{"id":177552,"date":"2001-12-21T00:00:00","date_gmt":"2001-12-20T18:30:00","guid":{"rendered":"https:\/\/www.legalindia.com\/judgments\/bishan-lal-kanodia-vs-the-commissioner-of-income-tax-on-21-december-2001"},"modified":"2016-11-23T08:37:06","modified_gmt":"2016-11-23T03:07:06","slug":"bishan-lal-kanodia-vs-the-commissioner-of-income-tax-on-21-december-2001","status":"publish","type":"post","link":"https:\/\/www.legalindia.com\/judgments\/bishan-lal-kanodia-vs-the-commissioner-of-income-tax-on-21-december-2001","title":{"rendered":"Bishan Lal Kanodia vs The Commissioner Of Income Tax, … on 21 December, 2001"},"content":{"rendered":"
Delhi High Court<\/div>\n
Bishan Lal Kanodia vs The Commissioner Of Income Tax, … on 21 December, 2001<\/div>\n
Equivalent citations: 2002 IIIAD Delhi 957, 2002 257 ITR 449 Delhi<\/div>\n
Author: S Sinha<\/div>\n
Bench: S Sinha, A Sikri<\/div>\n<\/p>\n
<\/pre>\n
JUDGMENT<\/p>\n
S.B. Sinha, C.J.<\/p>\n
1. Reference to this Court has been mae by the Income Tax Appellate
\nTribunal, Delhi Bench ‘D’, Delhi (hereinafter referred to as the ‘Tribunal’) for its
\nopinion in relation to the following questions:-\n<\/p>\n
“1. Whether on a proper construction of the deed
\ndissolution could it be held that it was a case of retirement of
\nthe partner and not of the dissolution of the firm?\n<\/p>\n
2. Whether on the facts and in the circumstances of the
\ncase and in law the excess of Rs. 3,62,631\/- received by the
\npartner on the dissolution of the firm could be subject to
\nasstt. as income under the head ‘Capital Gain’?”\n<\/p>\n
2. The brief relevant facts are as under:\n<\/p>\n
The assessed was one of the partners in M\/s. Jyoti Prasad Jagan Nath.
\nThe other two partners were Mr. Mukut Behari and Mrs. Mathri Devi. The said firm was
\nclaimed to have been dissolved by a deed dated 19.05.1975 when the assessed went out
\nof the partnership business while the other two partners took over the continuing
\nbusiness. The assessed got Rs. 6,47,176\/- against his entitlement of rs. 2,84,545\/- on
\naccount of his capital and share of profit for the year ended 19.05.1974, ie., the
\nassessment year 1975-76. The assessed claimed that the excess sum of Rs. 3,62,631\/-
\nwas not assessable to capital gains, as the same is exempted under Section 47(ii) of the
\nAct being the assets received on dissolution of the firm. The Income Tax Officer (in
\nshort, the ‘ITO’), however, held that there was no dissolution of the firm and the
\nassessed had retired from the firm and, therefore, capital gain was attracted. The ITO
\nheld that the assessed’s going out of the firm and the other two partners containing the
\nbusiness was merely a change in the constitution of the partnership and payment to the
\noutgoing partner came within the meaning of transfer under Section 2(47) of the Act.\n<\/p>\n
The assessed preferred an appeal there-against before the Commissioner
\nof Income Tax (in short, the ‘CIT(A)’). The CIT(A) while accepting the contention of
\nthe assessed held that the dissolved firm was governed by partnership deed dated
\n23.06.1965 which by para 9 stipulated that partnership was at will and by deed of
\ndissolution dated 19.5.1975 it was decided that the partnership shall be deemed to have
\nbeen dissolved w.e.f. the said date and by mutual agreement the assets of the firm were
\ndivided between the various partners and the book value of the assets allotted to the
\nassessed was Rs. 3,97,176\/- besides cash payment of Rs. 2,50,000\/-. CIT(A), however
\ndid not decide the assessed’s alternate contention that what he had received was in the
\nnature of goodwill, but observed that the assessed had no right to participate in the
\ngoodwill on dissolution. Thereafter, the Revenue preferred an appeal before the
\nTribunal, which while reversing the order of the CIT(A) and restoring the order of the
\nITO held that there was no dissolution of the firm and the assessed had retired from the
\nfirm and, therefore, capital gain was attracted.\n<\/p>\n
3. Having regard to the order proposed to be passed, the question No. 1 viz.
\nas to whether the deed dated 19.05.1974 is a deed of dissolution or retirement need not
\nbe considered in great details.\n<\/p>\n
4. Mr. Salil Aggarwal, learned counsel appearing on behalf of the assessed,
\ncontended that the said deed is required to be construed having regard to the entirety
\nthereof and if so read, it would be evident that it was a deed of dissolution and not a deed
\nof retirement.\n<\/p>\n
In any event, the learned counsel would contend that in a case of
\nretirement, the assets received by a partner from a partnership firm cannot be treated to
\nbe a capital gain.\n<\/p>\n
The learned counsel further submitted that in view of the fact the
\ndeed of partnership was executed w.e.f. 06.05.1975 in terms whereof, the assessed had
\nbeen taken in as a full-fledged partner; having regard to the provisions contained in
\nSection 43 of the Partnership Act, it must be held that he had right to dissolve the said
\npartnership.\n<\/p>\n
The learned counsel contended that, in any event, as the continuing
\npartners entered into another partnership as regards a new business, the learned Tribunal
\nmust be held to have arrived at a wrong finding. In support of the said contention,
\nreliance has been placed on Commissioner of Income Tax v. Tribhuvandas G. Patel,<\/a>
\nreported in (1978) 115 ITR 95; Eskayef ltd. v. Income Tax Officer and Anr.  reported in
\n(1986) 160 ITR 165 and Tribhuvandas G. Patel v. Commissioner of Income Tax
\nreported in (1999) 236 ITR 515.\n<\/p>\n
5. Mr. R.C. Pandey, learned counsel appearing on behalf of the Revenue, on
\nthe other hand, submitted that it is not a case where the Assessing Officer has not
\nallowed the claim as regards the assets derived from the partnership firm.\n<\/p>\n
The learned counsel contended that the assets received by the assessed
\nfrom the partnership firm amount to Rs. 2,84,545\/- in relation whereto there does not
\nexist any dispute.\n<\/p>\n
It was further contended that and above the assessed has received a
\nsum of Rs. 3,62,631\/-, which cannot be considered to be allowable in terms of Section
\n47(ii) of the Act, as it stood prior to its amendment in 1988. According to the learned
\ncounsel, the excess amount of Rs. 3,62,631\/- cannot be said to be a capital.\n<\/p>\n
6. The contention of learned counsel for the Revenue appears to be correct.\n<\/p>\n
In Tribhuvandas G. Patel (1978) (Supra) , the question which arose for
\nconsideration was:-\n<\/p>\n
“… … … … … … …\n<\/p>\n
(3) Whether, on the facts and in the circumstances of the
\ncase, the sum of Rs. 4,77,941\/- or any part thereof was liable
\nto tax as capital gain by reason of Section 47(ii) of the Act?”\n<\/p>\n
The answer to the said question rendered in the following term:-\n<\/p>\n
  “… in the instant case and the mode in which the
\nretirement of the assessed has taken place we have come to
\nthe conclusion that the transaction amounts to a ‘transfer’
\nwithin the extended meaning of the expression as given in
\nSection 2(47) of the Act and the consideration received by
\nthe assessed, therefore, will give rise to capital gains
\nchargeable to tax under Section 45 of the Act.”\n<\/p>\n
7. The question is also covered by a decision in Sunil Siddharthbhai v.
\nCommissioner of Income Tax,<\/a>  reported in (1985) 156 ITR 509.\n<\/p>\n
The questions involved in that reference were:-\n<\/p>\n
“1. Whether, on the facts and in the circumstances of the
\ncase, the Income-tax Appellate Tribunal was right in law in
\nholding that no capital gains resulted from the transfer of the
\nshares held by the assessed to the partnership firm as his
\ncapital contribution, the cost of acquisition of the shares to
\nthe assessed being Rs. 1,49,819\/- and the market vale of the
\nshared being Rs. 1,60,279\/-?\n<\/p>\n
2. Whether, on the facts and in the circumstances of the
\ncase, the Tribunal was right in law in holding that there was
\na transfer within the meaning of Clause (47) of Section 2 of
\nthe Income-tax Act, 1961 of the shares contributed by the
\nassessed as capital to the partnership firm in which he was a
\npartner?”\n<\/p>\n
It was held:-\n<\/p>\n
 “… What the partner gets upon dissolution or upon
\nretirement is the realization of a pre-existing right or
\ninterest. It is nothing strange in the law that right or
\ninterest should exist in praesenti but its realization or
\nexercise should be postponed. Therefore, what was the
\nexclusive interest of a partner in his personal asset is, upon
\nits introduction into a partnership firm as his share to the
\npartnership capital, transformed into an interest shared with
\nthe other partners in that asset. Qua that asset, there is a
\nshared interest. During the subsistence of the partnership,
\nthe value of the interest of each partner qua that asset cannot
\nbe isolated or carved out from the value of the partner’s
\ninterest in the totality of the partnership assets. And in
\nregard to the latter, the value will be represented by his share
\nin the net assets on the dissolution of the firm or upon the
\npartner’s retirement.”\n<\/p>\n
Thus, the aforesaid questions were answered in the following terms:-\n<\/p>\n
“… In the result, the questions which arise in these
\nappeals are answered as follows:-\n<\/p>\n
1. There was a transfer of the shares when the assessed
\nmade them over to the partnership firm as his capital
\ncontribution.\n<\/p>\n
2. When the assessed transferred his shares to the
\npartnership firm, he received no consideration within
\nthe meaning of Section 48 of the Income-tax Act,
\n1961, nor did any profit or gain accrue to him for the
\npurpose of Section 45 of the Income-tax Act, 1961.”\n<\/p>\n
8. It may stated that the Gujarat decision in Commissioner of Income
\nTax v. Mohanbhai Pamabhai reported in (1973) 91 ITR 393 is the only decision
\ndirectly on the point at issue before us but the question is whether the position of a
\nretiring partner could be equated with that of a partner upon the general dissolution for
\ncapital gains tax purposes? The equating of the done by the Supreme Court in
\nAddanki Narayanappa v. Bhaskara Krishnappa<\/a> ,  was not
\nfor capital gains tax purposes but for considering the question whether the instrument
\nexecuted on such occasion between the partners inter se required registration and could
\nbe admitted in evidence for want of registration. For capital gains tax purposes, the
\nquestion assumes significance in view of the fact that under Section 47(ii) any
\ndistribution of assets upon dissolution of a firm has been expressly excepted from the
\npurview of Section 45 while the case of a retirement of a partner from a firm is not so
\nexcepted and hence the question arises whether the retirement of a partner stands on the
\nsame footing as that upon a dissolution of the firm. In our view, a clear distinction exists
\nbetween the two concepts, inasmuch as the consequences flowing from each are entirely
\ndifferent. In the case of retirement of a partner form the firm it is only that partner who
\ngoes out of the firm and the remaining partners continue to carry on the business of the
\npartnership as a firm, while in the latter case the firm as such no more exists and the
\ndissolution is between all the partners of the firm. In the Indian Partnership Act, the two
\nconcepts are separately dealt with. Section 31 to 38 which occur in Chapter V deal with
\nthe incoming and outgoing partners and some of the consequences of retirement of a
\npartner are dealt with in Sub-sections (2) and (3) of Section 32 while some others are
\ndealt with in Sections 36 and 37. Under Section 37, the outgoing partner or the estate of
\nthe deceased partner, in the absence of a contract to the contrary, would be entitled at the
\nopinion of himself or his representatives to such share of the profits made since he
\nceased to be a partner as may be attributable to the property of the firm or to interest at 6
\nper cent per annum on the amount of his shares in the property of the firm. The subject of
\ndissolution 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
\ndissolution and the rules of settlement of accounts between the partners mentioned
\ntherein are subject to agreement by the partners, in other words, in the absence of any
\nagreement made in that behalf, the rules mentioned in the Section would apply. It would
\nbe interesting to mention that the Partnership Act nowhere contemplates or deals with the
\nconcept of any partial dissolution or a dissolution qua an individual partner, the concept
\nindicated in Section 39 appearing in Chapter VI is a total dissolution between all the
\npartners of the firm. Further, under Section 32, which occurs in Chapter V, retirement of
\na partner may take any form as may be agreed upon between the partners and can occur
\nin three situations contemplated by Clauses (a), (b) and (c) of Sub-section (1) of Section\n<\/p>\n
32. It may be that upon retirement of a partner his share in the net partnership assets
\nafter deduction of liabilities and prior charges may be determined on taking accounts on
\nthe footing of notional sale of partnership assets and be paid to him but the determination
\nand payment of his share may not invariably be done in that manner and it is quite
\nconceivable that, without taking accounts on the footing of notional sale, by mutual
\nagreement, a retiring partner may receive an agreed lumps sum for going out as and by
\nway of consideration for transferring or releasing or assigning or relinquishing his
\ninterest in the partnership assets to the continuing partners and if the retirement takes this
\nform and the deed in that behalf is executed, it will be difficult to say that there would b
\nno element of “transfer” involved in the transaction.\n<\/p>\n
9. A couple of things emerge clearly from the aforesaid passages. In the first
\nplace, a retiring partner while going out and while receiving what is due to him in respect
\nof his share, may assign his interest by a deed or he may, instead of assigning his interest,
\ntake the amount due to him from the firm and give a receipt for the money and
\nacknowledge that he has no more claim on his co-partners. The former type of
\ntransactions will be regarded as sale or release or assignment of his interest by a deed
\nattracting stamp duty while the latter type of transaction would not. In other words, it is
\nclear, the retirement of a partner can take either of two forms, and apart from the
\nquestion of stamp duty, with which we are not concerned, the question whether the
\ntransaction would amount to an assignment or release of his interest in favor of the
\ncontinuing partners or not would depend upon what particular mode of retirement is
\nemployed and as indicated earlier, if instead of quantifying his share by taking accounts
\non the footing of notional sale, parties agree to pay a lump sum in consideration of the
\nretiring partner assigning or relinquishing his share or right in the partnership and its
\nassets in favor of the continuing partners, the transaction would amount to a transfer
\nwithin the meaning of Section 2(47) of the Act.\n<\/p>\n
10. In Tribhuvandas G. Patel (1999) (Supra) , the dispute was with regard to
\na sum of Rs. 50,000\/- representing the share in the goodwill. Three questions were raised
\nin the said case, which are as under:-\n<\/p>\n
“1. Whether, on the facts and in the circumstances of the
\ncase, Rs. 1,72,182\/- or Rs. 1,00,000\/- were liable to be
\nincluded in the total income of the assessed as his share of
\nprofit from the firm of Kumar Engineering Works?\n<\/p>\n
2. Whether, on the facts and in the circumstances of
\nthe case, the sum of Rs. 50,000\/- received by the assessed
\nas his share of the value of the goodwill or any part thereof
\nwas liable to tax as capital gain?\n<\/p>\n
3. Whether, on the facts and in the circumstances of
\nthe case, the sum of Rs. 4,77,941\/- or any part thereof was
\nliable to tax as capital gain by reason of Section 47(ii) of
\nthe Act?”\n<\/p>\n
The Court noticed the fact of the matter and held:-\n<\/p>\n
“The assessed was a partner with two others in a
\npartnership firm, Kumar Engineering Works. On
\nDecember 5, 1960, the assessed served a notice of his
\nintention to dissolve the firm with effect from December
\n31, 1960. Since the other partners refused to agree with
\nthe said demand, the assessed filed a suit being Suit No. 72
\nof 1961 in the Bombay High Court for a declaration that
\nthe firm was dissolved with effect from December 31,
\n1960, and for accounts and other ancillary reliefs.
\nUltimately, the dispute was settled between the parties
\nunder a deed dated January 19, 1962. Under this deed of
\nsettlement the assessed was deemed to have retired from
\nthe firm with effect from August 31, 1961, and the
\nremaining partners were authorized to continue to carry on
\nthe business of the firm. The assessed was paid a sum of
\nRs. 1,00,000\/- as his share of profits of the firm for the
\nperiod ending August 31, 1961. In addition to this,
\nRs. 1,00,000\/- he was also paid Rs. 8,00,000\/- including the
\nsum of Rs. 50,000\/- representing his share in the goodwill
\n(question No. 2) and Rs. 4,77,941.47 representing his share
\nin the assets of the firm (question No. 3). In his
\nassessment proceedings, the assessed himself contended
\nthat only the sum of Rs. 1,00,000\/- should be brought to
\ntax and not the other amounts. In the assessment
\nproceedings of the firm, however, the shares of the assessed
\nin the profits was arrived at Rs. 1,72,155\/- later reduced to
\nRs. 1,36,930\/-. The assessed’s contention was that
\nnotwithstanding the said act, only a sum of Rs. 1,00,000\/-
\nshould be treated as his income. This was not agreed to by
\nthe authorities. When the matter came before the High
\nCourt, it answered the said question (No. 1) in the
\nfollowing words (page 109):\n<\/p>\n
 “In view of the above discussion, the first question
\nis answered thus : on the facts and in the circumstance of
\nthe case not Rs. 1 lakh, but the assessed’s shares of profit
\nthat may ultimately be determined in the assessment of the
\nfirm as his share of profit from the firm is liable to be
\nincluded in his total income.”\n<\/p>\n
In our opinion the answer given by the High Court
\nis the correct one in law. We cannot agree with Mr.
\nSharma that inasmuch as he has actually received only a
\nsum of Rs. 1,00,000\/- only that amount should be taken as
\nhis share of profits and not the actual amount worked out
\nin the assessment of the firm. The amount over and above
\nRs. 1,00,000\/- is also his income in law. It has accrued to
\nhim. It is immaterial that he may choose not to recover
\nit.”\n<\/p>\n
11. In view of the aforementioned authoritative pronouncement, there cannot
\nbe any doubt whatsoever that whether it is held to be a case of dissolution of the partnership
\nas a retirement, having regard to the provisions contained in Section 47(ii) of
\nthe Act, as it stood prior to 1988, the assessed was entitled only to the assets, he derived
\nfrom the partnership firm and not the excess amount. Thus, the aforementioned
\nquestion are answered (SIC).\n<\/p>\n
12. This reference is disposed of accordingly.<\/p>\n","protected":false},"excerpt":{"rendered":"
Delhi High Court Bishan Lal Kanodia vs The Commissioner Of Income Tax, … on 21 December, 2001 Equivalent citations: 2002 IIIAD Delhi 957, 2002 257 ITR 449 Delhi Author: S Sinha Bench: S Sinha, A Sikri JUDGMENT S.B. Sinha, C.J. 1. Reference to this Court has been mae by the Income Tax Appellate Tribunal, Delhi […]<\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_lmt_disableupdate":"","_lmt_disable":"","_jetpack_memberships_contains_paid_content":false,"footnotes":""},"categories":[14,8],"tags":[],"class_list":["post-177552","post","type-post","status-publish","format-standard","hentry","category-delhi-high-court","category-high-court"],"yoast_head":"\nBishan Lal Kanodia vs The Commissioner Of Income Tax, ... on 21 December, 2001 - Free Judgements of Supreme Court & High Court | Legal India<\/title>\n<meta name=\"robots\" content=\"index, follow, max-snippet:-1, max-image-preview:large, max-video-preview:-1\" \/>\n<link rel=\"canonical\" href=\"https:\/\/www.legalindia.com\/judgments\/bishan-lal-kanodia-vs-the-commissioner-of-income-tax-on-21-december-2001\" \/>\n<meta property=\"og:locale\" content=\"en_US\" \/>\n<meta property=\"og:type\" content=\"article\" \/>\n<meta property=\"og:title\" content=\"Bishan Lal Kanodia vs The Commissioner Of Income Tax, ... on 21 December, 2001 - 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