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TMI Blog1970 (9) TMI 109X X X X Extracts X X X X X X X X Extracts X X X X ..... ion of this instrument, it would be desirable to set out some of its material provisions in extenso. They read, according to their English translation : '1. We have retired from the firm of Messrs. Velo Industries with effect from Aso Vad Amas Samvat year 2021 and you have taken over the administration of the firm in its present condition together with all goods, debts, outstanding transactions, tenancy and leasehold rights, quotas, permits, licences, etc., as also goods, properties, reserve funds, tools, equipment, etc., and all liabilities of the firm and you are entitled to carry on the business in partnership between yourselves or by taking new partners. All rights and liabilities resulting from the administration of the business of the firm hereafter will now devolve upon you and your new administration. 2. It is agreed between us that the accounts including determination of profit of the present administration up to Aso Vad Amas Samvat year 2021 are to be settled between us by mutual consent as soon as possible and whatever is the amount coming to the share of each of us is to be credited in his respective account with the firm and no one is to be entitled to raise ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ly, that the instrument was a conveyance for the amount of ₹ 2,25,632.35 on which stamp of ₹ 12,430 would be required under article 25, clause (b), of the Schedule I to the Bombay Stamp Act, 1958. Pursuant to the decision of the Chief Controlling Revenue Authority, the Collector passed an order dated 29th December, 1967, adjudicating that a sum of ₹ 12,430, should have been paid under article 25, clause (b) of Schedule I to the Act and, therefore, the amount of deficit of stamp duty of ₹ 12,400, together with fine of ₹ 500 aggregating in all to ₹ 12,900 should be recovered from Madanlal Makandas Valia, one of the continuing partners who had produced the instrument for registration. The firm was aggrieved by the decision of the Chief Controlling Revenue Authority and, accordingly, an application dated 1st February, 1968, was made by the firm to the Chief Controlling Revenue Authority, requiring him to draw up a statement of the case and refer it to the High Court and, on the application, the Chief Controlling Revenue Authority made the present reference for obtaining the decision of this court on the following two questions : '(1) Whether t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... visions that the instrument is nothing but a simple deed of retirement recording the terms and conditions on which three partners retired from the firm. On retirement, the three partners undoubtedly ceased to have interest in the partnership assets and the partnership assets continued to belong to the firm consisting of the continuing partners, but there was no transfer of interest from the retiring partners to the continuing partners in consideration of a sum of money. The retiring partners merely took money representing their respective shares in the partnership and went out of the firm. This position becomes very clear if we consider what is the true nature of the interest of a partner in a partnership and what happens when a partner retires from the firm. The following statement of the law is to be found in Lindley on Partnership, twelfth edition, at page 375, where the learned author describes the nature of the share of a partner in a partnership : 'What is meant by the share of a partner is his proportion of the partnership assets they have been all realised and converted into money, and all the partnership debts and liabilities have been paid and discharged. This it i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Court, it is a right to obtain his share of profits from time to time during the subsistence of the partnership and on dissolution of the partnership or his retirement from the partnership, to get the value of his share in the net partnership assets which remain after satisfying the liabilities set out in clause (a) and sub -clauses (i), (ii) and (iii) of clause (b) of section 48. When, therefore, a partner retires from the partnership and the amount of his share in the net partnership assets after deduction of liabilities and prior charges is determined on taking accounts on the footing of a national sale of the partnership assets and given to him, what he receives is his share in the partnership and not any price for sale of his interest in the partnership. His share in the partnership is worked out by taking accounts in the manner prescribed by relevant provisions of the partnership law and it is this and this only, namely, his share in the partnership which he receives in terms of money. There is in this transaction no element of sale; the retiring partner does not sell his interest in the partnership to the continuing partners. He, on the contrary, carves out his interest and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fter discharging the debts and other obligations and there was accordingly no sale of the theatres by the partnership to the individual partners in consideration of their respective shares in the residue, and, consequently, the amount of ₹ 44,380 could not be included in the total income of the partnership under the second proviso to section 10(2)(vii). Shah J., speaking on behalf of the Supreme Court, stated the law on the subject in these terms : 'Under section 46 of the Partnership Act, 1932, on the dissolution of the firm every partner or his representative is entitled, as against all the other partners or their representatives, to have the property of the firm applied in payment of the debts and liabilities of the firm, and to have the surplus distributed among the partners or their representatives according to their rights. Section 48 of the Partnership Act provides for the mode of settlement of accounts between the partners. The distribution of surplus is for the purpose of adjustment of the rights of the partners in the assets of the partnership; it does not amount to transfer of assets. On dissolution of the partnership, each theatre must be deemed to be retur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... xecution of the instrument in question was extinguishment of the rights and interest of the first party in certain specified properties of the dissolved firm and corresponding augmentation of the rights and interest of the second party, in consideration of a certain sum of money paid to the first party, there was no reason why the transaction should not be regarded as a sale of the undivided interest of the first party to the second party. This reasoning, with the greatest respect, overlooks the true nature of the interest of a partner in a partnership and fails to take into account what really happens when a partner retires from a partnership and takes away, either in cash or in property, his share in the partnership. We cannot accept this decision as laying down the correct law, and, in any event, in view of the decision of the Supreme Court in Commissioner of Income -tax v. Dewas Cine Corporation, it must be regarded as devoid of authority. We must, therefore, reach the conclusion that the instrument in the present case was not a conveyance on sale and, therefore, not a conveyance within the meaning of section 2(g) and hence it must be held to be not chargeable under article 25 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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