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1981 Supreme(Cal) 282
High Court Of Calcutta
SABYASACHI MUKHERJI, C. K. BANERJEE
COMMISSIONER OF INCOME-TAX - Appellant
Versus
DHANRAJ DUGAR - Respondent
Income-Tax Reference 135 Of 1978
Decided On : 07/27/1981
The amount received by the assessee in settlement of a suit for partition of properties held under a joint venture agreement was not taxable as it did not arise from the assessee's normal course of business and there was no transfer of any interest of the assessee in the capital asset.
Headnote:
INCOME TAX - Assessment year 1972-73 - Whether the sum of Rs. 1,00,000 received by the assessee arose not out of the normal business as a broker but out of the distribution of capital assets of the firm or other association of persons within the meaning of Section 47 (ii) of the Income-tax Act, 1961? - YES
Fact of the Case:
The assessee, an individual engaged in the business of land and building brokerage, entered into an agreement with three others to purchase and sell certain premises. The agreement provided that if the parties could not agree on the development, letting out, resale, or management of the properties, they would be entitled to get the properties partitioned in equal one-fourth shares. A dispute arose, and the assessee filed a suit for partition. The suit was settled by terms of settlement under which the assessee received Rs. 1,00,000 in full and final settlement of all his claims and costs. The ITO taxed the income, but the AAC and the Tribunal held that it was not taxable.
Finding of the Court:
The Tribunal found that the income in question did not arise from the assessee's normal course of business and that there was an element of mutual agency and in essence all the ingredients of a partnership were present. But as the partnership venture did not succeed, the suit was filed in terms of the agreement to get the assessee's share under the agreement and the suit was settled.
Issues: Whether the sum of Rs. 1,00,000 received by the assessee arose not out of the normal business as a broker but out of the distribution of capital assets of the firm or other association of persons within the meaning of Section 47 (ii) of the Income-tax Act, 1961?
Ratio Decidendi: The court held that the sum received by the assessee was not taxable as it did not arise from the assessee's normal course of business and there was no transfer of any interest of the assessee in the capital asset as envisaged under Section 2 (47) of the I. T. Act, 1961. Even if there was any transfer, it had not cost the assessee anything in terms of money and in such a case the question of computation of capital gains could not arise.
Final Decision: The question referred to the court was answered in the affirmative and in favor of the assessee.
( 1 ) IN this reference under Section 256 (1) of the I. T. Act, 1961, the following question has been referred to this court:"whether, on the facts and in the circumstances of the case, and on a proper interpretation of the terms of agreement dated the 15th October, 1959 and 2nd June, 1971, the Tribunal was right in holding that the sum of Rs. 1,00,000 received by the assessee arose not out of the normal business as a broker but out of the distribution of capital assets of the firm or other association of persons within the meaning of Section 47 (ii) of the Income-tax Act, 1961?"
( 2 ) THE assessment year involved in this case is 1972-73. In that assessment the ITO noted that the assessee's system of accounting was mercantile. The assessee is an individual and he derived his income from the business as a broker of land and building. The assessee had shown a sum of Rs. 1,00,000 in Part II of the return and had claimed that it was a capital receipt not liable to income-tax. The assessee contended that there was an agreement dated the 15th October, 1959, to which we shall refer later, between the assessee and three others, viz. , Sri Banwarilal Pasari, Sri Purushottamdas Pasari and Sri Sankarlal Pasari in respect of the purchase and sale for profit of permises No. 12-A and 12-B, Russel Street, Calcutta. It would be relevant in view of the contentions that have been raised before us to refer to some of the clauses of the agreement. The agreement, after setting out the names of the parties, inter alia, provided as follows: "that the first, second; third, and fourth parties will purchase the properties known as 12-A and 12-B, Russel Street, Calcutta, at or for a sum of Rs. 8,00,000. "
( 3 ) IT may be mentioned that Dhanraj Dugar who is named as the party of the fourth part is the assessee before us. Other relevant clauses of the agreement are as follows:"that money required for the purchase of the properties, registration and other expenses and for the developments, etc. , will be provided by the parties as and when required interest whereon will be allowed at the rate of 6 per cent. per annum. Provided, however, that the fourth party shall not be required to make any contribution for the money as aforesaid. That this agreement is not to be regarded as a partnership agreement; the parties merely agreeing to do jointly in the manner laid down herein one particular transaction, i. e. , to purchase the properties known as 12-A and 12-B, Russel Street, Calcutta, and to resell the same in one or several lots observing the terms and conditions mentioned herein. That if the parties hereto cannot agree upon the question of development, letting out, resale or the management of the properties, such of them will be, entitled to get the properties partitioned in equal one-fourth share and that in case such partition takes place, each of the parties will pay for his share of the total money expended if not already paid. "
( 4 ) THERE was another clause which provided for a reference to arbitration in case of disputes and differences. As an attempt to arbitration failed in this case it is not necessary for us to refer to that clause in detail.
( 5 ) AS we have mentioned before it appears that the said agreement essentially provided that in case there was a difference of opinion amongst the four persons after the aforesaid premises were purchased in developing the property or working out the joint venture, the premises involved in the agreement, viz. , the premises No. 12-A and 12-B, Russel Street, Calcutta, were to be partitioned into four equal parts and allotted to the four persons. As the arbitration attempt failed and a difference of opinion arose, the assessee filed a suit on the 3rd December, 1963, in the Calcutta High Court claiming a partition under the said clause. In the said suit the plaintiff, viz. , the assessee in this case, had set out the history and thereafter alleged that the two premises in question we
