ORDER
1. The appellant-revenue, by the present appeal, challenges the correctness of the order dated 3-2-1987, of the learned Appellate Assistant Commissioner, for assessment year 1983-084, inter alia, on the following ground :-
“The ld. AAC has erred both in law and on facts in holding that the sum of Rs. 40,000 received by the assessee from the firm over and above the capital as per books was not liable to capital gains tax.”
2. By status, the assessee in this case is an individual and was a partner up to 31-12-1982 in the firm known by the name and style as M/s Rajindra Agro Industries, carrying on business of manufacturing, purchase and sale of various kinds of agricultural implements, auto parts, cycle parts, tractor parts, etc. The accounting period was the year ending 31-3-1983 and the accounts were maintained on mercantile basis. Return in this case was filed on 30-9-1983, declaring net income of Rs. 14,514. It was noted by the by the learned Income-tax Officer during assessment proceedings that the assessee had retired from the above firm, vide deed executed on 31-12-1982. Copies of arbitration award dated 28-12-1982 and arbitration agreement dated 21-12-1982, were placed on record. The ld. ITO understood, after perusal of those papers, that this was a case of retirement of a partner from the firm and not dissolution of the firm. From the dissolution deed, it was noted by the ld. ITO that party of third part, i. e., the assessee in this case, had retired from the firm, leaving the entire assets and liabilities including the goodwill of the firm, trade marks, stock-in-trade, excepting land and building under construction at plot No. B-34, Focal Point, Ludhiana, to the parties of first and second part. The parties of first and second part had taken over the business of the firm as a going concern and all the benefits attached thereto. In fact, the remaining partners constituted themselves into a new firm and continued the same business. The ld. ITO considered that in this case there was a mere reconstitution of the firm and there was no dissolution. The dissolution was said to be result of retirement of the partner from the firm. He considered that any amount received by the outgoing partner, i. e., the assessee, in excess of the amount standing to his credit on his joining, the same will constitute gains arising form a transacting amounting to transfer within the meaning of section 2(47) of the Income-tax Act. According to him, the assessee was liable to pay capital gains on the amount, he receive, over and above the value of his share in the firm. Thus, inclusion of Rs. 40,000 was made on account of capital gains, with the following observations :-
“The assessee by mutual agreement is a retiring partner and agreed to receive a sum of Rs. 40,000 for going out and by may of consideration for transferring or releasing or assigning or relinquishing his interest in the partnership assets to the continuing partners. There has been no determination of payment of his share on the footing of notional sales of partnership assets and hence it is a transfer chargeable to capital gains. As per clause 3 of the Arbitration award, the assessee is entitled to receive plot and building at Focal Point and as per clause 4, the total cost of this at Rs. 3,09,094 is to be adjusted against the capital of the assessee and shortfall up to amount of Rs. 40,000 is to borne by the continuing partners. In other words, the assessee relinquishment his interest in the partnership concern and is entitled to receive his capital as per the books plus Rs. 40,000 and instead of receiving these amounts in cash, he is entitled to take the Focal Point plot, and building. This entitlement to lump sum of Rs. 40,000 for relinquishment of his share or right in the partnership and its assets in favour of the continuing partner, is liable to capital gains, as it is a transfer within the meaning of section 2(47) of the Act, Reliance is placed upon Bombay High Court judgment in CIT v. H. R. Aslot [1978] 115 ITR 255 and CIT v. Tribhuvandas G. Patel [1978] 115 ITR 95.”
3. Sh. Subhash Aggarwal, ld. A. R., argued the matter before the ld. AAC and brought on record detailed argument. He also placed reliance on the cases in CIT v. L. Raghu Kumar [1983] 141 ITR 674 (AP), CIT v. N. Palaniappa Gounder [1983] 143 ITR 343 (Mad.), Addl CIT v. Smt. Mahinderpal Bhasin [1979] 117 ITR 26 (All.) and CIT v. Bhupinder Singh Atwal [1981] 128 ITR 67 (Cal.). After examining the ratio in those cases, the ld. AAC came to the conclusion that the amount received by the assessee in this case was not liable to capital gains. He thus deleted the inclusion of Rs. 40,000 made by the ld. ITO.
4. Therefore, the present appeal, by the revenue, before us, The ld. Sr. D. R. Sh. D. Chatterjee placed heavy reliance on the assessment order and placed further reliance on the ratios in the following cases :-
(a) A. S. Krishna Shetty & Sons v. Addl. CIT [1975] 100 ITR 587 (Kar.);
(b) CIT v. Tribhuvandas G. Patel [1978] 115 ITR 95 (Bom.); and
(c) CIT v. H. R. Aslot [1978] 115 ITR 255 (Bom.).
According to the ld. Sr. D. R., there was a clear transfer of assets from the firm to the outgoing partner and that this being a case of mere reconstituted fir, the ld. ITO was justified to include the difference, on account of capital gains and the ld. AAC unjustifiably excluded the said sum. It was pointed out that the ld. AACs order was very brief and there was no proper discussion on the facts and issues.
5. On behalf of the assessee, the ld. counsel Sh. Subhash Aggarwal relied upon the ratios and the decisions mentioned in the impugned order and further placed reliance on the ratios in the following cases :-
(i) CIT v. P. H. Patel [1987] 34 Taxman 479/ [1988] 171 ITR 128 (AP);
(ii) Addl. CIT v. Mohanbhai Pamabhai [1987] 165 ITR 166 (SC); and
(iii) Sunil Siddharthbhai v. CIT [1985] 156 ITR 509 (SC).
It was argued by Sh. Aggarwal that the firm got dissolved on 31-12-1982 and in this connection, our attention was invited to page 6 of the paperbook, being a copy of the dissolution deed. Mention was also made of the copy of account of the assessee in the firm M/s Rajindra Agro Industries, for the period from 1-4-1982 to 31-12-1982, wherein a sum of Rs. 2,56,543 was shown on the credit side and another amount of Rs. 3,09,094 on the debit side. Page 12 of the paperbook, again being copy of account of the assessee, was mentioned to show as to how an amount of Rs. 40,696 was received by the assessee in excess of the value of his share, in terms of the arbitration award and the consequential dissolution deed. According to him, a wrong including was rightly vacated.
6. Sh. Aggarwal also argued that the transaction in this case was relatable to assessment year 1984-85 and, therefore, could not have been discussed and decided in this year. It was also argued by him that at the most, the amount of Rs. 40,000 could be considered as gift made to the assessee by the two partners @ Rs. 20,000 each and thus it could not be the subject-matter of capital gains.
7. In reply, it was pointed out by the ld. Sr. D. R. that mention of gift was a new case and cannot be set up at this stage. It was pointed out that Rs. 40,000 was paid extra by the firms to the assessee to get rid of him, as there were said to be some differences and it constituted capital gains taxable under the provisions of the Income-tax Act.
8. Submissions made on behalf of the contesting parties have been heard and record carefully perused. Undisputed facts in this case are that a firm by the name and style, mentioned hereinabove, was constituted with three partner, namely, S/Sh. Rajinder Pal Sood, Satish Sood and Suresh Sood. From the recital in the dissolution deed, copy placed at page 6 of the paperbook, it is seen that as if Satish Sood and Suresh Sood were sons of first partner Rajinder Pal Sood. Subsequently, some differences were said to have cropped up between the partners and the matter was referred for arbitration, by Sh. Sham Lal. Arbitration agreement was entered into between the concerned parties on 21-12-1982 and the award was actually made on 25-12-1982, as is clear from the copy placed at page 9 of the paper book. As a result of that arbitration award, the firm got dissolved on 31-12-1982, as is clear from the deed, and the assessee Sh. Suresh Sood retired from the business, leaving the entire assets and liabilities, including the goodwill of the firm, trade marks, and stock-in-trade, and got only land and building under construction at B-34, Focal Point, Ludhiana. Other partners had taken over the business as a going concern, along with other benefits and liabilities. As is clear from pages 11 and 12 of the paperbook, the assessee got, on account of value of the property, he received, an extra amount of Rs. 40,696. It means that the value of the assessees share was computed and then plot was given to him, whose value was more than the value of the assets, by an amount of Rs. 40,969. According to the ld. ITO, extra amount of Rs. 40,696 was a capital receipt received by the assessee as a result of transfer of his share to the firm and getting the plot in lieu thereof. Since, according to the ld. ITO, there was a transfer, difference of Rs. 40,696 was taxable as capital gains, and so he did.
9. When the matter came before the ld. AAC in second appeal, he, relying upon the ratios in the cases mentioned in paragraph 2 of his order, deleted the addition made on account of capital gains. Thus, the matter has come to us at the instance of the revenue, against that finding of the ld. AAC.
10. On behalf of the revenue, mention was made of the ratio in the case of Tribhuvandas G. Patel (supra), where it was held that when the firm got dissolved, the amount paid to the retiring partner for his share of assets of the firm could not amount to distribution of assets on dissolution, and the amount paid in consideration for transfer of right of partner was considered as liable to capital gains. This ratio was subsequently repeated in the case of H. R. Aslot (supra) and decided by the same Honble High Court, at page 255. This is the master reliance by the revenue. Mention by the ld. Sr. D. R. was also made of the case of A. S. Krishna Setty & Sons (supra), wherein the revenue authorities were found to be right, by the Honble Karnataka High Court, in holding that there was a transfer of machinery and plant by the assessee-firm in favour of its partners, when coir factory was transferred exclusively in favour of four of the partners and the oil mills was transferred to the other three partners and when subsequently the partners who took over the items entered into separate deeds of partnership among themselves with some new persons, the ld. ITO applied the provisions of section 34(3) (b), rectified the assessment order u/s 155(5), withdrawing the rebate and calling upon the assessee to pay the deficit tax. In the opinion of the ld. Sr. D. R. Situation in that case constituted transfer and thus was the rebate said to have been withdrawn. Reliance of the ld. Sr. D. R. on the case supra, decided by the Bombay High Court, is for the purpose that when there was some receipt by the partners consequent upon dissolution of the firm, that resulted in capital gains. This in fact is the crux of the revenues stand in this case.
11. On the other hand, the assessee relied upon a number of authorities, wherein other Honble High Courts are seen to have taken a different view. For instance, in the case of Mobanbhaia Pamabhai (supra), Honble Supreme Court is seen to have observed that when some partners retire from a firm and amount as received by the retiring partners in respect of their shares in the partnership including goodwill, no part of amount received is assessable as capital gains. Of course, there are other authorities also but this ratio, laid down by the Honble Supreme Court, puts at rest the point that the amount received by the retiring partner could not be the subject matter of capital gains. Similar view is seen to have been taken by the Honble Andhra Pradesh High Court in the case of P. H. Patel (supra) and so also in the cases, relied upon by the 1d. AAC, and in Smt. Mahinderpal Bhasins case (supra), Bhupinder Singh Atwals case (supra) and N. Palaniappa Gounders case (supra). So far so good.
12. In all those case, relied upon by the contesting parties, it is seen that the issue involved was regarding the amount received by the retiring partners in respect of their shares in the partnership. In the view of some High Courts, it was taxable; whereas in the view of some other High Courts, including the Supreme Court, it could not be subjected to a capital gains tax. This issue thus is seen to have been settled by the judgment supra of the Honble Supreme Court, besides Honble High Courts.
13. The issue before us is slightly different. The assessee, as mentioned earlier, is said to have received an extra amount of Rs. 40,696 as the value of the plot/building he received at Focal Point, was more than value of his share. Now the issue for consideration before us in the present appeal is as to whether this extra amount of Rs. 40,000 was taxable as capital gains in the hands of the retiring partner or not ? Before answering this question, we want to make certain observation. Here, the firm was having three partners and one of them retired. Such retirement was preceded by an award by arbitrator and consequential dissolution deed. The assets were distributed in accordance with award and deed and, in our view, therefore, there was no transfer, as understood u/s 2(47). It was some sort of mutual settlement by the partners for smooth running of the business. Since the extra amount was received by the assessee on account of difference in value, it is difficult to consider such receipt as gift because it was not seen to be the intention of the parties. On behalf of the assessee, it was also argued that the transaction was relatable to assessment year 1984-85.
This submission also is without merit, as the firm got dissolved on 31-12-1982, i. e., during the period under consideration. In the present case, as mentioned earlier, the facts are that the assessee received in excess of what was the value of his share in the firm. The ITOs case being that we have discussed already that such difference was taxable as capital gains resulting from transfer of assets in terms of section 2(47), the answer to the ld. ITOs finding is clearly given by the Honble Andhra Pradesh High Court in the case in L. Raghu Kumar (supra), wherein it was held that even if the partner received in excess and over and above the capital, even then the transaction could not constitute capital gains. This ratio, in our view, clinches the issue clearly against the revenue. In fact, the ld. AAC recorded his finding, after following this ratio, amongst others. In the light of our above discussion, we see no justification to interfere in the finding under challenge and the same is hereby confirmed.
14. In the result, the appeal is dismissed.