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TMI Blog1974 (10) TMI 20X X X X Extracts X X X X X X X X Extracts X X X X ..... th effect from January 1, 1961. On what terms and conditions these two partners should retire was the subject-matter of reference to the sole arbitrator, one Shri Narottambhai P. Hathisingh, under an agreement of March 25, 1961. The said arbitrator by his award of October 2, 1961, laid down terms and conditions on which the aforesaid two partners should retire from the firm and all its branches. A deed of retirement of partnership was executed on October 10, 1961, in terms of the said award. Broadly, the terms of retirement were that the remaining partners should continue the business of partnership firm under the name and style of M/s. Nagindas Kilabhai Company and the two retiring partners should transfer all their shares, rights, title and interests in the assets and liabilities of the said firm to the remaining partners and they should retire with effect from January 1, 1961. In consideration of their retirement and release of their interests from the assets and liabilities of the firm, it was agreed that the continuing partners of M/s. Nagindas Kilabhai Company would pay a sum of Rs. 39,000 to each of the two retiring partners per annum for the accounting year ending on th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ould not be treated as revenue expenditure and he, therefore, disallowed the claim of the assessee. The assessee, therefore, carried the matter in appeal before the Appellate Assistant Commissioner, where the same claim based on the same contention was advanced. The Appellate Assistant Commissioner, however, by his order of March 21, 1970, confirmed the order of the Income-tax Officer and disallowed the claim of the assessee. He, therefore, took the matter in appeal before the Tribunal. The Tribunal accepted the assessee's contention that instead of the payment being made of the entire amount in lump sum, the partners agreed to pay the said amount by yearly instalments, and, to ensure such payments, a floating charge on the properties of the firm was created in favour of the retiring partners. It was also pointed out that if the entire amounts in lump sum were to be paid, the financial position of the firm would have been affected and the assets would have been depleted. It was also urged before the Tribunal that the arrangement was arrived at in order that the business could be carried on without impairing any of the assets, and, therefore, the entire transaction was effecte ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rtners, and which has been described as a deed of dissolution of partnership, incorporating the terms and conditions of the award of the sole arbitrator, Shri Narottam P. Hathisingh. The document was made on 12th day of October, 1961, between the retiring partners, namely, Shri Anubhai N. Shah and Shri Dilipbhai A. Shah, who have been described is parties of the first part, and Shri Vimalbhai N. Shah, Sri Gautambhai V. Shah and Shri Vikrambhai V. Shah, who have been described as parties of the second part, and Shri Manibhai M. Patel, Shri Rameshbai M. Patel and Shri Natverlal M. Patel, who have been described as parties of the third part. It appears clearly that the two retiring partners, namely, Shri Anubhai N. Shah and Shri Dilipbhai A. Shah, were father and son. The parties of the second part comprised of Shri Vimalbhai N. Shah and his two sons, Gautambhai and Vikrambhai, and the parties of the third part comprised of Manibhai and his two sons, Rameshbhai and Natverlal. The relevant clauses for purposes of this reference are clauses 2, 3, 4 and 5, which read as under : " 2. That the parties of the first part have ceased on and from the 1st day of January, 1961, to have any sh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s not to restrict in any manner the continuing or future partners from dealing with such assets of Messrs. Nagindas Kilabhai Co., as required for the business of the firm." On behalf of the revenue much emphasis was laid on the fact that this deed of dissolution was made in the terms of the award of the arbitrator who was appointed for purposes of determining the terms and conditions on which the retiring partners had to retire from the firm, and its branches, and on which their respective shares and interests in all assets, stock-in-trade, liabilities and debts, agency rights, tenancy rights, quota rights and goodwill and other properties, articles and things belonging to the said firm and its branches were to be sold, transferred and assigned to the remaining partners. It was, therefore, urged on behalf of the revenue that a new firm came into existence which purchased the respective shares and interests of the retiring partners in the assets, stock-in-trade, agency rights, quota rights, goodwill and all other properties belonging to the firm and for purposes of getting all these things and rights transferred and assigned to the new firm, the new firm was under obligation to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ement and adjustment of the rights inter se between the partners and had nothing to do with the subsequent carrying on of the business by the continuing partners. The Division Bench also held that the expenditure incurred was not for the purposes of carrying on its business, and it was not an expenditure in the nature of a revenue expenditure and must, therefore, be characterised as capital expenditure. We have not been able to appreciate how this decision of the Bombay High Court can be of any assistance to the cause of the revenue. It cannot be said here in the present reference before us that the annual payments which the remaining partners of the firm agreed to make to the retiring partners had nothing to do with the business of the firm. In this connection a short reference to clause 3 of the deed of dissolution between the partners would clinch the issue. After providing in the said clause that such sums to be paid annually were to be paid every year from the gross receipts of the firm before ascertaining the net trading results or the profits distributable to the partners, it has been stated as under : "...and before any distribution can be made to them of the net profits ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er what he received by way of payment was his share in the partnership or was it a price of the sale of his interest in the partnership ? Bhagwati C.J. (as he then was), speaking for the court, after relying on the decision of the Supreme Court in Commissioner of Income-tax v. Dewas Cine Corporation said : " It is clear that the interest of a partner in the partnership is not an interest in a specific item of the partnership property, but, as pointed out by the Supreme Court, 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 his retirement from the partnership, to get the value of his share in the net partnership assets which remain after satisfying the liabilities set out in clause (a) and sub-clauses (i), (ii) and (iii) of clause (b) of section 48. When, therefore, a partner retires from the 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 a notional sale of the partnership assets and given to him, what he receives is his share in the partnership and not any price ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... was agreed that the remaining partners should pay annually a sum of Rs. 39,000 to each of them for a period of five years. Such payments were to be made from the gross receipts of the firm and in order to secure these payments, a floating charge was created on the properties and assets of the firm. The remaining partners were to carry on the business of the firm as it was with its branches as they were situated at that time with stock-in-trade of the old firm and with the aid of all the assets and properties including the quota rights, agency rights, tenancy rights : goodwill and all other articles and things belonging to the said firm. It has been also agreed that the remaining partners should furnish a bank guarantee to the retiring partners so as to secure the annual payments. The bank guarantee has been furnished by a deed of guarantee executed by the Bank of India Ltd., Ahmedabad Branch (as it was then prior to its nationalisation), somewhere in 1962. It should be recalled that the deed of dissolution was executed on 12th October, 1961. The deed of guarantee was executed by the Bank of India at the instance of the continuing partners. In our opinion, therefore, there is no mer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rt in Commissioner of Income-tax v. Mohanbhai Pamabhai, where the court was concerned with the question of the payment made on relinquishment of interest in partnership assets by a retiring partner, and whether such payment can be brought to tax as capital gains under section 45 of the Income-tax Act, 1961. The Division Bench of this court held : " 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 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 partnership and not any consideration for transfer of his interest in the partnership to the continuing partne ..... X X X X Extracts X X X X X X X X Extracts X X X X
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