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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 ..... 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 gain was offered by the assessee in respect of the said amount in his return of income, a notice under s. 148 was issued by the AO on 18th Sept., 1997, which was duly served on the assessee on 22nd Sept., 1997. During the course of reassessment proceedings under s. 147 r/w s. 143(3), it was contended on behalf of the assessee that his retirement from the firm did not result in the transfer of any asset and, therefore, the amount of Rs. 34,43,700 received by him on retirement was not liable to capital gains tax. It was also contended that in view of the provisio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 transaction would amount to transfer within the meaning of s. 2(47) of the IT Act. This view has been substantiated in the following decisions: (i) CIT vs. H.R. Aslot (1978) 115 ITR 255 (Bom) (ii) N.A. Mody vs. CIT (1986) 52 CTR (Bom) 149 : (1986) 162 ITR 420 (Bom) 7. The learned Judges of Bombay High Court pointed out that the Indian Partnership Act, 1932, did not have a specific provision for taking on account and settlement of accounts on the retirement of a partner. The learned Judges accordingly held that the question wheth ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sessee 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 of assets on such dissolution attracting the provisions of s. 45(4). It was also contended that in the facts and circumstances of the case there is no transfer involved as contemplated by Hon'ble Bombay High Court in the case of N.A. Mody and the addition made by the AO on account of long-term capital gain is liable to be deleted. The submission made on behalf of the assessee did not find favour with the learned CIT(A) and he proceeded to uphold the action of the AO on this count for the following reasons given in p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rayanappa 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 that when a partner retires from the firm, what is given to him by way of shares in partnership, whether it be cash or property in the partnership received by him, is his share in the net partnership assets after deducting liabilities and prior charges and there is no transfer of any interest in property from him to the continuing partners nor is it for price. He, therefore, strongly relied on the decision of Hon'ble Gujarat High Court in the case of Mohanbhai Pamabhai wherein their Lordships relying on the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y 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 conclusion that the ratio laid down by the Hon'ble Supreme Court in the case of Narayanappa vs. Bhaskara Krishnappa, although rendered in the context of registration of the relevant document, was equally applicable in the context of whether there was any relinquishment or extinguishment of interest of the partner on retirement. He submitted that the decision of Hon'ble Andhra Pradesh High Court in the case of CIT vs. R.L. Raghukumar has been affirmed by the Hon'ble Supreme Court vide its decision CIT vs. R. Lingma ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 Bench has already taken a view which is in favour of the assessee. 10. The learned Departmental Representative, on the other hand, submitted that heavy reliance has been placed by the learned counsel for the assessee on the decision of Hon'ble Gujarat High Court in the case of Mohanbhai Pamabhai in support of assessee's case stating further that the same has been affirmed by the Hon'ble Supreme Court in (1987) 165 ITR 166 (SC). He submitted that the facts involved in the case of Mohanbhai Pamabha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ts. 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 assigned by the erstwhile partners to the continuing partners. He contended that the mode of retirement as well as the method of settling the account of retiring partners was particularly different in the case of N.A. Mody and giving emphasis on this mode and method which was found to be a decisive point, the Hon'ble Bombay High Court held that there was a transfer by the retiring partners of their interest in the firm in favour of continuing partners within the meaning of transfer under s. 2(47) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uing 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 is a relevant consideration for deciding the issue about the taxability of amount received by retiring partner on retirement. As regards the decision of this Bench in the case of Aruna A. Bhat vs. Asstt. CIT, the learned Departmental Representative submitted that the decisions of Hon'ble Bombay High Court now relied upon in the present case by the Revenue were neither cited nor considered by the Tribunal while rendering the said decision and since the said decisions of Hon'ble juri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... T(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 Tribhuvandas G. Patel and H.R. Aslot and since the decision of Hon'ble Supreme Court in its judgment (2001) 166 CTR (SC) 398 : (2001) 247 ITR 801 (SC), the decisions of Hon'ble Bombay High Court in the case of Tribhuvandas G. Patel and H.R. Aslot as well as its subsequent decision in the case of N.A. Mody following the same which has been heavily relied upon by the learned CIT(A), stand impliedly overruled by the Hon'ble Supreme Court. We find it difficult to agree with thi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... urposes, 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 the view of Hon'ble Gujarat High Court in the case of CIT vs. Mohanbhai Pamabhai that the position of a retiring partner could be equated with that of a general dissolution of partnership firm considering that the same was based on the decision of Hon'ble Supreme Court in the case of Narayanappa vs. Bhaskara Krishnappa. In the said case, a question arose before the Hon'ble apex Court whether a document recording the terms and conditions of dissolution which included ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t 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 stands on the same footing as that upon a dissolution of the firm." The Hon'ble Delhi High Court then proceeded to hold that a clear distinction exists between the two concepts, i.e., retirement of a partner and a dissolution of a firm by discussing the relevant provisions of the Partnership Act as under: "In our view, a clear distinction exists between the two concepts, inasmuch as the consequences flowing from each are entirely different. In the c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... '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 by the Hon'ble Gujarat High Court that where a partner retires from a partnership and the amount of his share in the net partnership asset after deduction of liabilities and prior charges is determined on taking accounts in the manner prescribed by the relevant provisions of the partnership law, there is no element of transfer of interest in the partnership assets by the retiring partner to the continuing partner and specifically referring to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ehalf 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 observations of the Supreme Court in the context of dissolution of the partnership, which the Gujarat High Court found to be equally applicable when a partner retired from a partnership, it was held that when a partner retired from a partnership and the amount of his share in the net partnership assets, after deduction of liabilities and prior charges, was determined on taking accounts on the footing of a notional sale of the partnership assets and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s 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 notional sale, parties agreed 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 IT Act, 1961. In the document, the assessee stated that he did 'hereby assign and release unto the continuing partners and each of them all his right, tit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 in the case of Mohanbhai Pamabhai was found to be distinguishable by their Lordships from the facts in the case of N.A. Mody inasmuch as the mode of retirement adopted in the case of Mohanbhai Pamabhai was different in the sense that the amount of retiring partner's share in the net partnership assets after deduction of liabilities and prior charges was determined on taking accounts and as further observed in para No. 19 of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n 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 dissolution with that as on retirement. He placed reliance, in this behalf, upon an unreported judgment of the Supreme Court dt. 27th Sept., 1985, in Civil Appeal No. 1841 of 1981-Siddharthbhai vs. CIT reported at (1985) 49 CTR (SC) 72 : (1985) 156 ITR 509 (SC). The question before the Supreme Court was whether a transfer took place within the meaning of s. 2(47) of the IT Act, 1961, of an asset contributed by a partner as ca ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s 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 about by any transfer and in this context it was held by the Hon'ble Supreme Court that in the case of damage or destruction or loss of asset, there is no transfer of it in favour of a third party and thus there was no extinguishment of any rights therein within the meaning of s. 2(47) since such extinguishment envisaged in s. 2(47) is confined to extinguishment of right on account of transfer and cannot be extended to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t 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 counsel for the assessee that neither the Hon'ble Supreme Court nor the other High Courts have disapproved the proposition laid down by the Hon'ble Bombay High Court having regard to the particular mode of retirement. On the contrary, the Hon'ble Delhi High Court in its recent judgment in the case of Bishan Lal Kanodia vs. CIT has concurred with the said proposition propounded by the Hon'ble Bombay High Court ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 would depend upon what particular mode of retirement was employed. If, instead of quantifying his share by taking accounts on 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 is evident that the decision of Hon'ble Bombay High Court in the case of N.A. Mody was not cited before the Tribunal and it, therefore, had no occasion to consider the applicability of the same to the facts of the said case. In the present case, however, heavy reliance has been placed by the Revenue on the said decision and having come to the conclusion that the said decision of Hon ..... X X X X Extracts X X X X X X X X Extracts X X X X
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