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TMI Blog1977 (11) TMI 27X X X X Extracts X X X X X X X X Extracts X X X X ..... on of the partnership deed or to any act or omission of any party to the dispute or to any act which ought to be done by the parties in dispute or any of them or in relation to any other matters whatsoever touching the partnership affairs, that dispute shall be referred to arbitration in accordance with the provisions of the Indian Arbitration Act. Each partner was to appoint an arbitrator for the arbitration. There was some dispute among the partners in the year 1959 and the disputes were referred to the arbitration of one Mr. Manilal P. Kapadia, a solicitor. The terms of reference of arbitration to Mr. Kapadia included all matters relating to the dissolution of the partnership and the winding up of the affairs of the firm and the accounts of the division and distribution of the assets of the partnership and moneys amongst the partners in accordance with their respective shares either in specie or in such other manner as the arbitrator may determine. The arbitrator was also empowered to determine the date from which the partnership was to be treated as dissolved. The assessee, Mr. Aslot, had 5 annas share in the partnership firm and the other partner, Mr. N. K. Naik, had one anna ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... interests in the said partnership and the capital effects other than the personal chattels and capable of passing by delivery and goodwill thereof save and except as hereinafter provided and so that all accounts between the retiring partners and the continuing partners in respect of the said partnership shall be deemed to have been duly adjusted and squared up and that upon payment of the said amounts and the delivery of the office premises and the due observance and performance of the covenants on the part of the continuing partners as hereinafter contained in clause 6 hereof neither parties shall have any claim against the other in respect of the said partnership its accounts dealings assets or otherwise howsoever." In clause 10 of the award it was provided as follows : " Each of the parties hereto shall respectively sign, execute and do such further documents, deeds, acts and things as the other parties shall reasonably require for completely effectuating this award and that if any dispute or difference shall arise between the parties hereto or any of them of and incidental and in relation thereto in anywise the parties agree to abide by and execute and do such further doc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... artners all these their respective shares and all other, if any, their respective shares and interests of and in the said business of the partnership hereby dissolved and the assets thereof including the outstanding thereof and the goodwill thereof save as herein provided and including also in the said land, hereditaments and premises situate at Poisar and more particularly described in the Schedule ' B' hereunder written and the said tenancy rights in respect of the said godown situate at Lalbaug, Parel (in the property belonging to Bombay Silk Mills Ltd. and bearing C.S. No. 50 of Pare Sewree Division and F-Ward Nos. 1043 St. Nos. 34-34A) but excluding the chattels and things and other personal effects capable of passing by delivery to HOLD the same unto and to the continuing partners absolutely in proportion to their respective shares and interest in the said business." (Underlining is ours.) In pursuance of the award the assessee, Aslot, had received an amount of Rs. 4,67,529. The amount standing to the credit of the assessee in the books of the firm on 31st October, 1959, was determined at Rs. 2,33,535. The difference between the amount received by Aslot and the amount stand ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by the assessee in favour of the continuing partners was in the nature of a dissolution of partnership and reconstitution of the firm, the question reproduced above has been referred at the instance of the revenue. Mr. Joshi appearing on behalf of the revenue has argued that there is a known distinction between retirement of a partner from a partnership and the dissolution of a firm and that what had happened in the instant case was that the assessee had merely retired from the partnership firm and the other partners continued the business of the partnership firm which was treated as a reconstituted firm. It was contended that when the firm was said to be reconstituted, that reconstitution resulted not from the dissolution of a firm and a fresh constitution of a firm but that that was the legal result of the retirement of certain partners from the partnership firm. Mr. Joshi argued that the decision of the Supreme Court in Commissioner of Income-tax v. Bankey Lal Vaidya [1971] 79 ITR 594, which affirmed the decision of the Allahabad High Court in Bankey Lal Vaidya v. Commissioner of Income-tax [1965] 55 ITR 400, was not applicable to the case of a retirement of a partner and the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s possible because the business which was being carried on by the continuing partners of the reconstituted firm was different from the business which was carried on originally by the original firm. It was urged that a part of the business was permitted to be carried on by the retiring partners and, to that extent, the business now carried on by the retiring partners of the reconstituted firm must be said to be different from the business which was carried on by the original partnership. Alternatively, it was contended that the agreement dated 9th March, 1961, is not an assignment as was contemplated by the Division Bench in Patel's case [1978] 115 ITR 95 (Bom). It was vehemently contended that the rights of the continuing partners to carry on the business of the reconstituted firm flowed not from the agreement dated 9th March, 1961, but that so far as both the continuing partners and the assessee were concerned, their rights were crystallised by the award of the arbitrator and whatever moneys have been received by the assessee have been received in pursuance of the right given to him by the award of the arbitrator. Now, the first question which falls for consideration in the inst ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... described as outgoing partners, the other partners continuing to carry on the same business as before. It cannot be, however, disputed that the real legal effect of the award of the arbitrator read along with the agreement dated 9th March, 1961, will not be controlled by how the transactions have been described by the arbitrator or by the parties and, therefore, merely because at some places in the award the arbitrator has used the word " dissolution ", the use of that word will not be conclusive. We have already reproduced earlier clause 2 of the award. It is, no doubt, true that the arbitrator has stated that the firm " stands dissolved by mutual consent ". But these words have to be read in the context in which they are used because those words are followed by the words " so far as concerns the said Harendra Ratilal Aslot and Manubhai Khandubhai Naik (hereinafter referred to as " the retiring partners ") who retires from the said firm as from 1st January, 1960 ". Therefore, though the words " dissolved by mutual consent " have been used, the arbitrator has taken care to make it clear that this dissolution only affects the two partners who are described thereaf ter as " retiring ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... remises were to be given to them and subject to the negative covenants with regard to the carrying on of certain kinds of business, the retiring partners were to continue a part of the business as before and that they were to execute the necessary documents required to assign and release in favour of the continuing partners their respective shares and all other interest in the business of the partnership firm. It must be noted that the award was made in terms of the agreement between the parties. Such outgoing of a partner from the partnership firm is clearly covered by section 32(1)(a) of the Partnership Act which provides that a partner may retire with the consent of all other partners. Therefore, in spite of the fact that the original disputes referred to the arbitrator related to the dissolution of the partnership firm, so far as the final award of the arbitrator was concerned, it was made by consent of all the partners by which two of the partners were allowed to retire leaving the other partners free to do the same business as before either in the same name or in any other name. Section 32(2) clearly indicates that the partners who are left behind as partners in the partnersh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ly to the transfers which are enumerated therein and clause (ii) of that section reads : " any distribution of capital asset on the dissolution of a firm, body of individuals or other association of persons ". The argument before the Division Bench was that what was brought about in that case was mere dissolution of partnership and, therefore, no capital gains tax was attracted by virtue of clause (ii) of section 47 of the Income-tax Act, 1961. The Division Bench pointed out in that case the difference between the retirement of a partner and the dissolution of a firm and while pointing out this distinction observed as follows : " In our view, a clear distinction exists between the two concepts, inasmuch as the consequences flowing from each are entirely different. In the case of retirement of a partner from the firm it is only that partner who goes out of the firm and the remaining partners continue to carry on the business of the partnership as a firm, while in the latter case the firm as such no more exists and the dissolution is between all the partners of the firm. " The Division Bench then went on to refer to the provisions of sections 31 to 38 which deal with the incomi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... earlier, if, instead of quantifying his share by taking accounts on the footing of notional sale, parties agree to pay a lump sum in consideration of the retiring partner assigning or relinquishing his share or right in the partnership and its assets in favour of the continuing partners, the transaction would amount to a transfer within the meaning of section 2(47) of the Income-tax Act. " The ratio of the decision of the Division Bench, therefore, is that where in lieu of consideration received by the retiring partner, the retiring partner assigns or relinquishes his share or right in the partnership assets, the transaction would amount to a transfer within the meaning of section 2(47) of the Income-tax Act, 1961. Now, though this view was taken in respect of the provisions of section 45 of the Income-tax Act, 1961, in our view no different principle would be applicable in a case to which section 12B of the Indian Income-tax Act, 1922, is applicable. We are really not concerned in this case with the fact that a provision analogous to clause (ii) of section 47 of the Income-tax Act, 1961, is not to be found as a part of the provisions of section 12B of the Indian Income-tax Act, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ement is very clear and there is no ambiguity about the words used therein. Clause 3 refers to the consideration which the retiring partners have received, the consideration consisting of the amount of Rs. 1,25,000 and the provision which is made at different places in the award in the form of covenants, declarations and agreements on the part of the continuing partners. It is for this consideration that the two outgoing partners have assigned and released in favour of the continuing partners their respective shares and interest of and in the said business of the partnership and the assets thereof including outstandings and goodwill as also the land, hereditaments and premises situated at Poisar. The rights between the parties are now, therefore, governed by this agreement of 9th March, 1961. It is, therefore, difficult to see why the case of the revenue should not be accepted that the retiring partners have assigned and released in favour of the continuing partners all their share and interest in the partnership property and assets by this document dated 9th March, 1961. If this agreement thus is now the foundation of the rights of the parties and it satisfies the test laid down b ..... X X X X Extracts X X X X X X X X Extracts X X X X
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