for agreeing to allow the remaining partners to continue to carry on the business of the firm as a going concern. His appeal before the Tribunal was captioned as ITA No. 258/Bang./1997. The Bangalore Bench of the Tribunal heard this appeal and passed its order on July 10, 1997. In this order the Tribunal the conclusion was that clause 16 of the partnership deed contained a special provision permitting dissolution of the firm with the option of the business being carried on as a going concern by one or more of the partners who pay the remaining partners their s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hai [1973] 91 ITR 393 could be extended to the case of partnership business being sold in entirety in court held auction? (6) Whether interveners have a 'locus standi' to intervene in an appeal on the ground that such interveners are likely to have similar issues in their own cases which are not already before that Bench of the Tribunal and whether Tribunal is justified in entertaining such interveners? 5. Hon'ble President of the Tribunal framed the constitution of the special bench to examine the issues involved in all these eight appeals with direction to hear these appeals on November 1, 1999. The above appeals were accordingly posted before us for hearing November 1, 1999 and we had heard them on November 1 2, 1999 and hence the present order. 6. Mr. Venkatesan, Chartered Accountant submitted his arguments for Mrs. Arathi Shenoy, Mrs. Pushpalatha, Mrs. Vatsala Shenoy and Mr. Suresh Rao. Mr. K.R. Prasad, Senior Advocate submitted his arguments for the estate of Mr. Raghuramaprabu through his L/R Mrs. Kaveribai, Mr. Janardhana Rao and Mrs. Hemalatha. Mr. Ananda Rao remained unrepresented because Mr. Venkatesan had submitted that the authority given to him earlier had bee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ovided for in sections 582 and 583 of the Companies Act before the High Court of Karnataka [HCK for short]. HCK examined the provisions of clause 16 of the partnership deed and expressed that in the interest of one and half lakh employees who were spread all over Karnataka State whose livelihood depended on the business of the firm a Chartered Accountant [CA for short] should examine the records of MGBW and determine the value of the assets and liabilities of the firm. Accordingly a CA was appointed by the High Court and was directed to submit his report to HCK. CA submitted his report to HCK in which he had determined the value of all fixed assets including goodwill at Rs. 28 Crores. 10. HCK considered the report of the CA along with other factors contained in the deed of partnership especially concerning the dissolution process. HCK considering the clause 16 of the deed or partnership that provided for the business being taken over by one or more of the partners as a going concern ruled that the partner or partners who are interested in the taking over of the business to submit their tenders indicating that the base price shall be Rs. 30 Crores. A few years had passed by before ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The other proposal was for substitution of the terms of the order that was on the method of calculation of the profit for the period from 1-4-1994 to the date of deposit. HCK found their pleas to be reasonable and accepted them and modified its order as reproduced in paragraph 11 above. The modified portion of the order is reproduced below : "(v) If the sale of the dissolved partnership firm as a going concern in favour of any partner or partners or any outsider as accepted by the Court, such offer shall, within 60 (sixty) days from the date of acceptance of the offer, deposit with the Official Liquidator the price or such part of the price together with the actual profits earned from 6-12-1987 till 31-3-1994 and the profits from 1-4-1994 till the date of deposit (after adjusting the Income-tax payable on pending assessment for the portion of the assessment year 1995-96) on the basis of the average profits for the last two years. Proportionate profits from 1-4-1994 shall be calculated on the basis of number of days from 1-4-1994 to the date of deposit." The final order on the acceptance of the tender was made by HCK on 21-9-1994 and this reads as under: "The highest bid amo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ount as on 31/03/1994 20,31,93,200 Total amount payable to outgoing -------------------------------- Partners 128,90,35,852 -------------------------------- Profit sharing ratio of partners after assignment of Mr. Vinoda Rao's share in favour of the following assignees Rs. 1. Estate of Mr. B. Raghuramaprabhu 16.059 2. Mr. M. Janardhana Rao Rs.8.472 3. Mrs. M. Pushpalatha 13.843 4. Mrs. M. Hemalatha 13.843 5. Mr. M. Suresh Rao 8.361 6. Mrs. M. Vatsala Shenoy 8.361 7. Mrs. M. Arathi Shenoy 8.361 -------------------------- Total 77.300 -------------------------- Statement showing the amount payable to the individuals Total of A+B+C Bid Amount and accumulated profits 131,90,40,459.41 Less: Debit balance in account of Mr. M. Vinoda Rao 4,44,34,468.98 ---------------------------------- Balance amount 127,46,05,990.43 ---------------------------------- --------------------------------------------------------------------------------------------------------------------------------------------------- Name of Partners Ratio Share in bid Debit balance Net amount amount and as on payable profits 31/03/1994 --------------------------------------- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ill 31-3-1994 and the receipt of notional profit for the broken period of 234 days is a subject-matter of reference made to the High Court of Karnataka within the meaning of section 256(1) of the Act and the reference is pending. 15. The Joint Commissioner of Income-tax (Assessment), Special Range, Mysore [referred to as Assessing Officer] was entrusted with the assessment of these eight assessees. Assessing Officer had the benefit of both the orders of the Tribunal in the case of the other partner of MGBW Mr. Ramanatha Shenoy. All assessees insisted that there case being identical to that of Mr. Ramanatha Shenoy and that he should follow the orders of the Tribunal. 15.1 Assessing Officer was not satisfied with the pleas of the appellants because on many issues he felt that the decision of the Tribunal could be otherwise. For one he felt that the Tribunal having come to the conclusion that consequent upon the partners being paid for surrendering their interest in the firm that resulted in extinguishments of their interest that involved transfer, the consequential conclusion should have been that it resulted in capital gain both long-term and short-term. 15.2 For expressing th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r purchase of an asset by the firm the share of each partner in the said is in proportion of capital brought in by him. He noted that where a partner brings into the firm an asset owned by him, his interest in the assets of the firm would be equal to the value of the asset brought in by him. He observed that the concept of mutual adjustment of rights is discussed in the Indian Partnership Act, 1932. He observed that section 14 of the Indian Partnership Act, 1932 read with section 45 of the Act describe the property of the firm to be (a) the property and rights and interest in the property brought in and (b) property acquired by purchase or otherwise including goodwill of business. 16.3 He observed that sections 14 and 37 of the Indian Partnership Act touch upon the option to purchase the interest of a partner in case of his death or of the out-going partner by the continuing partners. On the exercise of the option to purchase the interest by the continuing partners, the outgoing partners would be liable for capital gains on the excess amount received. He further observed that where the asset of the firm in which the partners have there share or share their interest in it and is s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... going concern was handled by the Official Liquidator attached to the High Court. Therefore, viewed from that angle, the correct status of the assessee for assessment year 1995-96 will be under section 160(1)(iii). The Assessing Officer, therefore, can assess the income directly in the hands of the beneficiary under sections 165 166. Section 166 specifically provides for direct assessment of the person on whose behalf or for whose benefit income is received. The sale proceedings have shown the beneficiaries in the instant case care out-going members including the assessee. It was the Official Liquidator who received the sale amount of Rs. 92 Crores and other amounts and further distributed the amounts to the out-going members." 17. Assessing Officer considered the capital contribution in the firm by each of the abovementioned appellants and compared it with the amounts received by them from the Official Liquidator. He had also observed that the growth in the value of the assets of the firm was not by an equal contribution of capital by the partners. He observed that the amounts that were paid or deposited with the Official Liquidator was after adjustment of the debit balance ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ir order dated 14-6-1991 fixed the minimum bid at Rs. 30 Crores for the entire firm. It is important to note that the valuation and appropriation of assets into long-term, short-term/depreciable assets is very much possible and it is not without any basis. Karnataka High Court order dated 14-6-1991 has in fact, in a way handed down fairly rational, scientific method which in turn has been based on sound accountancy principles adopted by CA's (Rao Swamy). It is this method that is being applied in this case. The same method was also adopted in the case of 2 partners i.e., M. Ramanatha Shenoy (assessment year 1995-1996) M. Vinod Rao (Assessment year 1994-95). Therefore, I need to emphasis that there is a rational and scientific basis and also consistency in the method that is being followed now. Detailed study and analysis of Balance Sheet of MGBW (AOP) for assessment year 1995-96 shows falsity in the assessees claim of his/her liability to appropriate long-term and short-term capital gains. This new concern has, in its Balance Sheet for assessment year 1995-96 shown following appropriation in the matter of addition to its assets of Rs. 92 Crores. Rs. Rs. Goodwill (this h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ---------------------------------- 1. Land as per H.S. 19.00 17,47,90,000 2,41,97,564 Seshagiri Registered valuer 2. Buildings -do- 4.10 3,80,00,000 * included in 3 below 3. Plant Machinery 0.30 25,00,000 *56.03,646 estimated on the basis of Swamy Rao's report 4. Goodwill - being 760 70,47,10,000 9,75,54,390 balancing figure remaining out of total figure of 92,00,00,000 also being almost same figure if super profit method is adopted From the above table it is also clear that the above ratios or percentages can be rationally adopted to quantify the value of goodwill (long-term), land (long-term), building and plant machinery (Depreciable assets) in the case of net value of assets, rights etc., to Rs. 12,73,55,600 - received by the assessee. As a matter of clarification, it is noted that there is not much time gap between above valuation and time when assessee received the share. TABLE-3 Appropriation of sales/market value of different assets in case of for the assessment year 1995-96 ---------------------------------------------------------------------------------------------------------------------------------------------------- No. Asset %age Sales/market ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at the decision of the apex court in Addl. CIT v. Mohanbhai Pamabhai [1987] 165 ITR 166 was not attracted to the facts of the case because in the case before the apex court the issue was that of a retirement of a partner or dissolution of the firm and consequent distribution of the assets of the firm in the course of dissolution. He upheld the orders of the Assessing Officer on all counts. 19. The appellants aggrieved by the orders of both the lower authorities have preferred their appeal before the Tribunal. As observed earlier not only the facts apply to all the appellants uniformly, their pleas are also uniformly the same and identical. Mr. Venkatesan raised one additional ground and pleaded that it was a legal ground and the same be admitted. The additional ground reads--- "The appellants beg to submit that they may be awarded costs in prosecuting the appeal and also order for the refund of the institution fees as part of the costs in view of the fact that the appellants have prosecuted the appeal on account of the authorities below in not following the decisions of the Hon'ble Tribunal." This additional ground shall be dealt with at its appropriate place later in this or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assets of the firm. Referring to the decision of the apex court in Sunil Siddharthbhai v. CIT [1985] 156 ITR 509/23 Taxman 14-W, it was submitted that the court had clearly laid down that a partner by bringing in any of his individually owned asset as his capital contribution to the firm, no longer can claim any ownership right on that property inspite of the fact that such contribution did not result in any transfer of an asset. 20.3 The counsels for the appellants submitted that the situation of distribution of assets consequent to dissolution of the firm is exact opposite to the one that was considered by the apex court in Sunil Siddharthbhai's case. It was pleaded that the partners who had only interest on the assets, they become defined and specific on such assets being allotted to them in settlement of their rights in the firm's assets. The right that existed all the time is only magnified and therefore, the receipt of their existing rights in the firm does not result in any transfer and consequently no capital gains is attracted. It was contended that the settlement of the account of the partner on dissolution is by considering his capital account, drawing account and oth ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... HCK for winding up, the firm comprising of a compendium of partners ceased. It was at the instance of HCK that the partners of the erstwhile firm had agreed to remain united till the final picture is pronounced by HCK and it was this feature that brought about the concept of AOP. AOP in view of HCK's direction became in a way owner of the business and the assets of the erstwhile firm and they were trustees of the firm because the AOP could not appropriate anything amongst them and they were functioning as any other receiver would function during the winding up of a company. The property was that of the firm and it is only the firm that could have parted with it. Because of the strange situation of firm not being continuing and because the partners did not wish to carry on the business in the same manner as they did till 6-12-1987 and it was in the course of winding up that during the intermittent period the erstwhile agreed at the instance of HCK to carry on as it used be till the winding up or the dissolution. 20.7 It was also contended that the apex court very well appreciated the concept of partnership in Addanki Narayanappa v. Bhaskara Krishnappa AIR 1966 SC 1300. In this cas ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... joint bid but, the bid of the 3 was higher HCK accepted it. This joint bidding brought with it the AOP of 3 members and AOP of 7 and two members individually. Therefore, the AOP of 7 members had received the amount on behalf of its members and it is only this AOP of 7 members could perhaps be called as having agreed to give over the rights of its 7 members in favour of AOP of 3 members. It was also contended that the Official Liquidator had received on behalf of the out-going partners and if at all any proceeding could be initiated under the Act, it could be on him only. It was pleaded just like a receiver appointed by a court to carry on the business till it is wound up and assessments of income are made on him as a representative, the Official Liquidator is the representative assessee of the above appellants. It was on this basis the plea made was that the assessments framed on the appellants deserve to be quashed. 21. Mr. Indrakumar, the Standing Counsel for the Department supported the orders of the two authorities. He laid emphasis on the fact that what all transpired before the High Court with reference to the parties who agitated before it could not be lost sight of. He c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he distribution of the assets of the firm in the partnership agreement between the partners. A firm is bound by the agreement or contract entered into by the partners and such agreement binds the partners too inter se. One of the point on which the partners may express their agreement is about the dissolution of the firm and the manner in which the assets of the firm, business, etc., shall be distributed amongst them. In the instant case, the partners of MGBW had expressed their agreement on the dissolution of the firm and the consequent settlement of accounts inter se and this is so expressed in clause 16 of the deed of partnership and this is reproduced hereunder as it is the basis on which the appellants became entitled to make their claim and get it. "If the partnership is dissolved, the going concern carried on under the name of the firm Mangalore Ganesh Beedi Works and all trade marks used in the course of the said business by the said firm and under which the business of the partnership is carried on shall vest in and belong to the partner who offers and pays or two or more partners who jointly offer and pay the highest price therefore as a single group to a sale to be the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of allowing the three a free hand in carrying the business along with the trade marks. 22.3 HCK before giving its final ruling on the bid had considered the allegations made by some directed that the business be continued as it used to be. This aspect was taken into account by HCK in its final ruling that is why it contained that part of the amount representing the actual profits for the period from 6-12-1987 till 31-3-1994 and for the period from 1-4-1994 till 20-11-1994 also to be deposited by the bidders. 22.4 There was no agreement amongst the partners to extend the life of the firm on from 6-12-1987. Two of the partners had called for the dissolution from 18-12-1987. They filed a petition for winding up before HCK. HCK considering the livelihood of one lakh fifty thousand employees depended on the business of the firm had directed the business to be continued. This business was carried on without there being any agreement between the partners from 6-12-1987 and hence the profits of the business came to be assessed on an entity AOP up to assessment year 1994-95. 22.5 In dissolution of a firm there is distribution of assets of the firm between the partners inter se. The m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eir joint bid. But because the bid of 3 members was higher the same was accepted. 22.8 The question that needs our consideration is, does this bid by 3 and acceptance by 7 and 2 others bring about the concept of AOP of 3 members, AOP of 7 members and 2 individuals. In order to provide an answer to this question it needs to be appreciated the events that transpired from the time of dissolution. The firm MGBW was yet to be dissolved and from the time it was sought to be dissolved till the time 9 members/partners of AOP/firm were paid through the Official Liquidator, the AOP that was carrying on the business did not get any ownership rights on any of the assets of the erstwhile firm. All that happened was that there being no firm in existence and during the pendency of the settlement the business that was carried on by all was classified as AOP, i.e., members remaining together for a common purpose and that was settlement as desired before HCK HCK had directed that the bidder must deposit the amounts into a Nationalized Bank in the name of the Official Liquidator. HCK also defined the role of the Official Liquidator to receive the amounts and pay to the litigants of the respective a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r because of certain irreconcilable differences which have arisen between them ...... As could be seen from the very statement of the learned Company Judge as to his view of clause 16 of the partnership deed and the submission of the learned counsel for the respondents 2 to 7, referred to therein, all that could be said is that there, was on the part of the learned Company Judge an endeavour to bring about an amicable settlement among the partners of the partnership - parties to the present Company Petition..... Coming to the interlocutory order dated 3/5/11/1988 made by the learned Company Judge on Company Application No. 764/1988, it is an order made to restrain respondents 2 to 7 from carrying on their newly started 'beedi' business under the name and style of 'New Mangalore Ganesh Beedi Company', pending final disposal of the present Company Petition, having taken the view that if such business is allowed to be carried on, the same would jeopardize the interest of the business of the dissolved partnership firm, the winding up of which is sought, particularly when that business is allowed to be carried on by the Court....... The very object of clause (16) is to enable the firm t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... never existed. This is because settlement always has to be between partners inter se though they may bring in an outside agency to settle their dispute. The outside agency is no more than an arbitrator and therefore, has no interest in the dispute. It is only the interested parties to the dispute could receive their claim. Because 3 and 7 persons joined together to place their bid, it does not bring in new parties of 3 and 7 as AOP and this is obvious for they were not parties to the dispute at the start of the dissolution. Accepting this proposition would mean and result in a situation of dissolution started with 12 but settled with a group of 3 and 7 and 2 individuals but not with those 12 persons. 22.14 Though, it may be argued that the group 3 and 7 were satisfied through the AOP, it is not the same as settlement between the 12 persons. In other words it would mean that though HCK ruled that it is only partners could make the bid and the partner did make their bid and the remaining partners had to give their undertaking to the bidders that they would give a free hand to the bidders for carrying on the business along with the trademarks, this AOP concept would go contrary to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... her observe that the Official Liquidator was concerned with the amounts to be paid to the respective individuals according to the amounts against their respective names and he had made the payment to the individuals and not to any AOP of 7 because neither HCK nor the Official Liquidator was aware of any AOP at all. 22.17 The transfer of interests in the firm was by some of the partners to the other partners and it is not a case of firm distributing the assets or the proceeds of the assets amongst the partners. It is also not a case of dissolution of an AOP and distribution amongst its members because, there was no transfer from the firm to AOP and it is a well known proposition that no one can give a better title than he had at the time of sale. When AOP was not the owner of the assets, it could not have sold any thing. As the facts show that the partners had acted as agreed to by them in their deed of partnership of paying off the uninterested partners for their rights and shares for being allowed a free hand to carry on the business. 22.18 The plea of the appellants that the assessments should have been on the AOP of 7 is accordingly without any basis and hence, rejected. In ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ers. The partners rose to the occasion and place their highest bid that was accepted by HCK and consequently by the parties to the litigation, is indicative that the rights and interest of the partners of the firm has to be evaluated with reference to this highest bid. This was what the authorities below did and the authorities found that the price received by the parties for their interests in the firm exceeded the cost and because, there was a transfer of capital asset, tax on capital gains was levied. In our considered opinion the authorities had proceeded on right and proper lines in all these cases and by invoking or applying the provisions of the Act that was attracted, namely, transfer resulting in capital gains. 22.22 The counsels for the appellant had insisted that the Tribunal should follow their earlier decision in Ramanatha Shenoy because, it was pronounced on the same set of facts and he was one other partner who had received the payment for giving up his rights and interests in the firm as was held by the Andhra Pradesh and the Gujarat High Court. The two decisions of the Andhra Pradesh High Court are in CIT v. P.H. Patel [1988] 171 ITR 128/[1987] 34 Taxman 479 and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rs. Certain transactions that are transfers in the ordinary course are continued to be exempted from capital gains tax like properties received consequent to the partition of HUF and so on. Till the assessment year 1987-88, the assets received by the partner on dissolution of the firm was not taxed but, from the assessment year 1988-89, the distribution of assets by a firm consequent to its dissolution attracts capital gains tax. Section 47(ii) of the Act has been amended effective from 1-4-1988 and 'distribution of assets on dissolution of firm, body of individuals or other association of persons' that was regarded not as transfer till assessment year 1987-88 was deleted. 22.25 The Act could indicate some of the transactions as not liable to capital gains tax and so on and unless the transaction is such that it squarely falls within the exempted clause, the transaction would be liable to tax. Stretching of any provisions of the statute that would make the application of the section and its provision ineffective would not be proper implementation of the provision. Apex court had ruled that no court has any authority to add or remove any word to the provisions as enacted so as to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... .28 In CIT v. Bangalore Turf Club Benevolent Fund [1984] 145 ITR 323 16 Taxman 357 the Karnataka High Court the issue was whether the amount of fines, etc., levied by Bangalore Turf Club and transferred to the assessee is its income. The High Court ruled that it is not its income. This is based on the fact that when the recipient of the income is one person and that income is transferred to another person, the income is not assessable in the hands of the transferee. In the instant case, the real recipients of the sale proceeds of the share of rights and interest are the individuals, the appellants in the instant case and by virtue of the jurisdictional High Court ruling, it is not open to them contend that the income is assessable in the hands of another entity AOP. AOP as observed above has come into being because HCK had permitted the carrying on of the business in the fashion as it used to be earlier till the petition before it is disposed of. AOP never became owner of the assets of the firm MGBW as there was never any transfer in its favour and it was the firm that was being considered for dissolution and not the AOP, i.e., dissolution of AOP was never an issue at any time by a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... excess of the balance in their respective capital accounts could be attributed to capital gain. However, the AO himself had not proceeded on this basis, and it was not so claimed by the Department, the capital gains could not be considered as relatable to excess over the capital account balance. 22.32 The other alternative that is likelihood is with reference to the base price of Rs. 30 Crores. This was the price fixed as minimum by HCK for purpose of dissolution. The partners could consider the corresponding amount credited to their capital accounts as the price on revaluation of assets for settlement of accounts and withdrawal of capital accounts if done may not result in any capital gain. But, since, this was not so done, this possible contention may not arise in the instant case. 22.33 This leaves the only alternative of relating the gains on the assets is with reference to the valuation of each asset in order to determine the capital gain on the transfer of the interest in the firm. HCK while dealing with the minimum price had touched upon the fact that poor people mostly smoke beedis and they normally prefer a brand that gives them the most satisfaction. Further they also ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d name and may be by the name of the company that makes the brand. Therefore, the brand name has definitely a value and it adds up the value of the goodwill separately. Copyrights are assets and no person other than the person owning it could make copies of the same. These are again registered just like patents, trademarks. These have their initial cost and subsequent renewal charges. These being assets that have a value and being transferable, they have to be related to their respective market value as on the date of sale and the option of the assessee to substitute its value on 1st April, 1981. 22.36 One possible method that appeals to us is the value adopted by the buyers for the simple reason that they remain the best judges as to the value of the assets that they have been able to acquire. Land, Buildings, etc., the tangible assets have been considered with reference to the valuation reports and more or less the values are near about the same. Goodwill is one item that comes with the package and the other items are trademarks, trade names and copyrights. Adopting the price that has been depicted by the buyers in their balance sheet could be reasonable guide in regard to the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rder from the High Court in that case but, could not do so on the basis of an order made in another case. 22.39 The other aspect of this matter is that Department that has sought reference in the case of Ramanatha Shenoy on the aspect of capital gain is attracted or not, could not have applied the decision of the Tribunal in other partner's cases because, it would be similar to self-goal or self-defeating of its cause. In our view, the following of the decision of the Tribunal that is final authority on facts is to be insisted upon only where the decision of the Tribunal has been accepted as final with no question of law being referred to the opinion of the High Court. We accordingly reject this plea of the appellants. 22.40 Finally we shall deal with the aspect of taxability of the profit for 234 days as revenue income. The assessee does not accept the decision of the Tribunal in that case and the reference is pending. HCK was concerned with two aspects of the issues agitated by the parties before it. One, the price for buying off of the shares of partner or partners because, the partners had sought for winding up and dissolution. Second, because it directed that the business ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... business but that it is the individual partners who are the owners and who are liable for capital gains tax on the business being taken over by a group of three erstwhile partners. It was further contended that an AOP can acquire, hold and sell property and the view of the income-tax authorities to the contrary is wrong. Our attention was drawn to the provisions of section 26, section 27(iii), section 49(1)(iii)(b) and section 47(ii) of the Income-tax Act in this behalf. It was then contended that in the balance sheet of the AOP, the assets of the erstwhile firm were shown as assets thereby reiterating the claim that those assets belonged to the AOP as such and not to the individual partners. Reliance in this connection was placed on the order of the Pune Bench of the Tribunal in P.N. Devgirikar's case. It was also contended that the partners of the erstwhile firm had come together to sell the business undertaking as such and since the Hon'ble High Court of Karnataka has said that the business must be sold as a going concern, it must be taken that the partners of the erstwhile firm had come together at least for the purpose of effecting the sale and such coming together was suffic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ny AOP. In our opinion, there is no coming together of the erstwhile partners. What really happened, if things are seen in proper perspective, is that each partner conveyed his share or interest in the erstwhile partnership firm to the successful bidders for a price. Therefore there was no AOP which could be taxed on the capital gains arising out of the transfer. In the case of CGT v. R. Valsala Amma [1971] 82 ITR 828 (SC), the assessee and her sister received a cinema theatre with machinery and another building called 'Police Quarters' under the Will of their mother. Each of them had a half-share in the properties. They gifted their properties to their brother by means of a single document of gift. On these facts, it was held by the Supreme Court that in law, since each one of them had a half-share in the properties, they were holding them as tenants in common and therefore each one must be held to have made a gift of her share in the properties though the gift was made through a single document. It was further held that the fact that they did not divide the property was not material. It was therefore held that the assessee and her sister could not be taxed as an AOP or Body of in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cover such a situation and the profits earned by the business after the dissolution could not be brought to income-tax in the hands of the firm. However, the profits which were substantial cannot also be permitted to escape taxation. Therefore, it was that a method was devised, which also had the tacit approval of the income-tax authorities, by which the profits could be assessed and the most appropriate status in which the profits could be assessed was that of an AOP. The conduct of the assessee in filing the returns in the status of an AOP and that of the income-tax authorities in accepting the returns should, in our opinion, be confined only to the purpose of taxing the profits of the business and cannot be read as a conscious or deliberate act on the part of the erstwhile partners to associate or join together with the common object of producing income or with the common object of conveying the business as such as a running concern to the successful bidders. Similarly, in our opinion, nothing more can be read into the conduct of the department in accepting the returns filed in the status of an AOP. By accepting the returns in the status of an AOP, the income-tax authorities ca ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rs, which was wholly different from the AOP consisting of 12 members, which existed earlier. In this view of the matter, the fact that returns of income were filed in the status of an AOP consisting of 12 members and accepted by the income-tax authorities has no relevance or significance so far as the claim that it was an AOP consisting of 9 persons members which transferred the business as a going concern to the successful bidders is concerned. It is another matter that, as we have held, there is no evidence to show the existence of an AOP consisting of 9 members, as claimed by the appellants, which could be stated to have transferred, in concert, the business of the erstwhile firm to the successful bidders. 30. The provisions of sections 26,27(iii), 47(ii) and 49(1)(iii)(b) which were referred to on behalf of the appellants no doubt support the proposition that in law an AOP as such can acquire, hold and sell property. However, the question is whether there was an AOP at all. In our opinion, there was no AOP. Therefore, these statutory provisions do not assist the case of the appellants. If anything, section 26 would appear to go against the contention of the appellants inasmuc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ayanappa case is that the partner becomes entitled to a share in the assets of the firm which remains after satisfying the liabilities set out in clause (a) and sub-clauses (i), (ii) and (iii) of clause (b) of section 48 of the Indian Partnership Act. When the partners have become entitled to receive such share upon dissolution, unless there is some overt or conscious act on their part, apart from the mere entry in the balance sheet of an alleged AOP, it is not possible to spell out a merger of such shares of the erstwhile partners into a common pool so that it could be stated that there was an Association of Persons (AOP) which could be stated to have sold the business to the successful bidders and thus become liable to tax on the capital gains. We are therefore not prepared to regard the accounting treatment as conclusive of the matter. 32. In support of the argument that the individual partners of the erstwhile firm were not liable to capital gains tax, attention was drawn to the finding recorded by the Tribunal in the case in ITA No. 591 to the effect that there was no distribution of any assets amongst the partners in December, 1987, a finding, which has been accepted by the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... en there will be no liability to capital gains tax in the hands of the erstwhile partners on the principle laid down by the Supreme Court in CIT v. Bankey Lal Vaidya [1971] 79 ITR 594 and Malabar Fisheries Co.'s case, as rightly contended on behalf of the appellants. But we have before us a somewhat peculiar case where there was a dissolution of the firm in December, 1987, followed by the continuance of the business of the firm by virtue of clause (16) of the partnership deed solely for the purpose of enabling a partner or group of partners to successfully bid and purchase the interests of the other partners. Clause (16) expressly mentions that the continuing business shall vest in the successful bidder or bidders in a sale to be held amongst the partners at which sale nobody other than the partners shall be entitled to bid. The clause further says that the partners who have sold their interests to the successful bidders shall execute and complete in favour of the "purchasing partner or partners" all such deeds etc. as are necessary for the completion of the transaction. What the partners could sell to the successful bidders is only their respective interest in the dissolved firm. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... we find facts similar to the facts obtaining in the cases before us. 34. We cannot also accept the alternative contention that the fair market value of the capital asset in 1987 should be adopted as the cost of acquisition of such asset because the partners did not become entitled, for the first time, to share in the net assets of the partnership firm. That right was acquired by them the moment they became partners in the firm but the occasion for working out that right arose only in 1987, but that is quite different from saying that they acquired the right to share in the net partnership assets in the year 1987. 35. It was further contended on behalf of the appellants that the sale was of a going concern for a slump price and therefore there was no liability to capital gains tax. In this connection, one of the arguments advanced was that the sale was of the undertaking as a whole, which is different from the components thereof and nowhere in the calculations has any break-up been given apportioning the price of various assets. It was also argued that there was no cost of acquisition or cost of improvement in respect of the going concern as such and even the date of coming int ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sting that the fair market value as on 4-12-1987, reasonably estimated, could be taken as cost of acquisition, the appellants have recognised that it is possible to envisage a cost for the capital asset and that the asset is not one of which it is not possible at all to envisage a cost. The contention therefore fails. 38. Grounds have been taken, and some arguments were also advanced, on the question whether the Assessing Officer was justified in treating the capital gains, insofar as they related to Goodwill and Land, as long-term capital gains and the capital gains, insofar as they related to depreciable assets, as short-term capital gains. It was submitted that the entire capital gains, if taxable, should be treated as long-term. The Assessing Officer has, in our opinion, rightly classified the various components of the right, as per the date of acquisition and the provisions of section 50, as long-term or short-term. When the actual figures are available in respect of each of the assets and the provisions of section 50 are applicable to some of them, we do not find any merit in the claim that no part of the capital gains can be assessed as short-term. We therefore reject the ..... X X X X Extracts X X X X X X X X Extracts X X X X
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