1989 (12) TMI 83 - AT - Income Tax

Arbitration Award, Arbitration Award, Capital Gains, Capital Gains, High Court, High Court, Partnership Firm, Partnership Firm, Share In Firm, Share In Firm, Supreme Court, Supreme Court.

Summary

Issues Involved:
1. Determination of whether the sum of Rs. 40,000 received by the assessee from the firm is liable to capital gains tax.
2. Consideration of whether the transaction should be assessed in the assessment year 1984-85 or 1983-84.
3. Evaluation of whether the amount of Rs. 40,000 could be considered as a 'gift'.

Detailed Analysis:

Issue 1: Determination of Capital Gains Tax Liability

The primary issue revolves around whether the sum of Rs. 40,000 received by the assessee upon retirement from the firm constitutes capital gains and is thus taxable. The Income-tax Officer (ITO) argued that the amount received by the outgoing partner in excess of his capital contribution is liable to capital gains tax as it constitutes a transfer under section 2(47) of the Income-tax Act. The ITO included Rs. 40,000 as capital gains, stating: "The assessee by mutual agreement is a retiring partner and agreed to receive a sum of Rs. 40,000 for going out and by way of consideration for transferring or releasing or assigning or relinquishing his interest in the partnership assets to the continuing partners."

The Appellate Assistant Commissioner (AAC), however, disagreed, relying on various judicial precedents such as CIT v. L. Raghu Kumar and others, concluding that the amount received by the assessee was not liable to capital gains tax. The AAC deleted the inclusion of Rs. 40,000 made by the ITO.

Upon appeal, the revenue contended that there was a clear transfer of assets from the firm to the outgoing partner, thus justifying the inclusion of the amount as capital gains. The revenue cited cases like CIT v. Tribhuvandas G. Patel and CIT v. H. R. Aslot to support their stance.

The assessee's counsel argued that the firm was dissolved on 31-12-1982, and the amount received was in accordance with the arbitration award and dissolution deed, thus not constituting a transfer liable to capital gains. The counsel relied on Supreme Court judgments such as Addl. CIT v. Mohanbhai Pamabhai and Sunil Siddharthbhai v. CIT, which held that amounts received by retiring partners are not assessable as capital gains.

The Tribunal concluded that the extra amount received by the assessee was due to the difference in the value of the plot/building received and his share in the firm. The Tribunal observed, "The assets were distributed in accordance with award and deed and, in our view, therefore, there was no transfer, as understood u/s 2(47)." The Tribunal upheld the AAC's decision, stating that the receipt of Rs. 40,000 did not constitute capital gains based on the precedent set by the Andhra Pradesh High Court in L. Raghu Kumar.

Issue 2: Assessment Year Consideration

The assessee's counsel argued that the transaction should be assessed in the assessment year 1984-85, as the dissolution occurred on 31-12-1982. However, the Tribunal found this argument without merit, stating, "the firm got dissolved on 31-12-1982, i.e., during the period under consideration." Therefore, the transaction was correctly assessed in the assessment year 1983-84.

Issue 3: Consideration as 'Gift'

The assessee's counsel suggested that the amount of Rs. 40,000 could be considered as a 'gift' from the continuing partners. The Tribunal dismissed this argument, noting, "it is difficult to consider such receipt as 'gift' because it was not seen to be the intention of the parties." The Tribunal emphasized that the amount was received due to the difference in the value of the plot/building and the assessee's share, not as a gift.

Conclusion:

The Tribunal dismissed the revenue's appeal, confirming the AAC's decision that the sum of Rs. 40,000 received by the assessee was not liable to capital gains tax. The Tribunal concluded that the transaction did not constitute a transfer under section 2(47) and upheld the AAC's finding based on judicial precedents, including the Supreme Court's judgment in Mohanbhai Pamabhai. The appeal was dismissed.