C.I.T., U.P. Vs. Bankey Lal Vaidya
[1971] INSC 28 (21 January 1971)
SHAH, J.C. (CJ) SHAH, J.C. (CJ) HEGDE, K.S.
GROVER, A.N.
CITATION: 1971 AIR 2270 1971 SCR (3) 406
ACT:
Income tax Act, 1922, s. 12B(1) Partition of
assets of a firm on dissolution--Assets of firms valued -Outgoing - partner
paid value of his share-Whether transaction amounts to sale resulting in
capital gain.
HEADNOTE:
The respondent who was the karta of his Hindu
undivided family entered into partnership with one D to carry on the business
of manufacturing and selling pharmaceutical products etc. On July 27, 1946 the
partnership was dissolved. The assets of the firm which included goodwill,
machinery, furniture etc. were valued on the date of dissolution at Rs.
2,50,000 and the respondent was paid the sum of Rs. 1,25,000 in lieu of his
share and the business together with the goodwill was taken over by D. The
question in income-tax proceedings was whether the transaction was one of sale
liable to capital gains tax under s. 12B(1) of the Income-tax Act. 1922. The
assessing and appellate authorities held against the respondent. The High Court
in reference, however, held in his favour. The revenue appealed.
HELD : There was no clause in the partnership
agreement providing for the method of dissolution of the firm or for winding up
of its affairs. In the course of dissolution the assets of the firm may be
valued and the assets divided between the partners according to their
respective shares by allotting the individual assets or paying money value
equivalent thereof. This is a recognised method of making up the accounts of
the dissolved firm. In that case the receipt of money by a partner is nothing
but a receipt of his share in the distributed assets of the firm. The
respondent received the money value of his share in the assets of the firm; he
did not agree to sell, exchange on transfer his share in the assets of the
firm. Payment of the amount agreed to be paid to the respondent under the
arrangement of his share was therefore not consequence of any sale, exchange or
transfer of assets. [408 C-E] James Anderson v. Commissioner of Income-tax,
Bombay City, 39 I.T.R. 123 and Commissioner of Income-tax, Madhya Pradesh and
Nagpur & Bhandara v. Dewas Cine Corporation, 68 I.T.R.
240, distinguished.
CIVIL APPELLATE JURISDICTION: Civil Appeal
No. 1223 of 1967.
Appeal from the judgment and decree dated
March 5, 1964 of the Allahabad High Court in Income-tax Reference No. 71 of
1959.
S. K. Mitra, B. B. Ahuja, R. N. Sachthey and
B. D. Sharma, for the appellant.
Ram Lal and A. T. M. Sampat, for the
respondent.
The Judgment of the Court was delivered by
Shah, C.J. The respondent who is the Karta of a Hindu Un- divided Family
entered on behalf of the family into a partnership with one Devi Sharan Garg to
carry on the business of 407 manufacturing and selling pharmaceutical products
and literature relating thereto. On July 27, 1946 the partnership was dissolved
. The assets of the firm which included goodwill, Machinery, furniture,
medicines, library and copyright in respect of certain publications were valued
at the date of dissolution at Rs. 2,50,000/-. The respondent was paid a sum of
Rs. 1,25,000/- in lieu of his share and the business together with the goodwill
was taken over by Devi Sharan Garg.
In proceedings for assessment of the
respondent for the year 1947-48 the Income-tax Officer sought to bring an
amount of Rs. 70,000/- to tax as capital gains. The contention raised by the
respondent that no part of the amount of Rs. 1,25,000/received by the
respondent represented capital gains was rejected by the Income-tax Officer,
Appellate Assistant Commissioner and the Income-tax Appellate Tribunal. The
Tribunal however reduced the amounts capital gains brought to tax to Rs.
65,000/-. The Tribunal referred the following question to the High Court of
Allahabad under s. 66(1) of the Indian Income-tax Act, 1922 "Whether on a
true interpretation of sub-section (1) of section 12-B of the Income-tax Act,
the sum of Rs. 65,000/- has been correctly taxed as capital gains".
The High Court answered the question in the
negative.
Against that order, with certificate granted
by the High, Court, this appeal has been preferred.
Section 12-B(1), insofar as it is relevant
provides "The tax shall be payable by an assessee under the head
"Capital gains" in respect of any profits or gains arising from the
sale, exchange or transfer of a capital asset effected after the 31st day of
March 1946 . . . and such profits and gains shall be deemed to be income of the
previous year in which the sale, exchange or transfer took place Provided. . .
Provided further. . .
Provided further that any transfer of capital
assets . . . . . . . . on the dissolution of a firm or other association of
persons............. shall not for the purposes of this section, be treated as
sale, exchange or transfer of the capital assets;
408 Liability to pay capital gains arises
under S. 12-B(1) if there be a sale, exchange or transfer of capital assets.
There was no sale or exchange of his share in
the capital assets of the firm by the respondent to Shri Devi Sharan Garg. Nor
did he transfer his share in the capital assets.
The assets of the firm included the goodwill,
machinery, furniture, medicines library and the copyright in respect of certain
publications. A large majority of the assets were incapable of physical
division, and the partners agreed that the assets be taken over by Devi Sharan
Garg at a valuation, and the respondent be paid his share of the value in
money.
Such an arrangement, in our judgment,
amounted to a distribution of the assets of the firm on dissolution.
There is no clause in the partnership
agreement providing for the method of dissolution of the firm or for winding up
of its affairs. In the course of dissolution the assets of a firm may be valued
and the assets divided between the partners according to their respective
shares by allotting the individual assets or paying the money value equivalent
thereof. This is a recognized method of making up the accounts of a dissolved
firm. In that case the receipt of money by a partner is nothing but a receipt
of his share in the distributed assets of the firm. The respondent received the
money value of his share in the assets of the firm; he did not agree to sell,
exchange or transfer his share in the assets of the firm. Payment of the amount
agreed to be paid to the respondent under the arrangement of his share was
therefore not in consequence of any sale exchange or transfer of assets.
To persuade us to take a different view,
reliance was placed on behalf of the Revenue upon James Anderson v.
Commissioner of Income-tax Bombay City(1). In that case the assessee held a
power of attorney from the executor of a deceased person, in the course of the
administration of his estate.
He sold certain shares and securities
belonging to the deceased for distribution among the legatees. The excess
realized by sale was treated by the Income-tax Department as Capital gains. The
contention of the assessee that since the sale of the shares and securities
fell within the purview of the third proviso to s. 12-B-(1) it could not be
treated as a sale of capital assets within the meaning of s.
12-B(1) was rejected by this Court. This
Court observed that the object of the third proviso to s. 12-B(1), in providing
that "any distribution of capital assets under a will" shall not be
treated as sale, exchange or transfer of capital assets for the purpose of s.
12-B was that as long as there was distribution of capital assets in specie and
no sale, there was no transfer for the purposes of that section, but if, there
was a sale of the capital assets and profits or gains arose there from, the
liability to tax (1) 39 I.T.R. 123.
409 arose, whether the sale was by the
administrator or executor or a legatee, and that the expression
"distribution of capital assets" in the third proviso to s. 12-B(1)
meant distribution in specie and not distribution of sale proceeds. That case
has no application. There was no distribution of capital assets between the
legatees : the assessee had pursuant to the authority reserved to him from the
executor of the deceased person sold the shares and securities, and from the
sale of shares and securities capital gains resulted. In the case in hand there
is no sale and payment of price, but payment of the value of share under an
arrangement for dissolution of the partnership and distribution the assets. The
rights of the parties were adjusted by handing over to one of the partners the
entire assets and to the other partner the money value of his share. Such a
transaction is not in our judgment a sale, exchange or transfer of assets of
the firm.
In Commissioner of Income-tax, Madhya
Pradesh, Nagpur & Bhandara v. Dewas Cine Corporation(1) in dealing with the
meaning of the expressions "Sale" and "sold" as used in s.
(10) (2) (vii) of the Income-tax Act, 1922,
this Court observed that the expression "sale" in 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
for a price. In that case the assets were distributed among the partners and it
was contended that the assets must in law be deemed to be sold by the partners
to the individual partners in consideration of their respective shares, and the
difference between the written-down value and the price realised should be
included in the total income of the partnership under the second proviso to s.
10(2) (vii). This Court observed that a partner may, it is true, in an action
for dissolution insist that the assets of the partnership be realised by sale
of its assets, but property allotted to a family in satisfaction of his claim
to his share, cannot be deemed in law to be sold to him.
We therefore agree with the High Court that
the question referred must be answered in the negative.
The appeal fails and is dismissed with costs.
G.C. Appeal dismissed.
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