1982 (7) TMI 33 - HC - Income Tax

Summary

Issues Involved:
1. Entitlement of the assessee to add extra payment made to the estate of the deceased partner towards his share in the appreciation of shares to the original cost for computation of capital gains.
2. Legal status and implications of the partnership firm continuing after the death of a partner.
3. Determination of the cost of acquisition of shares under the Income Tax Act, 1961.

Detailed Analysis:

1. Entitlement to Add Extra Payment to Original Cost for Capital Gains Computation:
The primary issue was whether the assessee, a partnership firm, could add the extra payment made to the estate of a deceased partner towards his share in the appreciated value of shares to the original cost of those shares for capital gains computation. The Tribunal initially ruled in favor of the assessee, citing Supreme Court decisions in Kalooram Govindram v. CIT and Miss Dhun Dadabboy Kapadia v. CIT, which suggested that subsequent events affecting the cost should be considered. The Tribunal held that the payment made to the estate of the deceased partner was to preserve the ownership of the shares and should thus be added to the original cost.

2. Legal Status of the Partnership Firm:
The Revenue contended that the partnership firm is a separate entity under the Income Tax Act, 1961, and that the firm continued to own the same assets despite the death of a partner. The assessee argued that a partnership firm is not a legal entity and that the property of the firm is owned by the partners collectively. The court referred to several Supreme Court decisions, including Addanki Narayanappa v. Bhaskara Krishnappa and CIT v. R. M. Chidambaram Pillai, which established that a partnership firm is not a distinct legal entity apart from its partners. The court concluded that the firm is a compendious name for the partners and that any change in partners destroys the identity of the firm.

3. Determination of Cost of Acquisition:
The court examined the provisions of the Income Tax Act, particularly sections 45 and 48, which deal with the computation of capital gains. Section 48 specifies that the cost of acquisition and any improvement thereto should be deducted from the full value of the consideration received. The court held that the revaluation of assets for determining the share of the deceased partner has no effect on the actual cost of the assets. It emphasized that the payment made to the estate of the deceased partner was for settling his share and did not constitute an acquisition of the shares by the continuing partners. The court referred to the principles laid down in CIT v. Dewas Cine Corporation and CIT v. Bankey Lal Vaidya, which state that the distribution of surplus on dissolution or retirement is an adjustment of rights and not a transfer of assets.

Conclusion:
The court concluded that the partnership firm, upon the death of a partner, does not acquire any additional interest in the assets. The payment made to the estate of the deceased partner is for settling his share and does not affect the original cost of the shares for capital gains computation. The court answered the referred question in the negative, ruling against the assessee, and held that the extra payment made to the estate of the deceased partner cannot be added to the original cost of the shares for the purpose of computing capital gains. The assessee was ordered to pay the costs of the reference.