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1982 Supreme(AP) 77
Andhra Pradesh High Court
Judges : B.P.JEEVAN REDDY, K.A.SWAMI
Commissioner of Income Tax, A.P. - Appellant
Versus
L.Raghu Kumar - Respondent
Decided On : 03-21-82
Retirement of a partner from a firm does not involve a transfer of capital asset and hence, the amount received by the retiring partner is not taxable as capital gains.
Headnote:
CAPITAL GAINS - RETIREMENT FROM PARTNERSHIP - TRANSFER OF CAPITAL ASSET - NO TRANSFER INVOLVED - NOT TAXABLE AS CAPITAL GAINS - S. 45, 47(II), 2(14), 2(47) OF THE INCOME TAX ACT, 1961.
Fact of the Case:
The assessee, a partner in two firms, retired from the firms on 1/01/1971. On the date of retirement, his capital accounts were credited with a sum of Rs. 46,500 more than the amount due to him towards his capital and profits. The ITO assessed the capital gains in the hands of the assessee.
Finding of the Court:
The Tribunal accepted the contention of the assessee and allowed the appeal, holding that there was no transfer of any capital asset within the meaning of clause (47) of s. 2 of the Act.
Issues: Whether the excess amount of Rs. 46,500 received by the assessee on retirement from the two partnership firms is assessable to capital gains?
Ratio Decidendi: A partner has no right to the partnership assets as such and his right is only to receive a share in the profits and assets when he retires from the firms. On retirement, a partner receives his share in the partnership assets, which is not a consideration for a transfer of his interest in the partnership to the continuing partners. There is no relinquishment or extinguishment of the interest of a retiring partner. Hence, there is no transfer of a capital asset involved in the case of a retirement of a partner.
Final Decision: The reference was answered in the negative and in favor of the assessee.
( 1 ) THIS reference under s. 256 (I) of the I. T. Act of 1961 at the instance of the Revenue raises an interesting question of law as to the scope and ambit of s. 45 if the Act relating to capital gains tax.
( 2 ) THE assessee is the karta of an HUF. He was previously a partner in two firms : (1) M/s. Chegu Krishnamurthy, Guntur and (2) M/s. Southern Tobacco Packers, Guntur. The assessee retired from the above two firms with effect from 1/01/1971. On the date of retirement, his capital accounts were credited with a sum of Rs. 46,500 more than amount due to him towards his capital and profits. The firms from which the assessee retired were carrying on business with all remaining partners. The ITO observed that the amount of Rs. 46,500 received by the assessee. Accordingly the ITO assessed the capital gains in the hands of the assessee. The main contention that the case was governed by s. 47 (2) of the Act and the transaction cannot be regarded as a transfer so as to attract the liability under s. 45 of the Act was rejected by the ITO on the ground that it was not a case of a dissolution of the firms. The matter was carried in appeal. The assessee reiterated the same contention, namely, that the sum of Rs. 46,500 could not be treated as capital gains in view of s. 47 (2) of the I. T. Act, 1961. The AAC negatived the contention of the assessee and upheld the order of the ITO.
( 3 ) THE assessee went up in further appellate Tribunal there was a shift in the stand and the assessee contended that the was no transfer of any capital asset within the meaning of clause (47) of s. 2. It was urged that a partner has no right to the partnership assets as such and his right was only to receive a share in the profits and assets when he retired from the firms. In support of his contention, the assessee relied upon a decision of the Gujarat High Court in CIT v. Mohanbhai Pamabhai [1973] 91 ITR 393. The Tribunal accepted the contention based on the principle enunciated in the Gujarat case and allowed the appeal.
( 4 ) ON an application by the Revenue, the following question was referred to us for our decision :"whether, on the facts and in the circumstances of the case, the excess amount of Rs. 46,500 received by the assessee on retirement from the two partnership firms is assessable to capital gains ?"
( 5 ) TO answer this question, it is necessary to refer to a few relevant sections of the I. T. Act, hereinafter called "the Act".
( 6 ) SECTION 45, the charging section, is as follows :"45. (1) Any profits or gains arising from the transfer of a capital asset effected in the previous year shall, save as otherwise provided in section 53,54 54b, 54d and 54e be chargeable to income-tax under the head Capital gains, and shall be demanded to be the income of the previous year in which the transfer took place".
( 7 ) SECTION 2, clause (14), defines the capital asset as under :"2. (14) Capital asset means property of any kind held by an assessee, whether or not connected with his business or profession, but does not include -. . . "
( 8 ) SECTION 2, clause (47), defines transfer as follows :"2. (47) Transfer, in relation to a capital asset, includes the sale, exchange or relinquishment of the asset of the asset or the extinguishment of any rights therein or the compulsory acquisition thereof under any law. "
( 9 ) SECTION 47 exempts certain transfer from the provisions of s. 45. Section 47 is as follows :"47. (ii) Any distribution of capital assets on the on the dissolution of a firm, body of individuals or other association of persons. "
( 10 ) IT is admitted that the instant case is not governed by s. 47 (ii) of the Act there was no dissolution of the firm. The ITO as well as the AAC on facts found that the firm was continuing with the remaining members. In fact the assessee gave up the plea based on s. 47 (ii) even before the Appellate Tribunal.
( 11 ) MR. Suryanarayana Murthy, the learned counsel for the Revenue, mainly contended that
