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TMI Blog2012 (9) TMI 12X X X X Extracts X X X X X X X X Extracts X X X X ..... hange or transfer his share in the assets of the firm. Payment of the amount agreed to be paid to the appellant under the compromise was not in consequence of any share, exchange or transfer of assets to Y.Kalyana Sundaram. As up to the assessment year 1987-1988, Section 47 (ii) excluded these transactions and from assessment year 1988-89, in the case of dissolution of a firm, only the firm is taxable on capital gains on dissolution under Section 45 (4) of the Income Tax Act, 1961 and not the partner - in favour of assessee. - I.T.T.A.No.70 of 2000 - - - Dated:- 3-8-2012 - Goda Raghuram And M S Ramachandra Rao, JJ. For Appellant : Sri Y Ratnakar For Respondent : Sri J V Prasad, Senior Standing Counsel JUDGEMENT Per : M S Ramachandra Rao : This appeal is filed by the appellant/assessee under Section 260-A of the Income Tax Act, 1961 challenging the order dated 08-02-2000 of the Income Tax Appellate Tribunal, "B" Bench, Hyderabad in I.T.A.No.1529/Hyd/94 for the assessment year 1989-90. 2. The appellant was a partner in a firm by name M/s.Theatre Radha, a registered firm at Vijayawada along with one Y.Kalyana Sundaram under a partnership deed dated 06-07-1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Court of Andhra Pradesh. On 18-07-1987, the said appeal was allowed in part with the following directions: "1) That the total value of the property as on 08-03-1979 be and hereby is fixed at Rs.16,09,000/- (Rupees sixteen lakhs and nine thousand only) determining the value of the land at Rs.300/- per square yard instead of Rs.200/- per square yard; 2) That the first defendant liability to account is not disputed. 3) That the clauses (iii) and (i) of the Decree passed by the Trial Court shall be deleted and in place of clauses (iii) and (iv) of the decree, the following clauses namely "(iii) the partnership property i.e. the cinema theatre, shall be put to auction between the parties herein and (iv) If for any reason this auction fails, proceeds distributed between the parties equally subject to satisfaction of the debts outstanding if any shall be substituted as clauses (iii) and (iv) respectively. 4) That, same as aforesaid, the decree of the trial Court shall stand confirmed in other respects, and 5) That there be no order as to costs in this appeal." 5. Being aggrieved by the judgment and decree in A.S.No.2242 of 1983, Y.Kalyana Sundaram filed Civil Appeal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e appellant this sum was paid towards his share in full and final settlement of the amount due to him on the dissolution of the firm in lieu of his 50% share in the firm and the assets of the partnership were taken over by Sri Y.Kalyana Sundaram. 7. The appellant as an individual filed his return for the assessment year 1989-90 on 08-04-1991 declaring a total income of Rs.50,760/-. This income comprised of income from business at Rs.48,864/- and other source Rs.15,989/-. Out of this, the appellant claimed deduction under Sections 80-C and 80-L of Rs.14,094/-. The return of the assessee was processed by the respondent under Section 143 (1) (a), on 25-10-1991. 8. Subsequently, the respondent felt that the appellant had sold away his right and title in 50% share in the Theatre Radha to his partner Y.Kalyana Sundaram in November 1988 for Rs.15.00 lakhs, that the appellant did not admit any capital gain out of this transaction, that there is reason to believe that income chargeable to tax has escaped assessment and issued a notice under Section 148 on 27-12-1993. The appellant filed a letter on 13-01-1994 stating that the return already filed by him on 08-04-1991 admitting a total i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lance cannot be subjected to tax as capital gains. He contended that the compromise in the Supreme Court and the consequent judgment passed by the Supreme Court is one of the ways of settlement of accounts consequent to the dissolution of the firm and there was no transfer at all involved in the transaction. He further contended that even if any transfer had occurred, it is in the assessment year 1979-80 and not in the assessment year 1989-90. He contended that a sale deed was to be executed by the appellant in favour of the other partner on the dissolution and in fact, till that day, no such sale deed is executed and registered in favour of the other partner. Lastly he also contended that up to the assessment year 1987-1988, Section 47 (ii) of the Income Tax Act, 1961 excluded these transactions. From assessment year 1988-89, in the case of dissolution of a firm, only the firm is taxable on capital gains on dissolution under Section 45 (4) of the Income Tax Act, 1961 and not the partner. 13. The I.T.A.T. did not consider the above contentions raised by the appellant before it and dismissed the appeal by order dated 08-02-2000. Aggrieved thereby the appellant has filed the abov ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... solution insist that the assets of the partnership be realized by sale of its assets, but where satisfaction of the claim of the partner to his share in the value of the residue determined on the footing of an actual or notional sale of property is allotted, the property so allotted to him cannot be deemed in law to be sold to him. 19. In C.I.T. Vs. Bankey Lal Vaidya (supra), the Supreme Court held that a partner in a firm (carrying on business of manufacturing and selling pharmaceutical products and literature relating thereto) whose assets (which included good will, machinery, furniture, medicines, library and copy right) were valued at Rs.2,50,000/-, was paid towards his half share, on the dissolution of the firm, a sum of Rs.1,25,000/- in lieu of his share, the arrangement between the partners of the firm amounted to a distribution of the assets of the firm on dissolution. It held that there was no sale or exchange of the respondent's share in the capital assets to the other partner. The Supreme Court of India further held as follows: "In the course of dissolution the assets of a firm may be valued and the assets divided between the partners according to their respective s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rs passed by the C.I.T. (Appeals) and the respondent. When the appellant was paid Rs.15.00 lakhs by Y.Kalyana Sundaram in full and final settlement towards his 50% share on the dissolution of the firm, there was no "transfer" as understood in law and consequently there cannot be tax on alleged capital gain. The appellant was correct in law in contending that the amount he received from Y.Kalyana Sundaram is towards the full and final settlement of his share and such adjustment of his right is not a "transfer" in the eye of law. It is a recognized method of making up the accounts of the dissolved firm and the receipt of money by him is nothing but a receipt of his share in the distributed asset of the firm. The appellant received the money value of his share in the assets of the firm. He did not agree to sell, exchange or transfer his share in the assets of the firm. Payment of the amount agreed to be paid to the appellant under the compromise was not in consequence of any share, exchange or transfer of assets to Y.Kalyana Sundaram. Moreover , as rightly contended by the assessee, up to the assessment year 1987-1988, Section 47 (ii) of the Income Tax Act, 1961 excluded these transac ..... X X X X Extracts X X X X X X X X Extracts X X X X
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