1980 (6) TMI 12 - HC - Income Tax

Summary

Issues Involved:
1. Whether the receipt of money by the assessee from the firm as a retiring partner involves the transfer of a capital asset.
2. Whether the profit arising to the retiring partner from the receipt of such money is chargeable to capital gains tax.

Summary:

Issue 1: Transfer of Capital Asset
The primary issue was whether the receipt of money by the assessee from the firm as a retiring partner involved the transfer of a capital asset. The Tribunal held that no element of transfer of a capital asset was involved. The assessee and his brothers retired from the firm, and the reconstituted firm paid them Rs. 5 lakhs towards their shares in the net assets. The ITO, however, treated the amount received by the assessee as arising from the transfer of valuable assets, including goodwill, and included it under capital gains. The AAC reversed this decision, stating that no transfer of capital assets occurred. The Tribunal upheld the AAC's view, following the Gujarat High Court's principles in CIT v. Mohanbhai Pamabhai [1973] 91 ITR 393.

Issue 2: Chargeability to Capital Gains Tax
The Tribunal's decision was based on the interpretation of sections 45 and 47(ii) of the I.T. Act, 1961. Section 45 provides that profits or gains arising from the transfer of a capital asset are chargeable to income-tax under the head "Capital gains." Section 47(ii) exempts certain transactions, including the distribution of capital assets on the dissolution of a firm, from being regarded as transfers. The Tribunal concluded that the retirement of a partner, where the partner receives money in lieu of his share in the partnership assets, does not constitute a transfer of a capital asset. This view was supported by the Supreme Court's decisions in Narayanappa v. Bhaskara Krishnappa, CIT v. Dewas Cine Corporation, and Malabar Fisheries Co. v. CIT, which clarified that a partner's share in a firm represents a joint interest in the partnership assets, and receiving money upon retirement is an adjustment of rights rather than a transfer.

The High Court agreed with the Tribunal and the Gujarat High Court's view that the receipt of money by a retiring partner does not involve the transfer of a capital asset and is not chargeable to capital gains tax. The Court also noted that the Bombay High Court's decision in CIT v. Tribhuvandas G. Patel recognized that if accounts are taken and a partner receives his share, there may not be any transfer.

Conclusion:
The High Court answered the question in the affirmative, in favor of the assessee, holding that no capital gains tax was chargeable on the profit arising to the retiring partner from the receipt of such money. Each party was ordered to bear its own costs.