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TMI Blog1991 (1) TMI 41X X X X Extracts X X X X X X X X Extracts X X X X ..... xecuted on April 2, 1973, under which the assessee and the other two partners were to contribute capital of Rs. 5,000, Rs. 3,000 and Rs. 2,000, respectively, and share the profits and losses in the ratio of 50 : 30 : 20. The result of this was that the share of profits of the assessee, which was 75% to begin with and later reduced to 69%, ultimately got fixed at 50%, while the share of profits of the other two partners increased from 25% to 30% and from 6% to 20%, respectively. According to the assessee, it was agreed then among the partners of the firm that he should be paid Rs. 25,000 by the other two partners, in consideration of his giving up a portion of his share in the goodwill of the firm. Entries were made in the accounts of the assessee and the other two partners in the books of the firm on May 31, 1973, according to which the assessee's account was credited with Rs. 25,000 representing the amount payable to him by the other two partners in consideration of the assessee giving up a portion of his share in the goodwill of the firm and the accounts of the other two partners were debited with Rs. 5,000 and Rs. 20,000 respectively. In the course of the assessment proceedings ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... letion of the sum of Rs. 25,000 brought to tax as capital gains of the assessee?" Learned counsel for the Revenue contended that, in a firm in existence and carrying on its business, it is not open to any partner of the firm to say that he owned any asset and to deal with it on that footing and that the goodwill of the firm could be taken into account only in the event of the dissolution of the firm and not while the firm continued to exist and carry on its business. Reliance was also placed by learned counsel on some decisions which we shall refer to later in the course of this judgment. On the other hand, learned counsel for the assessee submitted that goodwill would constitute an asset of the firm and that there is no bar in law to effecting a redistribution of the total interest in the goodwill of a firm, as between the different partners and the resulting transfer of the interest in the goodwill of the firm by one of the partners in favour of others, having regard to the peculiar nature of the asset, would not attract tax as capital gains. Our attention was also drawn in this connection to certain decisions to which we shall advert a little later. From the account entries ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nature would undoubtedly form part of the property of the firm. Under section 14 of the Indian Partnership Act, the property of the firm includes also the goodwill. All that is meant by the expression property of the firm or assets of the firm, is that all partners have a joint or common interest in the property or assets. It, therefore, follows that, on the facts of this case, the assessee had relinquished or transferred a part of his interest in the goodwill which, under section 2(14) of the Act is a capital asset of the firm. Under section 2(47) of the Act, the expression "transfer", in relation to a capital asset, would include the sale or relinquishment of the asset or even the extinguishment of any rights therein and that definition is wide enough to include the transaction entered into by the assessee extinguishing his rights in a part of the goodwill of the firm within the meaning of "transfer". Under those circumstances, the assessee, in this case, had transferred part of his interest in a capital asset. Whether he can do so or not had not been debated before the Tribunal. We may, in passing, notice the contention urged by learned counsel for the Revenue that it is not op ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gistered document was raised on the ground that the partnership assets included immovable property and since it recorded relinquishment of the interest by the members of one family in those assets, the document was compulsorily registrable and not having been so registered, was inadmissible in evidence to prove the dissolution as well as the settlement of accounts. In the course of repelling this argument, the Supreme Court pointed out that the interest of a partner in partnership assets comprising movable and immovable properties should be regarded only as movable property and the unregistered deed of release by one family of its share was admissible in evidence, even though the partnership owned immovable property. It was in this context that the Supreme Court examined the nature of the interest of a partner during the subsistence of the partnership and upon dissolution and we are unable to interpret this decision as laying down that no partner can deal with his interest in the assets of the firm, inclusive of goodwill, so as to bring about redistribution of the rights of the partners inter se. We had also earlier pointed out that, in the course of the proceedings before the Trib ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he Revenue, for, as we had pointed out earlier, there had been only a redistribution of existing rights in the goodwill and even construing the extinguishment in part of the right of the assessee in the goodwill of the firm, as a transfer under section 2(47) of the Act, there was no cost of acquisition for the goodwill. In CGT v. P. Gheevarghese, Travancore Timbers and Products [1972] 83 ITR 403 (SC) ; [1972] 1 ITJ 374, the Supreme Court was concerned with the assessability to gift-tax of gifts made by the assessee to his daughters and a share in the goodwill of the partnership firm. The assessee filed a return in respect of the amounts gifted in favour of his daughters which also represented the share capital contributed by them. But the Gift-tax Officer took the view that the assessee had also gifted one-third portion of the goodwill and, on that basis, completed the assessment which was affirmed on appeal. However, the Tribunal held that goodwill was capital asset and the daughters of the assessee had only one-eighth share in the assets of the business and in the goodwill also and this was upheld by the High Court. Referring to section 14 of the Indian Partnership Act, the Supre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... law to distributing or redistributing the interest in the capital and the goodwill of a firm as between different partners and that the share in the capital and goodwill need not determine the share in the profits. We have earlier found that the assessee, by parting with a part of his interest in the goodwill of the firm, had brought about a redistribution in the interest of the partners in the goodwill of the firm and we may also observe that no provision of law was brought to our notice prohibiting the redistribution of the interest of the partners in the goodwill of the firm, while the firm exists and carries on its business. CIT v. B. C. Srinivasa Setty [1981] 128 ITR 294 (SC) dealt with a case of transfer of the goodwill of a firm for purposes of assessment of capital gains under section 45 of the Act, as it stood at the relevant time. In holding that the transfer of goodwill generated in a business does not give rise to capital gains for purposes of levy of income-tax, the Supreme Court examined the concept of goodwill of a firm in extenso and also the provisions in the Act relating to levy of tax on capital gains and concluded that when goodwill, an asset acquired by generat ..... X X X X Extracts X X X X X X X X Extracts X X X X
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