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TMI Blog2004 (10) TMI 290X X X X Extracts X X X X X X X X Extracts X X X X ..... nt of the jurisdictional High Court in the case of R. Lingmallu Raghukumar [ 1997 (1) TMI 74 - SUPREME COURT] and G. Seshagiri Rao [ 1992 (9) TMI 13 - ANDHRA PRADESH HIGH COURT] as the excess receipt is not liable to tax. Even otherwise, when all the partners agree that this is her share in assets of the firm, it is not for us to artificially arrive at what is her share in partnership assets and what is the excess amount. Nowhere in the compromise deed, it is stated that something in excess to her entitlement and share in assets was paid to her. Thus, we hold that what was received by mutual consent was only money's worth of her share in the assets of the partnership assets only. Even if it is held that the assessee had received something more than what is actually due to her on the rendition of accounts, the same cannot be brought to tax as already stated by us and also in view of the judgment of the Hon'ble Supreme Court in the case of s G. Patel v. CIT[ 1996 (2) TMI 16 - SUPREME COURT] , as well as the judgment reported in CIT v. R. Lingmallu Raghukumar. These judgments declare that when the assessee received her share in the value of asTribhuvandasets of the partnership ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The land was not contributed into the partnership firm by the sisters and thus it was not a partnership asset. All the constructed structures appeared in the books of the firm and are the assets of the firm (refer to paragraph 4.2 of the assessment order). Thus, only the theaters and commercial complexes are the assets of the partnership firm. 3. Disputes arose among the partners and the assessee filed a suit in the Court of the V Senior Civil Judge, City Civil Court, Hyderabad, vide O.S. No. 2140 of 1988, wherein she claimed 1/3rd share of the land as well as her 1/3rd share in the partnership assets. The partnership is at Will. The assessee issued a notice for dissolution of the partnership on 21-1-1989. The other two sisters of the assessee also filed a suit for dissolution of the firm, vide O.S. No. 389 of 1989. The suit filed by the other two sisters, who are also the other two partners of the firm, was initially dismissed for default, but was again restored and ultimately dismissed as not pressed. The assessee and the other two sisters filed joint compromise petition in the Court of the V Senior Civil Judge, City Civil Court, Hyderabad and the court passed a compromise decre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . 1.82 crores was not liable to tax in her hands, as it represented her share of the firm's assets received on its dissolution. He contends that the fixed assets were revalued and she received 1/3rd of the value which is her share in the partnership assets. Alternatively, it was contended that even if the amount represented her share in the firm's assets received on retirement, it was not liable to tax. The Assessing Officer, on the ground that the assessee had not invested any money in the construction of the theatres, commercial complex and other structures, held that it was a transfer and the amount was liable to be brought to tax in the block assessment. The first appellate authority upheld the order of the Assessing Officer by observing that though in a case of dissolution or retirement, the share of the retiring partner in the assets of the firm cannot be brought to tax, the excess amount received is liable to be taxed. He also held that the entire amount of Rs. 1.82 crores represents the excess amount liable to capital gains tax within the meaning of section 2(47) of the Income-tax Act. He relied on the decision of the Hon'ble Delhi High Court in the case of Bishan Lal Kanod ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s of settlement in O.S. No. 2140 of 1988 and retiring partner agreed to retire. He vehemently contended that this deed cannot have the effect of overriding the dissolution of the firm, which is acknowledged in the compromise deed. Thus, he submits that this is a case of dissolution of the firm and that in the case of dissolution of firm, section 45(4) of the Income-tax Act is applicable and the assessee is not liable to any capital gains tax as the liability is fastened on the firm only, by virtue of the section. 7. Alternatively, the learned counsel for the assessee contended that if the Tribunal takes a view that it is a case of retirement of a partner from the firm and not a case of dissolution, then also, what the assessee received was only a share in the assets of the firm and that no excess amount whatsoever was received and that on such facts and circumstances, there is no transfer and that the Hon'ble Supreme Court held in a number of cases that when a partner retires from a firm and his share in the net assets of the firm is given to him in money or money's worth, there is no transfer-as defined in section 2(47) of the Income-tax Act. He relied on the following judgments:- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... share and in para 2 the other two sisters were allotted the theatres, canteen, mulgies etc. As regards liabilities, he submitted that the assessee was kept away from the firm for nearly 12 years and the litigation was going on in the court and that the other two partners were carrying on the business of the firm and that the assessee had no role whatsoever in either assets and liabilities or profits of the firm, consequent to her filing a suit. He submitted that the other two sisters were allotted the theatres, canteen, mulgies etc. and they continued to carry on the business as before and it was mutually agreed in paragraphs 3 and 4 of the compromise deed that assessee is indemnified. He submitted that even going by the retirement deed, it is stated therein that the account of the retiring partner was drawn up and settled in full and that it was a mutually agreed statement. He submitted that the legal requirements of section 48 of the Indian Partnership Act regarding the drawing up of account of the retiring partner etc. should have been held to have been satisfied once the matter was mutually agreed between the partners in the court after eleven years. He submitted that the accou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nership Act, 1939, the dissolution of partnership is between all the partners of the firm and in the present case only one partner retired and the remaining partners continued to carry on the business of the firm. (5) The assessee was herself not sure as to whether it was a case of dissolution or retirement as is evident from ground No. 2 of the revised grounds of appeal filed on 14-9-2004. The learned DR submitted that sections 45 to 55 of the Indian Partnership Act, 1939, occur in the same Chapter VI of the Act, and all the sections pertain to dissolution of firm and section 45 provides for liability for acts of the partner done after dissolution; section 46 provides for right for continuing authority of partners for purposes of winding up; section 48 provides for mode of settlement of accounts between the partners and states that losses shall not be paid etc. Similarly, referring to sections 49, 53 and 54 as well as section 55, the learned DR submitted that though a notice was given under section 43, the other sections, i.e. sections 45 to 55 have not been followed by the assessee and that there was neither settlement of accounts nor distribution of assets under section 48 of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... deration of her assigning or releasing her interest or title in the partnership assets in favour of the continuing partners. Thus, he submitted that it is a transfer within the meaning of section 2(47) of the Income-tax Act. He placed reliance on the following decisions: CIT v. H.R. Aslot [1978] 115 ITR 255 (Bom.). N.A. Mody v. CIT [1986] 162 ITR 420 (Bom.). Bishan Lal Kanodia v. CIT [2002] 257 ITR 449 (Delhi). Referring to the case laws relied upon by the learned counsel for the assessee, the learned DR submitted that they are distinguishable on facts as in all those cases the amount was received by a partner towards his share in the partnership assets, which means after deduction of liabilities and prior charges in the manner described in the partnership law. He further submitted that in this case the amount of share of the assessee in the partnership assets was determined based only on the valuation of the assets but not after deducting the liabilities first. He vehemently contended that all the above cases were rendered when the provisions of section 47(ii) of the Income-tax Act were in the statute and that the Finance Act, 1987, has deleted section 47(ii) and that the case law ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ers. The learned DR's argument that there is a relinquishment is not correct as the matter was fought in a civil court for over 11 years and the assessee received through court the value of her 1/3rd share in the firm's assets, which could not be physically divided. The assessee did not give any concession. In the case of dissolution, the liability is fastened on the firm only and the assessee has no liability [Refer to Kanga and Palkhivala's Income-tax Law, 8th edition, Vol. I, under section 45(4)]. 16. If it is to be held, that this is a case of retirement and not a case of dissolution, the amount paid to the partner on retirement, as her share in the assets of the partnership firm, cannot be held be exigible to tax on the ground that there is a gain consequent to a transfer. The Hon'ble jurisdictional High Court in the case of CIT v. R. Lingmallu Raghukumar [1988] 141 ITR 674 (AP) held as follows (as per head note):- "The right of a partner in a partnership firm is, during the subsistence of the partnership, to receive a share of profits from time to lime as may be agreed upon and after dissolution of the partnership or with his retirement from partnership, to receive the value ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . The Income-tax Officer treated the additional amount of Rs. 46,500 as capital gains in the hands of the assessee. The assessee carried the matter in appeal but the appeal was dismissed upholding the order of the Income-tax Officer. The assessee then went up in further appeal to the Appellate Tribunal. Before the Tribunal, he contended that there was no transfer of any capital asset within the meaning of section 2(47) of the Act. It was held by this court that when the share of a partner in the partnership was worked out by taking accounts in the manner prescribed by the relevant provisions of the partnership law, there was no element of transfer of interest in the partnership assets by the retiring partner to the continuing partners. It was further held that for the purpose of section 45 of the Income-tax Act, no distinction could be drawn between an amount received by the partner on dissolution of the firm and that received on his retirement, since both of them stood on the same footing and the amount received by a partner from the partnership in excess of the capital and profits standing to his credit at the time of retirement could not be construed as "capital gain" under sect ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... risdictional High Court, which is approved by the Hon'ble Supreme Court, holds the field and that the amount received by a partner from the partnership firm in excess of the capital and profit standing to the credit of the partner at the time of retirement cannot be construed as capital gain under section 45 of the Income-tax Act inasmuch as there is no transfer within the meaning of section 2(47) of the Act and such excess is not exigible to tax on capital gain and thus, for the purpose of section 45, no distinction can be drawn between the amount received by a partner on dissolution of the firm and that received on his retirement. 18. The contention of the Revenue that the assessee had received an amount which is in excess of the amount that is recorded as her share in the books of account of the partnership firm and thus is liable to tax, is also not correct for the reason that the assets of the partnership have been revalued and 1/3rd of this value has been given to the assessee in pursuance of a compromise deed. What is received is only her share in the value of the assets of the partnership. These values were arrived at by mutual consent between the partners. The assessee's c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ht to tax as there is no transfer. In case of Tribhuvandas G. Patel, the Hon'ble Supreme Court answered question No. 3 as follows:- Question: "Whether, on the facts and in the circumstances of the case, the sum of Rs. 4,77,941 or any part thereof was liable to tax as capital gain by reason of section 47(ii) of the Act?" Answer: "So far as question No. 3 is concerned the assessee invoked clause (ii) of section 47 to contend that the said sum of Rs. 4,47,941 does not represent a capital gain. Mr. Sharma, learned counsel for the appellant-assessee, has brought to our notice the decision of this court in CIT (Addl) v. Mohanbhai Pamabhai [1985] 165 ITR 166 where it has been held, following the decision in Sunil Siddharthbhai v. CIT [1985] 156 ITR 509 (SC), that even where a partner retires and some amount is paid to him towards his share in the assets, it should be treated as falling under clause (ii) of section 47. Therefore, following this decision, this question has to be and is answered in favour of the assessee and against the Revenue." The court answered question No. 2 as follows:- Question: "Whether, on the facts and in the circumstances of the case, the sum of Rs. 50,000 receive ..... X X X X Extracts X X X X X X X X Extracts X X X X
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