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TMI Blog1992 (9) TMI 34X X X X Extracts X X X X X X X X Extracts X X X X ..... 40,000 which represented the goodwill amount of Rs. 20,000 and premium on account of revaluation of assets of Rs. 20,000. The return of income was filed on March 6, 1975. In this connection, show-cause notice was issued and served upon the assessee through the learned advocate representing her. The notice required the assessee to show cause within a stipulated period as to why the amount as stated above should not be included in the assessable income of the assessee. The assessee had filed the reply to the abovesaid show-cause notice dated February 16, 1977, contending that the abovesaid income cannot be taxed under section 28(iv) of the Income-tax Act, 1961, because it could not be said to be the value of the benefit arising from the business carried on by the firm, namely, Messrs. Security Equipment Manufacturers, in which the assessee was a partner. It was noticed that the firm came to be dissolved with effect from December 9, 1972, but prior to the abovesaid date the assessee had received the abovesaid amount of Rs. 40,000 from the firm for which the credit entry was placed in the account books prior to the dissolution of the firm. Since the dissolution deed could be drawn up ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vesaid date, the assessee had received the abovesaid amount of Rs. 40,000 from the firm, for which the necessary credit entry was posted in the accounts prior to the dissolution of the firm. On a consideration of these facts, the Incometax Officer found that the abovesaid amount of Rs. 40,000 should be treated as a assessable income in the hands of the assessee. When a reference is made to the orders pronounced by the Appellate Assistant Commissioner, it becomes clear that reliance was placed on the earlier decision dated April 16, 1978, and following the principle laid down in the abovesaid orders, the appeal came to be allowed and the addition of Rs. 40,000 in the assessable income of the assessee was ordered to be deleted. Practically on the same footing, the Tribunal had proceeded to say that the orders pronounced by the Appellate Assistant Commissioner were completely justified, and, therefore, the appeal deserves to be dismissed. We have not been provided with a the copy of the orders dated April 16, 1978, on which reliance has been placed by the Appellate Assistant Commissioner and the Tribunal. The contention raised by Mr. Thakore, learned counsel who appears on behalf of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ount received by the respondent should be brought to tax as capital gains under section 12B(1) of the Indian Income-tax Act, 1922. On the basis of the abovesaid facts, it was held that the arrangement between the partners of the firm amounted to a distribution of assets of the firm on dissolution and that there was no sale or exchange of the respondent's share in the capital assets to Devi Sharan Garg. In the same way, it was further noticed and held that he had not transferred his share in the capital assets and, therefore, the sum of Rs. 65,000 could not be taxed as capital gains. It was also pointed out that, in the course of the dissolution, the assets of a firm may be valued and the assets may be divided between the partners according to their respective shares by allotting either assets or paying the money value equivalent thereof. This being a recognised method of making up the accounts of a dissolved firm, the receipt of money by a partner is nothing but a receipt of his share in the distributed assets of the firm., Some benefit can be derived from the abovesaid principle laid down by the Supreme Court while deciding the present question referred to us. The assessee had re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... deciding the question referred to us. The reasons assigned by the Supreme Court in support of the abovesaid conclusion is that, upon the dissolution, the firm ceased to exist and then follows the making up of the accounts, then the discharge of debts and liabilities and thereupon distribution, division or allotment of assets would take place inter se between the erstwhile partners by way of mutual adjustment of rights between them. The distribution, division or the allotment of the assets is not done by the dissolved firm. In this sense, there is no transfer of the assets by the assessee to any person. The said reasoning adopted by the Supreme Court while coming to the aforesaid conclusion that the development rebate allowed to the firm could not have been withdrawn would operate as guiding feature in the instant reference also because on the analogy of the same, it can be accepted here in the instant case also that the abovesaid amount that had fallen to the share of the assessee as her share in the assets of the partnership firm could never be equated with the benefit accruing to her under the provisions contained in section 28(iv) of the Income-tax Act, 1961. In CIT v. Gangadha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ceived by the assessee-firm was a business receipt assessable to tax under section 10 of the Indian Income-tax Act, 1922. Learned counsel, Mr. Thakore, appearing on behalf of the Revenue, had tried to gain some assistance from the abovesaid case-law on the basis that the entire sum received by the assessee-firm was treated as a business receipt assessable under section 10 of the Act of 1922. But, before the abovesaid contention raised by learned counsel can be accepted, a reference shall have to be made to the reasons assigned by the Supreme Court in support of the abovesaid conclusion, namely, that the entire amount was a business receipt assessable under section 10 of the Indian Incometax Act, 1922. It has been emphasised by the Supreme Court that the assessee-firm had various business activities and joining B. and J. Co. was only one such activity. The firm merely replaced one trading activity by another. What had really happened was that the partners representing the firm in B. J. and Co. had surrendered their rights in partnership to the other partners and had obtained certain payments for surrendering their rights. According to the Supreme Court, this was a case of cancellat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eafter was the realisation of debts and payment of various expenses. On March 31, 1957, there was a credit balance of Rs. 3,82,905 in the firm's account in the books of the company. Initially, it was decided to issue shares of the company to the partners of the firm in lieu of the said credit balance and some resolution to that effect was also adopted in the meeting of the board of directors of the assessee-company. However, the shares were not issued and on June 22, 1970, the board of directors of the assessee-company had resolved that the aforesaid credit balance be transferred to the profit and loss appropriation account. Later on, on the advice of the auditors of the company, by another resolution, it was resolved that the aforesaid credit balance which was transferred to the profit and loss appropriation account be transferred to the capital reserve account. The question which had arisen before the Income-tax Officer in the course of the assessment proceedings for the assessment year 1971-72 was whether the abovesaid amount which was transferred to the capital reserve account was a revenue receipt in the hands of the assessee-company. The Income-tax Officer, however, had rejec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ong the partners was not a commercial transaction. The Income-tax Officer held that the 28 shops were the stock-in-trade and the profit made from dealing with that stock-in-trade was liable to tax and, therefore, he estimated the value of the 28 shops at Rs. 1,70,000 and computed the profits in this manner at Rs. 85,754. The Appellate Assistant Commissioner and the Tribunal took the view that the transaction was one of a division and distribution of the assets. On reference, it was held by this court that the distribution of the 28 shops in specie amongst the partners by the assessee-firm amounted to a business transaction by the assessee-firm and its distribution of the assets was part of the transaction of dissolution, and what applies to dissolution of partnership must also equally apply to a transaction entered into by businessmen when they decide to discontinue the business. It is on these facts and findings that ultimately the question referred came to be answered and replied in favour of the Revenue. Mr. Thakore, learned counsel, has emphasised the said decision before us for advancing his contention because of the fact that, in the abovesaid case, the distribution of the a ..... X X X X Extracts X X X X X X X X Extracts X X X X
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