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TMI Blog2003 (8) TMI 208X X X X Extracts X X X X X X X X Extracts X X X X ..... ay High Court thus laid great emphasis on the particular mode employed to effect and bring about the retirement of the assessee from the partnership and having regard to the fact that lumpsum consideration was received by the retiring partner in the case of N.A. Mody as consideration for assignment of his share in a firm to the retiring partners, came to the conclusion that there was a transfer within the meaning of s. 2(47) giving rise to capital gain. We also do not find merits in his contention that when a partner retires from the firm, it is a case of realization of his pre-existing rights and not the case of extinguishments or relinquishment of his rights within the meaning of s. 2(47), since as already discussed, observations to this effect were made by the Courts in the different context and as held by the Hon ble Bombay High Court, the same cannot be applied or read as a proposition of law in the context of taxability of amount received on retirement as long-term capital gain. As a matter of fact, it appears from the decisions relied upon by the learned counsel for the assessee that neither the Hon ble Supreme Court nor the other High Courts have disapproved the proposition ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the firm of M/s Mehta Kakade Associates as long-term capital gains, is raised in the following grounds raised therein: 1. The learned CIT(A) erred in confirming addition of Rs. 34,43,700 added in the assessment as long-term capital gain, without appreciating facts and circumstances of the case as also the correct legal position. The addition being unjustified both in law and on facts, may kindly be deleted. 2. The learned CIT(A) erred in relying on the decision of Bombay High Court in N.A. Mody s case, which according to the assessee, in fact was in favour of the assessee on the facts of the assessee s case. 3. The learned CIT(A) erred in not considering the decision of Supreme Court and High Courts cited in support of appellant's claim. 2. In this case, the assessee filed his return of income for the year under consideration on 30th Aug., 1995, declaring a total income at Rs. 26,813. Along with the said return, a letter was filed by the assessee stating therein that he has retired from the firm of M/s Mehta Kakade Associates by a deed of retirement dt. 1st Oct., 1994, and that he has received an amount of Rs. 34,43,700 on his retirement from the said firm. Since no capital gai ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by a partner on retirement. 6. The principles laid down by the Supreme Court in the case of Addl. CIT vs. Mohanbhai Pamabhai (1987) 165 ITR 166 (SC) and followed by the other High Courts in the decision relied upon by the assessee, the learned Judges were inclined to restrict the principles decided therein as applicable in strictness only to cases of general dissolution of partnership. They were inclined to hold that Supreme Court s decision cannot be applied to a case, where on retirement, a partner agrees to take a lumpsum from the other partners without valuation of the assets of the partners and without arriving at his share of the net assets. To adopt the reasoning of the Supreme Court for the purpose of capital gain taxation and make no distinction between dissolution on one hand and retirement of a partner on the other hand was not correct according to learned Judges of Bombay High Court. In the case of CIT vs. Tribhuvandas G. Patel (1978) 115 ITR 95 (Bom), the Bombay High Court held that, if partner agrees to pay a lumpsum consideration of the retiring partner assigning or relinquishing his share and right in partnership and its assets in favour of continuing partners, the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... above discussion, the consideration received of Rs. 34,43,700 is added as long-term capital gains of assessee. 4. Aggrieved by the order of the AO, the assessee preferred an appeal before the learned CIT(A) and it was submitted on behalf of the assessee during the course of appellate proceedings before him that the partnership firm of M/s Mehta Kakade Associates was originally constituted by a deed of partnership dt. 23rd June, 1994, with four partners out of which two partners, i.e., Shri Shevantibhai C. Mehta, assessee in the present case and Mrs. Anitaben Mehta retired w.e.f. 1st Oct., 1994, and the remaining two partners continued to carry on the business of the firm with all its assets and liabilities. The retiring partners were settled at Rs. 34,43,700 each by way of value of their interest in the firm. No assets were taken over by the retiring partners and the amount of Rs. 34,43,700 was paid to them in instalments on account of market value of their interest in the firm as mutually agreed in the deed dt. 1st Oct., 1994. It was, therefore, contended that this was a case of retirement of some of the partners of the firm and there was neither dissolution nor the distribution o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Krishnappa AIR 1966 SC 1300 and it was also held by the Hon ble apex Court in the said case that a deed of retirement did not operate as a relinquishment of interest in immovable property but that it was merely by way of adjustment of the rights of partners and no compulsory registration was involved under s. 17(1)(c). Further relying on the decision of Hon ble Gujarat High Court in the case of CIT vs. Mohanbhai Pamabhai in which reference was made to the decision of Hon ble Supreme Court in the case of Narayanappa vs. Bhaskara Krishnappa, he pointed out that the Hon ble Gujarat High Court has held that the observations of the Hon ble Supreme Court in the said case are applicable both for retirement and dissolution. He also invited our attention on the relevant portion of Hon ble Gujarat High Court decision on page Nos. 402 and 403 of the report wherein it was held that the decision of Hon ble apex Court in the case of Narayanappa vs. Bhaskara Krishnappa was relevant even for considering the relinquishment of the rights by the partner. He pointed out that a reference was made by the Hon ble Gujarat High Court in the said decision to the case of Velo Industries for the proposition ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t keeping in view their decision in the case of Sunil Sidharthbhai and thus the legal position of this issue has become final. 7. As regards the decision of Hon ble Bombay High Court in the case of N.A. Mody vs. CIT on which heavy reliance was placed by the learned CIT(A), he pointed out that the Hon ble Bombay High Court in the said decision has followed its earlier decisions in the case of CIT vs. Tribhuvandas G. Patel and CIT vs. H.R. Aslot. He submitted that the said two decisions of the Hon ble Bombay High Court came to be considered by the Hon ble Andhra Pradesh High Court in the case of CIT vs. L. Raghukumar (1982) 31 CTR (AP) 192 : (1983) 141 ITR 674 (AP) wherein their Lordships of Andhra Pradesh High Court clearly expressed their dissent from the view expressed by the Hon ble Bombay High Court in the said two decisions. Referring to the relevant observations of the Hon ble Andhra Pradesh High Court at p. 680 of the report, he pointed out that while dissenting from the two decisions of the Hon ble Bombay High Court, the Hon ble Andhra Pradesh High Court preferred to follow the decision of Hon ble Gujarat High Court in the case of Mohanbhai Pamabhai and came to the conclusio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is right and not a case of extinguishment or relinquishment of his right. This is because the right of the partner itself is equivalent to getting a surplus on realization of the properties on notional basis deducting liabilities therefrom and getting a share in the surplus. Thus getting share of surplus may be on notional basis is nothing but realization of the right and not a relinquishment or extinguishment of the right. This has been sufficiently explained by the Gujarat High Court in Mohanbhai Pamabhai which decision has been affirmed by the Supreme Court. 9. The learned counsel for the assessee also relied on the Third Member decision of Pune Bench of Tribunal in the case of Aruna A. Bhat vs. Asstt. CIT (2002) 75 TTJ (Pune)(TM) 675 : (2002) 81 ITD 218 (Pune)(TM) and submitted that in the identical facts and circumstances, the legal position as sought to be put forth by the assessee on a similar issue was accepted by the Division Bench in para No. 9 of the learned Accountant Member s order. He contended that the issue raised in the present appeal is squarely covered in favour of the assessee by the various decisions of Hon ble apex Court and following the said decisions, this ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... preme Court in the case of Sunil Sidharthbhai are, therefore, of no help to the assessee in the present case. 12. The learned Departmental Representative further submitted that even in the case of L. Raghukumar before the Hon ble Andhra Pradesh High Court, the facts involved were different and further their Lordships in their judgment rendered in the said case had distinguished the decision of Hon ble Bombay High Court in the case of CIT vs. Tribhuvandas G. Patel and CIT vs. H.R. Aslot on facts. According to him, it therefore cannot be said that the affirmation of the decision of Hon ble Andhra Pradesh High Court by the Hon ble Supreme Court in the case of L. Raghu Kumar has in effect overruled even impliedly the decisions of Hon ble Bombay High Court in the case of Tribhuvandas G. Patel and H.R. Aslot on which heavy reliance was placed by the Hon ble Bombay High Court in its subsequent judgment rendered in the case of N.A. Mody. He contended that in the case of N.A. Mody before the Hon ble Bombay High Court, the retiring partner was paid a lumpsum consideration and as per the deed of retirement executed in the said case, the rights in the assets of the firm were specifically assig ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... upreme Court in the case of CIT vs. Mrs. Grace Collis (2001) 166 CTR (SC) 201 : (2001) 248 ITR 323 (SC) has disapproved the said decision of Division Bench in the case of Vania Silk Mills (P) Ltd. while holding that the meaning of the expression extinguishment of any right therein used in s. 2(47) is wide and the same is not confined to transfer of any particular share. He contended that the surrender of rights in the interest of a firm by the retiring partners in favour of the continuing partners thus has to be considered in the light of this extended or wide meaning assigned by the larger Bench of the Supreme Court to the expression extinguishment of any right therein in the case of Mrs. Grace Collis and in that sense the same would constitute transfer within the meaning of s. 2(47) attracting the levy of capital gain tax. He contended that a similar issue arose for consideration before the Hon ble Delhi High Court recently in the case of Bishan Lal Kanodia vs. CIT (2002) 173 CTR (Del) 496 : (2002) 257 ITR 449 (Del) wherein the Hon ble Delhi High Court concurred with the view expressed by the Hon ble Bombay High Court in the case of N.A. Mody holding that the mode of retirement i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e stand sought to be taken by the Revenue is entertained by the Tribunal at this stage. 16. We have considered the arguments of both the sides in the light of material available on record as well as the decisions cited at bar. It is observed that the order of the AO in treating the amount of Rs. 34,43,700 received by the assessee on his retirement from the firm of M/s Mehta Kakade Associates to be liable to tax as long-term capital gain has been upheld by the learned CIT(A) mainly relying on the decision of Hon ble Bombay High Court in the case of N.A. Mody vs. CIT in which it was held that a lump sum consideration received on assignment of his share in a firm by partner on his retirement is liable for capital gain tax as there is transfer within the meaning of s. 2(47). For this proposition, the Hon ble Bombay High Court had relied on its two decisions rendered earlier in the case of CIT vs. Tribhuvandas G. Patel and CIT vs. H.R. Aslot. In this regard, the learned counsel for the assessee has contended that in the case of CIT vs. L. Raghukumar, the Hon ble Andhra Pradesh High Court has expressed their dissent from the view taken by the Hon ble Bombay High Court in the case of Trib ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iew taken in CIT vs. Tribhuvandas G. Patel. Thus in these two cases, the decision turned upon the facts of the said cases. 17. It is also observed that the dissent incidentally was expressed by the Hon ble Andhra Pradesh High Court in its decision rendered in the case of L. Raghukumar from the view of the Hon ble Bombay High Court taken in the case of Tribhuvandas G. Patel and H.R. Aslot to the effect that the position of a retiring partner, for capital gains tax purposes, could not be equated with that of a partner upon general dissolution since a clear distinction existed between the two concepts in as much as consequences flowing from each were entirely different. In the case of Tribhuvandas G. Patel, it was also held by the Hon ble Bombay High Court that in the case of retirement of a partners, it is only that partner who goes out of the firm and remaining partners continue to carry on the business of a partnership firm whereas in the case of dissolution, the firm as such no more exists and the dissolution is between all the partners of the firm. It is with this view that the Hon ble Andhra Pradesh High Court did not agree with the Hon ble Bombay High Court and concurred with t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rship assets as on the date of dissolution or retirement after a deduction of liabilities and prior charges. 18. From the above, it is evident that both the situations, i.e., retirement of a partner and dissolution of a partnership firm were treated on equal footing by the Hon ble Supreme Court in an entirely different context as further clarified by the Hon ble Delhi High Court in the case of Bishan Lal Kanodia vs. CIT in para No. 8 of its order, relevant portion of which is reproduced below: The equating of the two done by the Supreme Court in Addanki Narayana vs. Bhaskara Krishnappa AIR 1966 SC 1300, was not for capital gains tax purposes but for considering the question whether the instrument executed on such occasion between the partners inter se required registration and could be admitted in evidence for want of registration. For capital gains tax purposes, the question assumes significance in view of the fact that under s. 47(ii) any distribution of assets upon dissolution of a firm has been expressly excepted from the purview of s. 45 while the case of a retirement of a partner from a firm is not so exempted and hence the question arises whether the retirement of a partner ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rded in an entirely different context and as held by the Hon ble Delhi High Court, the same are not applicable for considering the question relating to capital gains tax. No doubt, a different view than that of Hon ble Bombay High Court in the case of Tribhuvandas G. Patel and Delhi High Court in the case of Bishan Lal Kanodia was taken by the Hon ble Andhra Pradesh High Court in the case of L. Raghukumar while holding that the decision of Hon ble Supreme Court in Narayanappa vs. Bhaskara Krishnappa which lays down the proposition of law unequivocally applies to the case of retirement of a partner in the context of taxability of the amount received on retirement as a long-term capital gain and there is no distinction between the retirement of a partner and dissolution of a firm even in this context and although the said decision of Hon ble Andhra Pradesh High Court has been affirmed by the Hon ble apex Court in (2001) 166 CTR (SC) 398 : (2001) 247 ITR 801 (SC), their Lordships have simply relied on the decision of Hon ble Gujarat High Court in the case of CIT vs. Mohanbhai Pamabhai which was affirmed by them in (1987) 165 ITR 166 (SC). In the case of Mohanbhai Pamabhai, it was held ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ts on dissolution of a firm or otherwise chargeable to tax as the income of the firm, such equating appears to be irrelevant for deciding the present case involving asst. yr. 1995-96. 20. Reverting to the decision of Hon ble Gujarat High Court in the case of Mohanbhai Pamabhai on which heavy reliance has been placed by the learned counsel for the assessee in support of assessee s case, it is observed that the said decision was also cited on behalf of the assessee before the Hon ble Bombay High Court in the case of N.A. Mody vs. CIT and their Lordships considered and dealt with the same elaborately in para Nos. 13 to 15 of its order as follows: 13. Great emphasis was placed by Mr. Dwarkadas on the decision of Gujarat High Court in CIT vs. Mohanbhai Pamabhai. This was a case in which the assessee had retired from a firm leaving continuing partners. The terms and conditions of retirement were contained in the minutes. It was argued on behalf of the Revenue that when the assessee retired, the interest of each of the assessees in the partnership was extinguished and there was, accordingly, a transfer of interest within meaning of s. 2(47) of the IT Act, 1961. Relying upon the observatio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sequences flowing from each were entirely different. In the case of retirement of a partner, it was only that the partner who went out of the firm and the remaining partners continued to carry on the business of the partnership as a firm: in the latter case, the firm as such no more existed and the dissolution was between all the partners of the firm. A retiring partner while going out and receiving what was due to him in respect of his share might assign his interest by a deed or he might, instead of assigning his interest, take the amount due to him from the firm and give a receipt for the money and acknowledge that he had no claims on his co-partners. The former type of transaction would be regarded as a sale or release or assignment of his interest by a deed while the latter type of transaction would not. In other words, it was clear that the retirement of a partner could take either of two forms and the question whether the transaction would amount to an assignment or release of his interest in favour of the continuing partners or not would depend upon what particular mode of retirement was employed. If, instead of quantifying his share by taking accounts on the footing of not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tal asset. In the particular case, no document had been executed and, therefore, the Court was not called upon to consider any document executed between the parties. Had there been a document, its terms would have been required to be considered. The effect of the decision in Tribhuvandas Patel s case was that it was the mode in which the retirement had been brought about which determined the question whether there was a transfer or not. If there was to be an acquisition of interest, there had to be a mode by which the interest must pass. If there was no process by which a transfer of interest could be said to have taken place in respect of the interest of the deceased partner, but what the estate of the deceased partner got was only the money value of his interest, it had to be held that in the case of retirement or the death of a partner where moneys were paid to the retiring partner or to the estate of the deceased partner in lieu of his share in the partnership, there was no acquisition of any interest by the surviving or continuing partners. 21. From a perusal of the aforesaid observations of the Hon ble Bombay High Court, it is quite evident that the factual position involved ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e partnership firm when neither the date of dissolution or retirement could be envisaged nor could there be any ascertainment of liabilities and prior charges which might not have even arisen yet, the Hon ble Supreme Court held that the consideration which a partner acquires on making over his personal asset to the partnership firm as his contribution to its capital cannot fall within the terms of s. 48 and since that provision was fundamental to the computation machinery incorporated in the scheme relating to the determination of the charge provided in s. 45, such a case must be regarded as falling outside the scope of taxation altogether. It is pertinent to note here that the said decision of Hon ble Supreme Court in the case of Sunil Sidharthbhai was also cited on behalf of the assessee in the case of N.A. Mody and the same was dealt with by their Lordships in para No. 12 of their judgment as under: Mr. Dwarkadas submitted that the same position in law obtained upon the retirement of a partner, in other words, that there was only a mutual adjustment of rights between the partners and no transfer of assets. He argued that the Supreme Court had equated the position in law as on di ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n the case of Vania Silk Mills (P) Ltd. vs. CIT wherein the following observations were recorded by their Lordships in para No. 8 of their judgment: 8. So also when a partner retires from the partnership what he receives is his share in the partnership which is worked out and realized. It does not represent consideration received by him as a result of the extinguishment of his interest in the partnership assets. He has no share in any particular asset of the firm. Therefore, there is no transfer of interest in any particular asset of the firm on account of the receipt of his share by a retired partner. As held in CIT vs. Mohanbhai Pamabhai (1973) 91 ITR 393 (Guj) no part of the amount received by the assessee as a retired partner is assessable to capital gains tax under s. 45. In this regard, it is observed that the question before the Hon ble Supreme Court in the said case was whether there was an extinguishment of right in the asset on loss of the same on account of fire within the meaning of s. 2(47) and the insurance claim received by the assessee from the insurance company as compensation was liable to capital gain tax on such extinguishment of right which was not brought abou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... chargeability of capital gains tax and as already observed, equating these two positions even otherwise would not be of any help in the present case after omission of cl. (ii) of s. 47 and insertion of s. 45(4). We also do not find merits in his contention that when a partner retires from the firm, it is a case of realization of his pre-existing rights and not the case of extinguishments or relinquishment of his rights within the meaning of s. 2(47), since as already discussed, observations to this effect were made by the Courts in the different context and as held by the Hon ble Bombay High Court, the same cannot be applied or read as a proposition of law in the context of taxability of amount received on retirement as long-term capital gain. We also do not agree with his contention that the mode of retirement which was held to be of great significance while considering a similar issue by the Hon ble Bombay High Court in the case of N.A. Mody is not relevant as held by Hon ble Andhra Pradesh High Court in the case of L. Raghukumar and as stated to be impliedly affirmed by the Hon ble Supreme Court. As a matter of fact, it appears from the decisions relied upon by the learned couns ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... amount to an assignment or release of his interest in favour of the continuing partners or not would depend upon what particular mode of retirement is employed and as indicated earlier, if instead of quantifying his share by taking accounts on the footing of notional sale, parties agree to pay a lump sum in consideration of the retiring partner assigning or relinquishing his share or right in the partnership and its assets in favour of the continuing partners, the transaction would amount to a transfer within the meaning of s. 2(47) of the Act. 25. Having regard to the elaborate reasons given by the Hon ble Delhi High Court in its aforesaid judgment to further support the view taken by the Hon ble Bombay High Court in the case of N.A. Mody as well as considering the specific basis on which the Hon ble Bombay High Court proceeded to draw an analogy in the case of N.A. Mody we find that the legal position which emerges from the analysis of the said decision can be summarized as under: (1) Retirement of a partner could take either of two forms and the question whether the transaction would amount to an assignment or release of his interest in favour of the continuing partners or not w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ip is not sham or an arrangement .' The AO has accepted the fact that the amount was received on retirement. He, however, took a legal stand that the retirement amounts to transfer and relying heavily on the judgment of the Bombay High Court in Tribhuvandas G. Patel held that the amount is liable to capital gains tax. The Hon ble Supreme Court in Mohanbhai Pamabhai has confirmed the decision of the Gujarat High Court in Mohanbhai Pamabhai's case that when a partner retired from the firm and received his share of an amount calculated on the value of the net partnership assets including goodwill of the firm, there was no transfer of interest of the partner in the goodwill, and no part of the amount received by him would be assessable as capital gains under s. 45 of the IT Act, 1961. The Hon ble apex Court again in the case of Tribhuvandas G. Patel vs. CIT (1999) 157 CTR (SC) 519 : (1999) 236 ITR 515 (SC), following the earlier judgment in Mohanbhai Pamabhai partly reversed the decision of the Bombay High Court in Tribhuvandas G. Patel case relied upon by the AO. Thus, the AO s order has no legal legs to stand. From a perusal of the aforesaid observations of the Tribunal, it i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he case. In this regard, he has relied on the decision of learned CIT(A) dt. 19th Feb., 2001, in the case of Smt. Anitaben S. Mehta, the other partner who retired simultaneously with the assessee from the firm of Mehta Kakade Associates on the identical terms and conditions. It is, however, observed that neither the AO nor the learned CIT(A) have considered the applicability of the said decision of Hon ble Supreme Court in the case of McDowell Co. Ltd. to the facts of the present case in their orders. In any case, the order of the learned CIT(A) dt. 19th Feb., 2001, in the case of Smt. Anitaben S. Mehta relied upon by the learned Departmental Representative has been set aside by us on this issue by our order of even date passed in ITA No. 415/PN/2001. 29. Before we part with our order, we may place on record our appreciation for the efforts made by the learned representatives of both the sides especially Mr. G.S. Singh, the learned CIT-Departmental Representative in raising elaborate arguments which have helped us in analysing the legal position emanating from various judicial pronouncements on the issue under consideration and in applying the same to the facts of the present case. ..... X X X X Extracts X X X X X X X X Extracts X X X X
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