JUDGMENT
S.B. Sinha, C.J.
Reference to this court has been made 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 of 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 assessment 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 19-5-1975, 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 entitlements of Rs. 2,84,545 on account of his capital and share of profit for the year ended 19-5-1974, i.e., 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, 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 Income Tax Officer held that the assessed’s going out of the firm and the other two partners continuing 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 (hereinafter referred to as the ‘Commissioner (Appeals)’). The Commissioner (Appeals) while accepting the contention of the assessed held that the dissolved firm was governed by partnership deed dated 23-6-1965, 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 with effect from 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. Commissioner (Appeals), 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 Commissioner (Appeals) and restoring the order of the Income Tax Officer 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 19-5-1974, is a deed of dissolution or retirement need not to 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 that the deed of partnership was executed with effect from 6-5-1975, 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 a 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 CIT v. Tribhuvandas G. Patel (1978) 115 ITR 95 (Bom), Eskayef Ltd. v. ITO & Anr. (1986) 160 ITR 164 (SC) and Tribhuvandas G. Patel v. CIT (1999) 236 ITR 515 (SC).
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 over 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 gain.
6. The contention of learned counsel for the revenue appears to be correct.
In CIT v. Tribhuvandas G. Patel (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 was 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. CIT (1985) 156 ITR 509 (SC).
The questions involved in that reference were :
“1. Whether, on the facts and in the circumstances of the case, the 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 value of the shares 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 a 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 the 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 be stated that the Gujarat decision in CIT v. Mohanbhai Pamabhai (1973) 91 ITR 393 (Guj) 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 two done by the Supreme Court in Addanki Narayanappa v. Bhaskara Krishnappa AIR 1966 SC 1300, 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 from 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. Sections 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 sub-section 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 share in the property of the firm. The subject of dissolution of a firm and the consequences are dealt with in Chapter VISections 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 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 clause (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 lump 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 be 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 v. CIT (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 5-12-1960, the assessed served a notice of his intention to dissolve the firm with effect from 31-12-1960. 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 31-12-1960, and for accounts and other ancillary reliefs. Ultimately, the dispute was settled’ between the parties under a deed dated 19-1-1962. Under this deed of settlement the assessed was deemed to have retired from the firm with effect from 31-8-1961, 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 31-8-1961. In addition to his, 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 share 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 fact, 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 (p. 109) :
“In view of the above discussion, the first question is answered thus : on the facts and in the circumstances of the case not Rs. 1 lakh, but the assessed’s share 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 pronouncements, there cannot be any doubt whatsoever that whether it is held to be a case of dissolution or the partnership and 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 questions are answered in favor of revenue.
The reference is disposed of accordingly.
OPEN