1992 (8) TMI 53 - HC - Income Tax

Summary

Issues Involved:
1. Whether the amount of Rs. 2,05,000 received by the assessee from newly admitted partners in the firm constituted a capital receipt or a revenue receipt.

Detailed Analysis of the Judgment:

Issue 1: Nature of the Receipt - Capital or Revenue

Factual Background:
The assessee was a partner in the firm Bharat Salt and Industrial Works with a 36% share. The firm was reconstituted on December 3, 1970, resulting in the assessee's share being reduced to 5%. The assessee received Rs. 2,05,000 as compensation for this reduction. The Income-tax Officer classified this amount as a revenue receipt and taxable, relying on the Supreme Court decision in CIT v. Gangadhar Baijnath [1972] 86 ITR 19.

Assessee's Argument:
The assessee contended that the compensation was a capital receipt, not taxable as revenue. The compensation was for the reduction in share, including goodwill and leasehold rights.

Appellate Assistant Commissioner's Decision:
The Appellate Assistant Commissioner agreed with the assessee, holding that the amount was for the reduction in the share of profit, goodwill, and other benefits, and thus could not be treated as a revenue receipt. The Commissioner noted there was no evidence that the assessee was in the business of entering and exiting partnerships for profit.

Tribunal's Decision:
The Tribunal upheld the Appellate Assistant Commissioner's decision, confirming that the amount was a capital receipt.

High Court's Analysis:
The High Court examined the facts and the nature of the receipt. The court noted that the assessee's share in the firm, an income-yielding asset, was reduced from 36% to 5%, indicating an impairment of the capital asset. The court emphasized that there was no evidence that the assessee engaged in the business of forming and dissolving partnerships for profit.

Distinguishing Gangadhar's Case:
The court distinguished the present case from Gangadhar's case, where the Supreme Court held that compensation received by a firm for surrendering its interest in another firm was business income. The court noted the peculiar facts in Gangadhar's case, such as the absence of a partnership deed, the partnership being terminable at will, and the assessee continuing various business activities, which were not present in the current case.

Relevant Precedents:
The court referred to Kettlewell Bullen and Co. Ltd. v. CIT [1964] 53 ITR 261, where the Supreme Court held that compensation for the loss of a capital asset is a capital receipt. The court also cited CGT v. Chhotalal Mohanlal [1987] 166 ITR 124, where the Supreme Court recognized the reduction in a partner's share as an impairment of a capital asset.

Conclusion:
The High Court concluded that the compensation received by the assessee for the reduction in his share in the reconstituted firm was a capital receipt. The court affirmed the Tribunal's decision and answered the question in favor of the assessee and against the Revenue.

Final Order:
The question referred to the court was answered in the affirmative, in favor of the assessee. There was no order as to costs.