Commissioner Of Income-tax, Andhra Pradesh V. L.
Raghu Kumar
High Court Of Telangana
Refered Case Appeal No. 28 Of 1977
Judgment Date:
21-03-1982
Commissioner Of Income-tax, Andhra Pradesh ..Petitioner
L. Raghu Kumar ..Respondent
Bench:
{HON'BLE MR. JUSTICE B.P. JEEVAN REDDY ; HON'BLE MRS. JUSTICE K.
AMARESWARI ; }
Citation:
(1982) 31 CTR AP 192 ;
AMARESWARI, J.
(1) THIS reference under s. 256 (I) of the I. T. Act of 1961 at the instance of the Revenue raises
an interesting question of law as to the scope and ambit of s. 45 if the Act relating to capital
gains tax.
(2) THE assessee is the karta of an HUF. He was previously a partner in two firms : (1) M/s.
Chegu Krishnamurthy, Guntur and (2) M/s. Southern Tobacco Packers, Guntur. The assessee retired
from the above two firms with effect from 1/01/1971. On the date of retirement, his capital
accounts were credited with a sum of Rs. 46,500 more than amount due to him towards his
capital and profits. The firms from which the assessee retired were carrying on business with all
remaining partners. The ITO observed that the amount of Rs. 46,500 received by the assessee.
Accordingly the ITO assessed the capital gains in the hands of the assessee. The main contention
that the case was governed by s. 47 (2) of the Act and the transaction cannot be regarded as a
transfer so as to attract the liability under s. 45 of the Act was rejected by the ITO on the
ground that it was not a case of a dissolution of the firms. The matter was carried in appeal. The
assessee reiterated the same contention, namely, that the sum of Rs. 46,500 could not be treated
as capital gains in view of s. 47 (2) of the I. T. Act, 1961. The AAC negatived the contention of
the assessee and upheld the order of the ITO.
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Commissioner Of Income-tax, Andhra Pradesh V. L. Raghu Kumar
(3) THE assessee went up in further appellate Tribunal there was a shift in the stand and the
assessee contended that the was no transfer of any capital asset within the meaning of clause (47)
of s. 2. It was urged that a partner has no right to the partnership assets as such and his right
was only to receive a share in the profits and assets when he retired from the firms. In support
of his contention, the assessee relied upon a decision of the Gujarat High Court in CIT v.
Mohanbhai Pamabhai [1973] 91 ITR 393. The Tribunal accepted the contention based on the
principle enunciated in the Gujarat case and allowed the appeal.
(4) ON an application by the Revenue, the following question was referred to us for our decision
:"whether, on the facts and in the circumstances of the case, the excess amount of Rs. 46,500
received by the assessee on retirement from the two partnership firms is assessable to capital
gains ?"
(5) TO answer this question, it is necessary to refer to a few relevant sections of the I. T. Act,
hereinafter called "the Act".
(6) SECTION 45, the charging section, is as follows :"45. (1) Any profits or gains arising from the
transfer of a capital asset effected in the previous year shall, save as otherwise provided in
section 53,54 54b, 54d and 54e be chargeable to income-tax under the head Capital gains, and
shall be demanded to be the income of the previous year in which the transfer took place".
(7) SECTION 2, clause (14), defines the capital asset as under :"2. (14) Capital asset means
property of any kind held by an assessee, whether or not connected with his business or
profession, but does not include -. . . "
(8) SECTION 2, clause (47), defines transfer as follows :"2. (47) Transfer, in relation to a capital
asset, includes the sale, exchange or relinquishment of the asset of the asset or the
extinguishment of any rights therein or the compulsory acquisition thereof under any law. "
(9) SECTION 47 exempts certain transfer from the provisions of s. 45. Section 47 is as follows
:"47. (ii) Any distribution of capital assets on the on the dissolution of a firm, body of individuals
or other association of persons. "
(10) IT is admitted that the instant case is not governed by s. 47 (ii) of the Act there was no
dissolution of the firm. The ITO as well as the AAC on facts found that the firm was continuing
with the remaining members. In fact the assessee gave up the plea based on s. 47 (ii) even before
the Appellate Tribunal.
(11) MR. Suryanarayana Murthy, the learned counsel for the Revenue, mainly contended that on
the retirement of a partner from a firm, a transfer, within the extended meaning given in clause
(47) of s. 2 of the Act is involved. There is relinquishment of the interest of the partner in the
partnership assets and an extinguishment of his rights in the partnership assist. He submits that a
distinction has to be drawn between a case of the retirement of a member of the dissolution of
the firm. He says that in the case of the former the retiring partner relinquishes his right in the
partnership assets resulting in an extinguishment of his rights in the existing partnership, whereas
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Commissioner Of Income-tax, Andhra Pradesh V. L. Raghu Kumar
in the case of a dissolution of a firm the position is different as the partnership itself comes to an
end.
(12) ON the other hand, it is contend by Mr. Anjaneyulu, the learned counsel for the assessee,
that in law there is no distinction between the two, as a partner has no right to the partnership
assets so as to involve a transfer on retirement or dissolution. There is neither relinquishment of
any assets nor the extinguishment of any right to the asset. The retiring partner walks out with
the amounts due to him towards his share of profits and assets.
(13) TO decide the controversy, it is necessary to determine the rights of a partner under the
provisions of the partnership Act.
(14) IN Narayanappa v. Baskara Krishnappa, AIR 1966 SC 1300 , a question arose whether a
document recording the terms and conditions of dissolution which included a stipulation which
included a stipulation that one of the partners had given up his share in the machines, etc. , and
in the business and made over the same to the other partners was compulsorily under s. 17 (1)
(c) of the Registration Act. In that connection, the Supreme Court analysed the relevant provisions
of the Partnership Act and observed as follows (p. 1303) :"from a perusal of these provisions it
would be abundantly clear that whatever may be character of the property which is brought in by
the partners when the partnership is formed or which may be acquired in the course of the
business of the partnership it becomes the property of the firms and what a partners is entitled to
is his share of profits, if any accruing to the partnership from the realisation of this property, and
upon dissolution of the partnership to a share in the money representing the value of property. No
doubt, since a firm has no legal existence, the partnership property will rest in all the partners
and in that sense every partner has an interest in the property of the partnership. During the
subsistence the partnership however, no partner can deal with any portion of the property as his
own. Nor can he assign his interest in a specific item of the partnership property of any one. His
right is to obtain such profits, if any, as fall to his share from time to time and upon the
dissolution of the firm to a share in the assets of the firm which remain after satisfying the
liabilities set out in clause (a) and sub-clauses (i), (ii), and (iii) of clause (b) of section 48. "
(15) THE Supreme Court quoted with approval the following statement of law of from Lindley on
Partnership, 12th edn. , at p. 375 (at p. 1303 of AIR 1966 SC) :"what is meant by the share of a
partner is his proportion of the partnership assets after they have been all realised and converted
into money, and all the partnership debts and liabilities have been paid and discharged. This it is,
and this only, which on the death of a partner passes to his representatives, or to legatee of his
share. . . and which on his bankruptcy passes to his trustee. "
(16) THE Supreme Court summarized the position in the later portion of the judgment as follows
(p. 1304) :". . . his right during the subsistence of the partnership is to get his share of profits
from time to time as may be agreed upon among the partners and after the dissolution of the
partnership or with his retirement from partnership of the value of his share in net partnership
assets as on the date of dissolution or retirement after a deduction of liabilities and prior charges.
"
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Commissioner Of Income-tax, Andhra Pradesh V. L. Raghu Kumar
(17) THE Supreme Court held that though the partnership assets included immovable properties,
there was no relinquishment of interest in any of the immovable properties by the outgoing
partner and what he gets is merely by way of adjustment of the rights of the partners on
dissolution by giving up his share in the net partnership assets after deduction of liabilities and
poor charges and it was, therefore, not compulsorily registrable under s. 17 (1) (c) of the
Registration Act.
(18) IN CIT v. Mohanbhai Pamabhai [1973] 91 ITR 393 , the Gujarat High Court held that the
observations of the Supreme Court in Narayanappa v. Bhaskar Krishnappa, AIR 1966 SC 1300 ,
are equally applicable where the partner retires from the partnership. Bhagwati C. J. , speaking
for the court, succinctly summarized the rights of a partner as follows (p. 402) : When, therefore,
a partner retires from a partnership and the amount of his share in the net partnership assets
after deduction of liabilities and prior charges is determined on taking accounts on the footing of
notional sale of the partnership assets and given to him, what he revives is his share in the
partnership and not any consideration for transfer of his interest in the partnership to the
continuing partners, His share the partnership is worked out by taking accounts in the manner
prescribed by the relevant provisions of the partnership law and it is this, and his only, namely,
his share in the partnership which he revives in terms money. There in this transaction no
element of transfer of interest in the partnership assets by the retiring partner to the continuing
partners. "
(19) MR. Suryanarayanamurthy, the learned counsel for the Revenue, submitted that the decision
in Narayanappa v. Bhaskara Krishnappa, AIR 1966 SC 1300 , related to a case arising under s. 17
(1) (c) of the Registration The language employed in s. 17 (1) (c) is analogous to s. 2, clause (47).
Section 17 (1) (c) requires compulsory registration of a document where it acknowledges payment
of consideration not only on account of creation, declaration, assignment or limitation but also on
account of extinction of any right, title or interest in immovable property, and the document in
Narayanappas case could have, therefore, clearly required compulsory registration if there was any
relinquishment or extinguishment of interest of one of the partners. We fall to see how the
observations of the Supreme Court do not apply in the case of a retirement of a partner. The
question is whether there is any relinquishment or extinguishment of right in the partnership
assets. That question depends upon the rights of a partner in the partnership assets and
Narayanappas case squarely decided the same.
(20) IN CIT v. Dilip Engineering Works [1981] 129 ITR 688 (Guj) , it was held that where a
retiring partner receives in lieu of his share in the partnership assets any cash or any other asset,
no transfer of the asset was involved. Though this case arose in the context of the provisions of s.
41 (2), it is relevant to this extent, namely, that no transfer is involved when a retiring partner
receives at the time of retirement his share in the partnership assets either in cash or any other
asset.
(21) IN Addl. CIT v. Smt. Mahinderpal Bhasin [1979] 117 ITR 26, the Allahabad High Court
followed the decision of the Gujarat High Court in CIT v. Mohanbhai Pamabhai [1973] 91 ITR 393
and held that when a partner retires, what he revives is really his share in the partnership assets.
It is not a consideration for a transfer of his interest in the partnership to the continuing
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Commissioner Of Income-tax, Andhra Pradesh V. L. Raghu Kumar
partners. In the case of a retirement of a partner just as in the case of a dissolution of
partnership, there is no element of transfer. It is only an adjustment of the rights of the partners
and not a relinquishment or extinguishment of the interest of a retiring partner.
(22) THE same view was followed in CIT v. Madan Lal Bhargava [1980] 122 ITR 545 (ALL) ,
wherein it was observed that all that all the assessee received on his retirement from the firm in
respect of his share in the good will was its value to which he was all along entitled and that the
case need not fall within the purview of s. 2, clause (47) and consequently s. 45 had no
application.
(23) MR. Suryanarayana Murthy drew our attention to two decisions of the Bombay High Court in
CIT v. Tribhuvandas G. Patel [1978] 115 ITR 95 and CIT v. H. R. Aslot [1978] 115 ITR 255 ,
taking a contrary view. In the first case a lump sum amount was paid to the retiring partner and
the question arose whether it amounted to a transfer under s. 2, clause (47). The Bombay High
Court drew a distinction between a case where a retiring partner gets his share of partnership
after deducting the liabilities and his share of partnership on taking accounts on the footing of a
notional sale of partnership assets and where a lump sum amount is paid in consideration of the
partner retiring without any accounting being done. It was held that in a case where the partner
is paid a particular amount of money as his share in the partnership assets after accounting, it
would not amount to a transfer, but where a lump sum amount is paid in consideration for his
retirement in the partnership and assignment of his interest to the other partners it would be a
transfer as defined in s. 2, clause (47). Referring to the terms of the retirement deed, it was held
that there was a transfer as defined by s. 2, clause (47) and hence liable to tax under s. 45 of
the Act. The other decision of the Bombay High Court also turned on the Act. Partition of the
retirement deed following the view taken in CIT v. Tribhuvandas G. Patel [1978] 115 ITR 95 (Bom)
. Thus, in these two cases the decision turned upon the facts of the said cases. It is no doubt
true as submitted by the learned counsel for the Revenue that the Bombay Court did not accept
the principle in CIT v. Mohanbhai Pamabhai [1973] 91 ITR 393 (Guj) , that there is no distinction
between a case of a retirement of the partner and dissolution of the partnership firm and that
there can never be a transfer of a capital asset in the case of a retirement of a partner as there
is no relinquishment of a capital asset or a retirement of a partner as there is no relinquishment
of a capital asset or extinguishment of rights therein. With great respect we are unable to agree
with the view of the Bombay High Court. The rights of a partner are governed by the provisions
of the Partnership Act. Otherwise by a mere description the nature of the transaction can be
altered. Further, the Gujarat High Court in CIT v. Mohanbhai Pamabhai [1973] 91 ITR 393 (Guj)
followed the decision of the Supreme Court in Narayanappa v. Bhaskara Krishnappa, AIR 1966 SC
1300 , which laid down the proposition of law unequivocally.
(24) MR. Suryanarayana Murthy lastly contended that if there was no distinction between the
retirement of a member and the dissolution of a firm s. 47 (ii) was unnecessary. But may be
mentioned that s. 47 (ii) deals, not only the case of the dissolution of a firm, but also with cases
of transfer by a body of individuals and other association of persons. That apart, s. 2, clause (47)
(ii) excludes the application of s. 45 in case of dissolution of firms on the ground that no transfer
is involved, it cannot be implied that f transfer is involved in the case of retirement. It cannot be
implied that a transfer is involved in the case of retirement. The converse or the opposite does
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Commissioner Of Income-tax, Andhra Pradesh V. L. Raghu Kumar
not follow.
(25) FOR the reasons given above, we agree with the view expressed by the Gujarat High Court
in CIT v. Mohanbhai Pamabhai [1973] 91 ITR 393 , which is based on the observation of the
Supreme Court in Narayanappa v. Bhaskara Krishnappa, AIR 1966 SC 1300 . The Tribunal was
perfectly right in upholding the contention of the assessee that the sum of Rs. 46,500 received by
him on his retirement is not assessable to capital gains.
(26) WE answer the reference in the negative and in favour of the assessee with costs. Advocates
fee Rs. 250.
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