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TMI Blog1982 (7) TMI 69X X X X Extracts X X X X X X X X Extracts X X X X ..... nds of the assessee. The main contention, that the case was governed by s. 47(2) of the Act and the transaction cannot be regarded as a transfer so as to attract the liability under s. 45 of the Act, was rejected by the ITO on the ground that it was not a case of a dissolution of the firms. The matter was carried in appeal. The assessee reiterated the same contention, namely, that the sum of Rs. 46,500 could not be treated as capital gains in view of s. 47(2) of the I.T. Act, 1961. The AAC negatived the contention of the assessee and upheld the order of the ITO. The assessee went up in further appeal to the Appellate Tribunal. Before the Appellate Tribunal there was a shift in the stand and the assessee contended that there was no transfer of any capital asset within the meaning of cl. (47) of s. 2. It was urged that a partner has no right to the partnership assets as such and his right was only to receive a share in the profits and assets when he retired from the firms. In support of his contention, the assessee relied upon a decision of the Gujarat High Court in CIT v. Mohanbhai Pamabhai [1973] 91 ITR 393. The Tribunal accepted the contention based on the principle enunciated i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... case of the former the retiring partner relinquishes his rights in the partnership assets resulting in an extinguishment of his rights in the existing partnership, whereas in the case of a dissolution of a firm the position is different as the partnership itself comes to an end. On the other hand, it is contended by Mr. Anjaneyulu, the learned counsel for the assessee, that in law there is no distinction between the two, as a partner has no right to the partnership assets so as to involve a transfer either on retirement or dissolution. There is neither relinquishment of any assets nor the extinguishment of any right to the asset. The retiring partner walks out with the amounts due to him towards his share of profits and assets. To decide the controversy, it is necessary to determine the rights of a partner under the provisions of the Partnership Act. In Narayanappa v. Bhaskara Krishnappa, AIR 1966 SC 1300, a question arose whether a document recording the terms and conditions of dissolution which included a stipulation that one of the partners had given up his share in the machines, etc., and in the business and made over the same to the other partners was Compulsorily re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a deduction of liabilities and prior charges. " The Supreme Court held that though the partnership assets included immovable properties, there was no relinquishment of interest in any of the immovable properties by the outgoing partner and what he gets is merely by way of adjustment of the rights of the partners on dissolution by giving up his share in the net partnership assets after deduction of liabilities and prior charges and it was., therefore, not compulsorily registrable under s. 17(1)(c) of the Registration Act. In CIT v. Mohanbhai Pamabhai [1973] 91 ITR 393, the Gujarat High Court held that the observations of the Supreme Court in Narayanappa v. Bhaskara Krishnappa, AIR 1966 SC 1306, are equally applicable where the partner retires from the partnership. Bhagwati C.J., speaking for the court, succinctly summarized the rights of a partner as follows (p. 402): " When, therefore, a partner retires from a 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 notional sale of the partnership assets and given to him, what he receives is his share in the pa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... are in the partnership assets. It is not a consideration for a transfer of his interest in the partnership to the continuing partners. In the case of a retirement of a partner just as in the case of a dissolution of partnership, there is no element of transfer. It is only an adjustment of the rights of the partners and not a relinquishment or extinguishment of the interest of a retiring partner. The same view was followed in CIT v. Madan Lal Bhargava [1980] 122 ITR 545 (All), wherein it was observed that all that the assessee received on his retirement from the firm in respect of his share in the goodwill was its value to which he was all along entitled and that the case need not fall within the purview of s. 2, cl. (47) and, consequently s. 45 had no application. Mr. Suryanarayana Murthy drew our attention to two decisions of the Bombay High Court in CIT v. Tribhuvandas G. Patel [1978] 115 ITR 95 and CIT v. H. R. Aslot [1978] 115 ITR 255, taking a contrary view. In the first case a lump sum amount was paid to the retiring partner and the question arose whether it amounted to a transfer under s. 2, cl. (47). The Bombay High Court drew a distinction between a case where a retiri ..... X X X X Extracts X X X X X X X X Extracts X X X X
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