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PETITIONER: C.I.T., U.P.

       Vs.

RESPONDENT: BANKEY LAL VAIDYA (DEAD) BY L.R.S.

DATE OF JUDGMENT21/01/1971

BENCH: SHAH, J.C. (CJ) BENCH: 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.

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JUDGMENT:  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,

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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 therefrom, 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

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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.  (2) 68 I.T.R. 240  410