1977 (9) TMI 13 - HC - Income Tax

A Partner, Accounting Year, Capital Gains, Dissolution Of Firm, Income Tax Act, Retirement Of Partner

Issues Involved:
1. Inclusion of Rs. 1,72,182 or Rs. 1,00,000 in the total income of the assessee as his share of profit from the firm of Kumar Engineering Works.
2. Tax liability on Rs. 50,000 received by the assessee as his share of the value of goodwill as capital gain.
3. Tax liability on Rs. 4,77,941 received by the assessee as his share in the remaining assets of the firm under section 47(ii) of the Income-tax Act.

Detailed Analysis:

Issue 1: Inclusion of Rs. 1,72,182 or Rs. 1,00,000 in the Total Income
The assessee retired from the firm of Kumar Engineering Works and was paid Rs. 1 lakh as his share of profit for the period ended August 31, 1961. The Income-tax Officer (ITO) allocated Rs. 1,72,155 to the assessee as his share of profit under section 158. The Tribunal held that since the assessment order against the firm was set aside and no fresh assessment was made, there was no basis for including Rs. 1,72,155. The Tribunal applied the theory of real income and included only Rs. 1 lakh. However, the High Court observed that the statutory provisions of sections 67, 158, and 182 mandate that the partner's share in the income of the firm, as assessed, must be included in his total income. The court concluded that the assessee's share of profit, as ultimately determined in the firm's assessment, should be included in his total income, not merely the Rs. 1 lakh received.

Issue 2: Tax Liability on Rs. 50,000 as Capital Gain
The sum of Rs. 50,000 received by the assessee as his share of the value of goodwill was considered. The High Court referred to its decision in Commissioner of Income-tax v. Home Industries and Co. [1977] 107 ITR 609 (Bom), which held that self-generated goodwill is not a capital asset, and its transfer does not give rise to chargeable capital gain. Since the goodwill in question was self-generated and cost nothing to the partners, the court concluded that Rs. 50,000 was not liable to capital gains tax. Thus, question No. 2 was answered in the negative and in favor of the assessee.

Issue 3: Tax Liability on Rs. 4,77,941 as Capital Gain
The assessee contended that Rs. 4,77,941 received upon retirement was not liable to capital gains tax as it was a distribution of capital assets on the dissolution of the firm, covered by section 47(ii). The Tribunal held that the transaction was a retirement, not a dissolution, and thus section 47(ii) did not apply. The High Court analyzed the nature of the transaction and the relevant statutory provisions. It distinguished between retirement and dissolution, noting that retirement involves the partner relinquishing his share in favor of continuing partners, which constitutes a "transfer" under section 2(47). The court examined the deed of retirement and concluded that the transaction amounted to a transfer, making the sum of Rs. 4,77,941 liable to capital gains tax under section 45.

Conclusion:
1. The assessee's share of profit, as ultimately determined in the firm's assessment, is liable to be included in his total income, not merely the Rs. 1 lakh received.
2. The Rs. 50,000 received as the share of the value of goodwill is not liable to capital gains tax.
3. The sum of Rs. 4,77,941 received upon retirement is liable to capital gains tax as it constitutes a transfer of capital assets.

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