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TMI Blog1987 (1) TMI 137X X X X Extracts X X X X X X X X Extracts X X X X ..... h Court for specific performance of the contract dated 9-11-1963 against the vendor. During the pendancy of this suit, the firm was dissolved in May 1978. Thereafter, the erstwhile partners contained the suit by amending the plaint. A compromise took place between the partners and the vendor and consent terms were drawn up on 20-7-1978. It was agreed that the agreement to sell dated 9-11-1963 subsisted. 5. Fresh acquisition proceedings commenced in 1977. The Special Land Acquisition Officer gave award under section 11 of the Land Acquisition Act on 19-2-1979. Under the said award the assessee as partner of the dissolved firm got compensation at Rs. 4,67,000 on 22-2-1979. 6. The plea of the assessee before the Income-tax Officer was that the said amount of Rs. 4,67,000 was a capital receipt not subject to tax. The alternate plea was that receipt of said amount gave rise to capital gains tax and not business income. The assessee claimed deduction under section 54E of the Income-tax Act, 1961. The working regarding capital gains given by the assessee was as under: ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in F.D. On 17-8-1979 (as worked out below). 3,57,980 -------- Balance 59,962 &nbs ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bsp; Balance 41,222 ------ 7. The Income-tax Officer relied on section 28(iv) read with section 176(3A) of the Act. According to him, the value of the benefit whether convertible into money or not arising from business was chargeable to tax as business income under section 28(iv) of the Act and that when the said business was discontinued and the amount was received by former partner after such discontinuance, the same was chargeable to tax as business income under section 176(3A) of the Act, with the result ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n of the amount as business income in the hands of the assessee. The assessee is now in further appeal before us. 11. The first question that we have to decide is whether the right of the firm under the agreement dated 9-11-1963 was stock-in-trade of the firm as was contended on behalf of the department. The firm was no doubt carrying on business of builders and contractors and it was in the course of that business that the agreement dated 9-11-1963 was entered into. However, the fact remains that the firm never obtained possession of the land. It had not paid full price of the land. It had paid only earnest money. The firm did not acquire any right, title or interest in said land. The only right it had, at the time of agreement, was right of obtaining specific performance from the vendor. Even that right came to an end when the land was acquired by the Government by notification. The right that survived was thereafter right to obtain appropriate share in the compensation that would be paid by the Government to the vendor as a result of compulsory acquisition. In these circumstances, it cannot be said that land in question was stock-in-trade of the firm at any moment of time. 12. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uit shall be as mentioned below: (a) Hariram N. Somaiya 20% (b) Navinchandra H. Somaiya 20% (c) Jairam H. Somaiya 20% (d) Smt. Asha N. Somaiya 20% (e) Smt. Sarla Dalip Sumaiya 20%." 16. It is obvious from this clause that interest of the firm under agreement dated 9-11-1963 was divided into five equal shares and each partner was allotted one-fifth share therein. The assessee thus had one-fifth share in the interest of the firm under agreement dated 9-11-1963. That interest of the firm resulted in grant of compensation and one-fifth of that compensation was received by the assessee as per terms in the deed of dissolution. Thus the amount of compensation represents the price which the assessee received for 1/5th share i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt was fruit of litigation and as such could not give rise to capital gains. This contention was also unacceptable. As already stated, although the amount came as a result of litigation, yet it was for acquisition by Government of right of the firm under agreement dated 9-11-1963. It was also submitted that since partnership deed did not single out this property (right under deed dated 9-11-1963) it could not be capital asset. This submission was also without merit. As already stated this property was distributed to five partners on dissolution and as such the share received by the assessee as one of the partners was a capital asset in his hands. Thus, none of the contentions raised by the department can be accepted against the finding recorded by us in the earlier paragraphs. 18. The learned counsel for the department relied on section 176(3A) of the Income-tax Act, 1961, which is as follows: "(3A) Where any business is discontinued in any year, any sum received after the discontinuance shall be deemed to be the income of the recipient and charged to tax accordingly in the year of receipt, if such sum would have been included in the total income of the person who carried on busi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on in the hands of the firm would have given rise to business income and not capital gains, yet said compensation received by assessee after dissolution of firm would not give rise to business income and that the words in section 176(3A) to not warrant the conclusion that when particular receipt would have been business income in the hands of the firm if the firm had continued, the same would necessarily be business income in the hands of the partner after dissolution. It would, no doubt, represent income but not necessarily business income. The head under which it would fall would depend upon facts of the case and the facts of present case indicate that head under which the income would fall would be capital gains. We now proceed to give detailed reasons in support of the said conclusion. 22. We have already quoted section 176(3A) of the Act. The words therein are almost identical with those in section 176(4). The former applies to discontinuance of business while latter applies to discontinuance of profession. In sub-sections (3A) and (4) of section 176 there is no statement that income should be chargeable under the head "Business or profession". The provisions in sub-sections ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the income should be assessed in the hands of recipient under section 176A (3) or 176(4). Subsequently, there came decision of Madras High Court in CIT v. Estate of Late A. V. Viswanatha Sastri [1980] 121 ITR 270 where it was held that the amount received after the death of the person carrying on profession should be assessed in hands of the recipient under the head "other sources". This decision has expressed view contrary to the view expressed in said treatise in Volume I. Subsequently, in 1982 Vol. III of said treatise was published in which decisions published subsequent to the publication of Vol. I were cited. Regarding the above observation in Vol. I the learned author in Vol. III added: "However, Madras High Court held in CIT v. Estate of Late A. V. Viswanatha Sastri [1980] 121 ITR 270 that the fees collected after the death of a professional person are taxable as income from other sources." Thus, it is clear that the Madras High Court decision has taken a view different from the view expressed in Vol. I of said treatise. There is no High Court decision which has dissented from the view of Madras High Court in the above case. Consequently, we are bound to follow said decis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sessee for which he received compensation and as such provisions relating to capital gains would be attracted.
26. We may reiterate that it was not the assessee's case before the Commissioner of Income-tax (Appeals) that the amount was not taxable at all. The plea was that it was taxable under the head 'Capital gains. Before us also the learned counsel for the assessee stated that it was not the assessee's case that the amount was not taxable at all. The assessee wanted that it should be taxed under the head 'Capital gains.
27. We may also mention that one of the contentions raised on behalf of the assessee before us was that section 176(3A) applied only when he firm had allowed cash system of accounting. We do not find anything in said provision to support said submission. Consequently, we have not accepted the said submission.
28. For the reasons given above, we set aside the orders of the authorities below on this point. We restore the matter to the ITO with direction to compute the capital gains and bring them to tax in accordance with law after giving exemption under section 54E, if the assessee is so entitled.
29. The appeal is allowed. X X X X Extracts X X X X X X X X Extracts X X X X
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