1996 (10) TMI 32 - HC - Income Tax

Summary

Issues Involved:
1. Deletion of capital gains assessed.
2. Interpretation of "transfer" under section 2(47) of the Income-tax Act, 1961.
3. Applicability of section 47(ii) of the Income-tax Act, 1961, for exemption of capital gains.

Detailed Analysis:

Issue 1: Deletion of Capital Gains Assessed

The Tribunal confirmed the deletion of the sum of Rs. 2,75,961 assessed as capital gains in the assessee's case. The Department argued that the amount received by the assessees was due to their retirement from the partnership firm, and hence, should be taxed as capital gains. However, the Tribunal found that the dissolution of the firm was complete, and the amount received by the assessees was by way of distribution of assets upon dissolution, not as a transfer of capital assets. Therefore, the Tribunal upheld the deletion of the capital gains assessed.

Issue 2: Interpretation of "Transfer" under Section 2(47) of the Income-tax Act, 1961

The Tribunal held that there was no transfer when the assessee received an amount over and above his capital for relinquishment of his right in the firm. The Tribunal distinguished the decision in CIT v. Tribhuvandas G. Patel [1978] 115 ITR 95 (Bom), which the Department relied upon, by stating that the facts of the present case were different. The Tribunal observed that a relinquishment or extinguishment of the share in a partnership, without an assignment thereof, would not amount to a transfer within the meaning of section 2(47) of the Act. The Tribunal found that there was no assignment in the assessees' case, and the dissolution deed referred to a release and relinquishment, not to an assignment.

Issue 3: Applicability of Section 47(ii) of the Income-tax Act, 1961

The Tribunal's finding that the capital gains of Rs. 2,75,961 is exempt under section 47(ii) of the Income-tax Act, 1961, was upheld. The Tribunal concluded that the dissolution of the firm was established on the facts, and the receipt of money by the assessees was not in consideration for the transfer of a capital asset but was by way of distribution of the assets of the firm on dissolution. Consequently, the Tribunal confirmed the order passed by the Commissioner of Income-tax (Appeals) and held that no capital gains tax was chargeable under section 47(ii) of the Act.

Conclusion:

The High Court affirmed the Tribunal's decision, holding that there was a complete dissolution of the partnership firm by a dissolution deed dated January 31, 1975. The Court found that the distribution of assets and liabilities among the partners did not amount to a transfer under section 2(47) of the Act, and hence, no capital gains tax was leviable. The Court also noted that the decision in CIT v. Tribhuvandas G. Patel [1978] 115 ITR 95 (Bom) was distinguishable and not applicable to the present case. The Court answered the questions referred to it in the affirmative and against the Department, concluding that no capital gains tax was warranted.