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TMI Blog1980 (10) TMI 41X X X X Extracts X X X X X X X X Extracts X X X X ..... reference are as under. The assessee is partnership firm styled as M/s. Dilip Engineering Works. It operated in Udyognagar, Rajkot. It originally consisted of four partners: (1) Mansukhlal Odhavji; (2) Popatlal Kunverji; (3) Mohanlal Chakubhai, and (4) Dhirajlal Popatlal. The concerned assessment year is 1968-69 covering accounts of the s. Y. 2023. On July 7, 1967, which fell in the material accounting year, two of the aforesaid partners, viz., Popatlal and Dhirajlal, retired from the partnership firm under a deed dated September 7, 1967, and under the terms of the retirement, the partners were given machinery and land at the values mentioned therein. The value of the machinery taken by Popatlal and debited to his account was Rs. 26,689 and the value of the land taken by Dhirajlal and debited to his account amounted to Rs. 9,804. Besides, tools worth Rs. 1,163 were also given to the retiring partners. The ITO considered that as a result of the retirement of the two partners from the firm, there was only a change in the constitution of the firm and not any dissolution thereof and that as the firm had continued, the allotment of the machinery to the retiring partners at the stated va ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by the assessee but in respect of which the assessee holds lease or other right of occupancy and any capital expenditure is incurred by the assessee for the purposes of the business or profession after the 31st day of March, 1970, on the construction of any structure or doing of any work in or in relation to, and by way of renovation or extension of, or improvement to, the building, then, in respect of depreciation of such structure or work, the following deductions shall, subject to the provisions of section 34, be allowed (i) such percentage on the written down value of the structure or work as may in any case or class of cases be prescribed; (ii) in the case of any such structure or work which is sold, discarded, demolished, destroyed or is surrendered as a result of the determination of the lease or other right of occupancy in respect of the building in the previous year (other than the previous year in which it is constructed or done) the amount by which the moneys payable in respect of such structure or work together with the amount of scrap value, if any, fall short of the written down value thereof : Provided that such deficiency is actually written off in the books of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... taking over machineries, land, etc. According to the ITO, this amounted to sale of machineries and land to the retiring partners in view of the fact that the firm was not dissolved but continued to exist so far as the remaining partners were concerned. The short question for our consideration is. Whether allotment of machineries and land to the retiring partners in lieu of their shares will amount to sale of the concerned shares to them so as to attract s. 41(2) of the Act which we have already reproduced earlier ? The connotation of the term " sale " as contemplated by s. 41(2) has to be gathered from the definition of the word " sale " or " sold " as found in s. 32(1)(iii), Expln., cl. (2). We have to consider the said Explanation for the purpose of finding out as to whether any sale took place in favour of the concerned partners when they were allotted these properties in lieu of their existing shares in the partnership assets. It is obvious that there was strictly speaking no sale in their favour nor was there any transfer by way of compulsory acquisition by them of any assets as contemplated by the aforesaid Expln., cl. (2), to s. 31(1)(iii). Consequently, it cannot be said t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on partially or wholly of his claim to a share in the residue of the assets after discharging the debts and other obligations. But thereby the theatres were not in law sold by the partnership to the individual partners in consideration of their respective shares in the residue, and, therefore, the amount of Rs. 44,380 could not be included in the total income of the partnership under the second proviso to section 10(2)(vii). " It was further observed in this connection (headnote of 68 ITR 240): " The expressions 'sale' and 'sold' are not defined in the Incometax Act; those expressions are used in section 10(2)(vii) in their ordinary meaning. 'Sale', according to its ordinary meaning, is a transfer of property for a price, and adjustment of the rights of the partners in a dissolved firm by allotment of its assets is not a transfer, nor is it for price." The second decision of the Supreme Court on the point is CIT v. Banker Lal Vaidya [1971] 79 ITR 594. The question before the Supreme Court in the aforesaid decision was as to whether a partner, on dissolution, was making any capital gains where his share in the assets of the partnership firm was being allotted to him on dissolu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The revenue in the aforesaid case had relied upon the word "transfer" in s. 2(47) of the Act. It was observed by this court in that connection (p. 394): " This definition gives an artificially extended meaning to the term by including within its scope and ambit two kinds of transactions which would not ordinarily constitute 'transfer ' in the accepted connotation of that word, namely, relinquishment of the capital asset and extinguishment of any rights in it. But, even in this artificially extended sense, there is no transfer of interest in the partnership assets involved when a partner retires from the partnership." It was further observed (p. 394): " The interest of a partner in a partnership is not interest in any specific item of the partnership property. 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 on his retirement from the partnership to get the value of his share in the net partnership assets which remain after satisfying the debts and liabilities of the partnership. When, therefore, a partner retires from a partnership and the amount of his share in the net partnershi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . Even though the retiring partners go out and the rest of the partners continue the business of the firm and there is no general dissolution of the partnership, even then, so far as the retiring partners are concerned, their shares in the partnership assets have to be ascertained and whatever falls due to them has to be given to them to square off their accounts. If any machinery is allotted to them in lieu of their shares, it cannot be said that the said machinery is sold by the firm to the concerned partners during the relevant years so as to attract the provisions of s. 41(2). Mr. Raval, for the revenue, contended that, in a given case, some assets of the partnership may be sold to the retiring partners by the other partners who continued to carry on the business of the firm. It is possible to visualise such a contingency. But so far as the facts of the present case are concerned, it is ascertained that, on retirement, the partners were allotted machineries and land in lieu of their shares in the partnership assets. It is not as if the retiring partners of their own volition selected some assets and purchased them from the other partners. Consequently, the question of the appli ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o exist. But so far as the machineries and land are concerned, they were allotted to the retiring partners in lieu of their share in the partnership assets. Consequently, the aforesaid Bombay decision cannot be of any assistance to the revenue in the present case when it stands on its own facts. Thereafter, Mr. Raval took us to a later decision of the Bombay High Court in CIT v. Tribhuvandas G. Patel [1978] 115 ITR 95. The question before the Division Bench of the Bombay High Court in that case was whether any amount paid to a retiring partner which came to be allotted to him in lieu of his share in the partnership assets can be brought to tax as capital gains under s. 45 of the Act. It is true that in the aforesaid decision, the Bombay High Court took the view that on the retirement of a partner from a firm, what is allotted to him amounted to " gains " to the concerned partner. But it must be noted that the aforesaid decision of the Bombay High Court considered the question posed before it in the light of s. 45 read with s. 47(ii) and in accordance with the wider definition of the term " transfer " as incorporated in s. 2(47) of the Act. It is pertinent to note that so far as the ..... X X X X Extracts X X X X X X X X Extracts X X X X
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