JUDGMENT
S.B. Sinha, C.J.
1. Reference to this Court has been mae by the Income Tax Appellate
Tribunal, Delhi Bench ‘D’, Delhi (hereinafter referred to as the ‘Tribunal’) for its
opinion in relation to the following questions:-
“1. Whether on a proper construction of the deed
dissolution could it be held that it was a case of retirement of
the partner and not of the dissolution of the firm?
2. Whether on the facts and in the circumstances of the
case and in law the excess of Rs. 3,62,631/- received by the
partner on the dissolution of the firm could be subject to
asstt. as income under the head ‘Capital Gain’?”
2. The brief relevant facts are as under:
The assessed was one of the partners in M/s. Jyoti Prasad Jagan Nath.
The other two partners were Mr. Mukut Behari and Mrs. Mathri Devi. The said firm was
claimed to have been dissolved by a deed dated 19.05.1975 when the assessed went out
of the partnership business while the other two partners took over the continuing
business. The assessed got Rs. 6,47,176/- against his entitlement of rs. 2,84,545/- on
account of his capital and share of profit for the year ended 19.05.1974, ie., the
assessment year 1975-76. The assessed claimed that the excess sum of Rs. 3,62,631/-
was not assessable to capital gains, as the same is exempted under Section 47(ii) of the
Act being the assets received on dissolution of the firm. The Income Tax Officer (in
short, the ‘ITO’), however, held that there was no dissolution of the firm and the
assessed had retired from the firm and, therefore, capital gain was attracted. The ITO
held that the assessed’s going out of the firm and the other two partners containing the
business was merely a change in the constitution of the partnership and payment to the
outgoing partner came within the meaning of transfer under Section 2(47) of the Act.
The assessed preferred an appeal there-against before the Commissioner
of Income Tax (in short, the ‘CIT(A)’). The CIT(A) while accepting the contention of
the assessed held that the dissolved firm was governed by partnership deed dated
23.06.1965 which by para 9 stipulated that partnership was at will and by deed of
dissolution dated 19.5.1975 it was decided that the partnership shall be deemed to have
been dissolved w.e.f. the said date and by mutual agreement the assets of the firm were
divided between the various partners and the book value of the assets allotted to the
assessed was Rs. 3,97,176/- besides cash payment of Rs. 2,50,000/-. CIT(A), however
did not decide the assessed’s alternate contention that what he had received was in the
nature of goodwill, but observed that the assessed had no right to participate in the
goodwill on dissolution. Thereafter, the Revenue preferred an appeal before the
Tribunal, which while reversing the order of the CIT(A) and restoring the order of the
ITO held that there was no dissolution of the firm and the assessed had retired from the
firm and, therefore, capital gain was attracted.
3. Having regard to the order proposed to be passed, the question No. 1 viz.
as to whether the deed dated 19.05.1974 is a deed of dissolution or retirement need not
be considered in great details.
4. Mr. Salil Aggarwal, learned counsel appearing on behalf of the assessed,
contended that the said deed is required to be construed having regard to the entirety
thereof and if so read, it would be evident that it was a deed of dissolution and not a deed
of retirement.
In any event, the learned counsel would contend that in a case of
retirement, the assets received by a partner from a partnership firm cannot be treated to
be a capital gain.
The learned counsel further submitted that in view of the fact the
deed of partnership was executed w.e.f. 06.05.1975 in terms whereof, the assessed had
been taken in as a full-fledged partner; having regard to the provisions contained in
Section 43 of the Partnership Act, it must be held that he had right to dissolve the said
partnership.
The learned counsel contended that, in any event, as the continuing
partners entered into another partnership as regards a new business, the learned Tribunal
must be held to have arrived at a wrong finding. In support of the said contention,
reliance has been placed on Commissioner of Income Tax v. Tribhuvandas G. Patel,
reported in (1978) 115 ITR 95; Eskayef ltd. v. Income Tax Officer and Anr. reported in
(1986) 160 ITR 165 and Tribhuvandas G. Patel v. Commissioner of Income Tax
reported in (1999) 236 ITR 515.
5. Mr. R.C. Pandey, learned counsel appearing on behalf of the Revenue, on
the other hand, submitted that it is not a case where the Assessing Officer has not
allowed the claim as regards the assets derived from the partnership firm.
The learned counsel contended that the assets received by the assessed
from the partnership firm amount to Rs. 2,84,545/- in relation whereto there does not
exist any dispute.
It was further contended that and above the assessed has received a
sum of Rs. 3,62,631/-, which cannot be considered to be allowable in terms of Section
47(ii) of the Act, as it stood prior to its amendment in 1988. According to the learned
counsel, the excess amount of Rs. 3,62,631/- cannot be said to be a capital.
6. The contention of learned counsel for the Revenue appears to be correct.
In Tribhuvandas G. Patel (1978) (Supra) , the question which arose for
consideration was:-
“… … … … … … …
(3) Whether, on the facts and in the circumstances of the
case, the sum of Rs. 4,77,941/- or any part thereof was liable
to tax as capital gain by reason of Section 47(ii) of the Act?”
The answer to the said question rendered in the following term:-
“… in the instant case and the mode in which the
retirement of the assessed has taken place we have come to
the conclusion that the transaction amounts to a ‘transfer’
within the extended meaning of the expression as given in
Section 2(47) of the Act and the consideration received by
the assessed, therefore, will give rise to capital gains
chargeable to tax under Section 45 of the Act.”
7. The question is also covered by a decision in Sunil Siddharthbhai v.
Commissioner of Income Tax, reported in (1985) 156 ITR 509.
The questions involved in that reference were:-
“1. Whether, on the facts and in the circumstances of the
case, the Income-tax Appellate Tribunal was right in law in
holding that no capital gains resulted from the transfer of the
shares held by the assessed to the partnership firm as his
capital contribution, the cost of acquisition of the shares to
the assessed being Rs. 1,49,819/- and the market vale of the
shared being Rs. 1,60,279/-?
2. Whether, on the facts and in the circumstances of the
case, the Tribunal was right in law in holding that there was
a transfer within the meaning of Clause (47) of Section 2 of
the Income-tax Act, 1961 of the shares contributed by the
assessed as capital to the partnership firm in which he was a
partner?”
It was held:-
“… What the partner gets upon dissolution or upon
retirement is the realization of a pre-existing right or
interest. It is nothing strange in the law that right or
interest should exist in praesenti but its realization or
exercise should be postponed. Therefore, what was the
exclusive interest of a partner in his personal asset is, upon
its introduction into a partnership firm as his share to the
partnership capital, transformed into an interest shared with
the other partners in that asset. Qua that asset, there is a
shared interest. During the subsistence of the partnership,
the value of the interest of each partner qua that asset cannot
be isolated or carved out from the value of the partner’s
interest in the totality of the partnership assets. And in
regard to the latter, the value will be represented by his share
in the net assets on the dissolution of the firm or upon the
partner’s retirement.”
Thus, the aforesaid questions were answered in the following terms:-
“… In the result, the questions which arise in these
appeals are answered as follows:-
1. There was a transfer of the shares when the assessed
made them over to the partnership firm as his capital
contribution.
2. When the assessed transferred his shares to the
partnership firm, he received no consideration within
the meaning of Section 48 of the Income-tax Act,
1961, nor did any profit or gain accrue to him for the
purpose of Section 45 of the Income-tax Act, 1961.”
8. It may stated that the Gujarat decision in Commissioner of Income
Tax v. Mohanbhai Pamabhai reported in (1973) 91 ITR 393 is the only decision
directly on the point at issue before us but the question is whether the position of a
retiring partner could be equated with that of a partner upon the general dissolution for
capital gains tax purposes? The equating of the done by the Supreme Court in
Addanki Narayanappa v. Bhaskara Krishnappa , was not
for capital gains tax purposes but for considering the question whether the instrument
executed on such occasion between the partners inter se required registration and could
be admitted in evidence for want of registration. For capital gains tax purposes, the
question assumes significance in view of the fact that under Section 47(ii) any
distribution of assets upon dissolution of a firm has been expressly excepted from the
purview of Section 45 while the case of a retirement of a partner from a firm is not so
excepted and hence the question arises whether the retirement of a partner stands on the
same footing as that upon a dissolution of the firm. In our view, a clear distinction exists
between the two concepts, inasmuch as the consequences flowing from each are entirely
different. In the case of retirement of a partner form the firm it is only that partner who
goes out of the firm and the remaining partners continue to carry on the business of the
partnership as a firm, while in the latter case the firm as such no more exists and the
dissolution is between all the partners of the firm. In the Indian Partnership Act, the two
concepts are separately dealt with. Section 31 to 38 which occur in Chapter V deal with
the incoming and outgoing partners and some of the consequences of retirement of a
partner are dealt with in Sub-sections (2) and (3) of Section 32 while some others are
dealt with in Sections 36 and 37. Under Section 37, the outgoing partner or the estate of
the deceased partner, in the absence of a contract to the contrary, would be entitled at the
opinion of himself or his representatives to such share of the profits made since he
ceased to be a partner as may be attributable to the property of the firm or to interest at 6
per cent per annum on the amount of his shares in the property of the firm. The subject of
dissolution of a firm and the consequences are dealt with in Chapter VI – Sections 39 to 55. Section 48 deals with the mode of settlement of accounts between partners upon
dissolution and the rules of settlement of accounts between the partners mentioned
therein are subject to agreement by the partners, in other words, in the absence of any
agreement made in that behalf, the rules mentioned in the Section would apply. It would
be interesting to mention that the Partnership Act nowhere contemplates or deals with the
concept of any partial dissolution or a dissolution qua an individual partner, the concept
indicated in Section 39 appearing in Chapter VI is a total dissolution between all the
partners of the firm. Further, under Section 32, which occurs in Chapter V, retirement of
a partner may take any form as may be agreed upon between the partners and can occur
in three situations contemplated by Clauses (a), (b) and (c) of Sub-section (1) of Section
32. It may be that upon retirement of a partner his share in the net partnership assets
after deduction of liabilities and prior charges may be determined on taking accounts on
the footing of notional sale of partnership assets and be paid to him but the determination
and payment of his share may not invariably be done in that manner and it is quite
conceivable that, without taking accounts on the footing of notional sale, by mutual
agreement, a retiring partner may receive an agreed lumps sum for going out as and by
way of consideration for transferring or releasing or assigning or relinquishing his
interest in the partnership assets to the continuing partners and if the retirement takes this
form and the deed in that behalf is executed, it will be difficult to say that there would b
no element of “transfer” involved in the transaction.
9. A couple of things emerge clearly from the aforesaid passages. In the first
place, 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 amount due to him from the firm and give a receipt for the money and
acknowledge that he has no more claim on his co-partners. The former type of
transactions will be regarded as sale or release or assignment of his interest by a deed
attracting stamp duty while the latter type of transaction would not. In other words, it is
clear, the retirement of a partner can take either of two forms, and apart from the
question of stamp duty, with which we are not concerned, the question whether the
transaction would amount to an assignment or release of his interest in favor of the
continuing partners or not would depend upon what particular mode of retirement is
employed and as indicated earlier, if instead of quantifying his share by taking accounts
on the footing of notional sale, parties agree to pay a lump sum in consideration of the
retiring partner assigning or relinquishing his share or right in the partnership and its
assets in favor of the continuing partners, the transaction would amount to a transfer
within the meaning of Section 2(47) of the Act.
10. In Tribhuvandas G. Patel (1999) (Supra) , the dispute was with regard to
a sum of Rs. 50,000/- representing the share in the goodwill. Three questions were raised
in the said case, which are as under:-
“1. Whether, on the facts and in the circumstances of the
case, Rs. 1,72,182/- or Rs. 1,00,000/- were liable to be
included in the total income of the assessed as his share of
profit from the firm of Kumar Engineering Works?
2. Whether, on the facts and in the circumstances of
the case, the sum of Rs. 50,000/- received by the assessed
as his share of the value of the goodwill or any part thereof
was liable to tax as capital gain?
3. Whether, on the facts and in the circumstances of
the case, the sum of Rs. 4,77,941/- or any part thereof was
liable to tax as capital gain by reason of Section 47(ii) of
the Act?”
The Court noticed the fact of the matter and held:-
“The assessed was a partner with two others in a
partnership firm, Kumar Engineering Works. On
December 5, 1960, the assessed served a notice of his
intention to dissolve the firm with effect from December
31, 1960. Since the other partners refused to agree with
the said demand, the assessed filed a suit being Suit No. 72
of 1961 in the Bombay High Court for a declaration that
the firm was dissolved with effect from December 31,
1960, and for accounts and other ancillary reliefs.
Ultimately, the dispute was settled between the parties
under a deed dated January 19, 1962. Under this deed of
settlement the assessed was deemed to have retired from
the firm with effect from August 31, 1961, and the
remaining partners were authorized to continue to carry on
the business of the firm. The assessed was paid a sum of
Rs. 1,00,000/- as his share of profits of the firm for the
period ending August 31, 1961. In addition to this,
Rs. 1,00,000/- he was also paid Rs. 8,00,000/- including the
sum of Rs. 50,000/- representing his share in the goodwill
(question No. 2) and Rs. 4,77,941.47 representing his share
in the assets of the firm (question No. 3). In his
assessment proceedings, the assessed himself contended
that only the sum of Rs. 1,00,000/- should be brought to
tax and not the other amounts. In the assessment
proceedings of the firm, however, the shares of the assessed
in the profits was arrived at Rs. 1,72,155/- later reduced to
Rs. 1,36,930/-. The assessed’s contention was that
notwithstanding the said act, only a sum of Rs. 1,00,000/-
should be treated as his income. This was not agreed to by
the authorities. When the matter came before the High
Court, it answered the said question (No. 1) in the
following words (page 109):
“In view of the above discussion, the first question
is answered thus : on the facts and in the circumstance of
the case not Rs. 1 lakh, but the assessed’s shares of profit
that may ultimately be determined in the assessment of the
firm as his share of profit from the firm is liable to be
included in his total income.”
In our opinion the answer given by the High Court
is the correct one in law. We cannot agree with Mr.
Sharma that inasmuch as he has actually received only a
sum of Rs. 1,00,000/- only that amount should be taken as
his share of profits and not the actual amount worked out
in the assessment of the firm. The amount over and above
Rs. 1,00,000/- is also his income in law. It has accrued to
him. It is immaterial that he may choose not to recover
it.”
11. In view of the aforementioned authoritative pronouncement, there cannot
be any doubt whatsoever that whether it is held to be a case of dissolution of the partnership
as a retirement, having regard to the provisions contained in Section 47(ii) of
the Act, as it stood prior to 1988, the assessed was entitled only to the assets, he derived
from the partnership firm and not the excess amount. Thus, the aforementioned
question are answered (SIC).
12. This reference is disposed of accordingly.