Shri Chalasani Venkateswara Rao, Vijayawada v. $Income Tax Officer, Ward-Iv, Vijayawada

HONOURABLE SRI JUSTICE GODA RAGHURAM AND HONOURABLE SRI JUSTICE M.S.RAMACHANDRA RAO %03.08.2012 I.T.T.A.No.70 of 2000 Shri Chalasani Venkateswara Rao, Vijayawada VERSUS ...APPELLANT $Income Tax Officer, Ward-IV, Vijayawada ...RESPONDENT < GIST: > HEAD NOTE: !Counsel for Appellant: Sri Y.Ratnakar ^Senior StandingCounsel for Respondent: Sri J.V.Prasad ? Cases referred [1](1968) 068 I.T.R. 0240 (S.C.) [2](1971) 079 I.T.R. 0594 (S.C.) [3](1983) 141 ITR 0674 [4](1988) 171 ITR 0128 [5](1973) 91 ITR 393 (Guj) [6](1987) 165 ITR 166 (SC) HONOURABLE SRI JUSTICE GODA RAGHURAM AND HONOURABLE SRI JUSTICE M.S.RAMACHANDRA RAO I.T.T.A.No.70 of 2000 JUDGMENT (per Hon’ble Sri Justice M.S.Ramachandra Rao): This appeal is filed by the appellant/assessee under Section260-A of the Income Tax Act, 1961 challenging the order dated08-02-2000 of the Income Tax Appellate Tribunal, “B” Bench,Hyderabad in I.T.A.No.1529/Hyd/94 for the assessment year1989-90. 2.The appellant was a partner in a firm by nameM/s.Theatre Radha, a registered firm at Vijayawada along with oneY.Kalyana Sundaram under a partnership deed dated 06-07-1976 withretrospective effect from 26-06-1976. The partnership was apartnership at will. Sri Y.Kalyana Sundaram was the owner of the siteand the super-structure and had brought those properties as his capitalin the firm. The appellant brought in liquid cash of Rs.3.00 lakhs. Accordingly the appellant acquired 50% interest in the site and thesuper-structure of the cinema theatre. At that point of time the propertywas valued at Rs.6.00 lakhs. The business of the firm was carried ontill 28-02-1979. Thereafter, disputes arose between the partners of thefirm. The appellant sent a notice dated 07-03-1979 dissolving the partnership firm. As per Section 43 of thePartnership Act, 1932, where the partnership is at will, the firm standsdissolved by any partner giving notice in writing of his intention todissolve the firm. Therefore, the partnership stood dissolved on07-03-1979 which falls in the assessment year 1979-80. 3.The other partner Y.Kalyana Sundaram filed a suitO.S.No.125 of 1979 in the Sub Court, Vijayawada for settlement ofaccounts which was decreed with the following directions: “ i) that the first defendant be and is hereby directed torender accounts of 2[nd] defendant firm up to 28-02-1979 withinone month from the date of this decree; ii) that in case, the first defendant fails to renderaccounts as per clause No.1, Commissioner be appointed forsettlement of accounts of D-2 firm; iii) that the plaintiff be and is hereby directed to depositinto court the half share of the first defendant in D-2 firm withinthe three months from the date of this decree, and within onemonth on such deposit, the first defendant be and is herebydirected to transfer his interest in D-2 firm to the plaintiff byexecuting necessary sale deed and registering it in the name ofthe plaintiff at the expenses of the plaintiff as per Cl.18 of thePartnership deed dated 06-07-1976 executed by plaintiff and 1[st]defendant; iv) In case, the first defendant fails to execute the saledeed in favour of the plaintiff as per Clause No.iii, the plaintiffbe at a liberty to get the sale deed executed and registeredthrough Court; v) and that the defendants do pay a sum ofRs.21,357.75 ps. to the plaintiff towards suit costs and do beartheir own costs of Rs.7,497/- in this suit.” 4.Aggrieved thereby, the appellant filed A.S.No.2242 of 1983 in the High Court of Andhra Pradesh. On 18-07-1987, the saidappeal was allowed in part with the following directions: “ 1) That the total value of the property as on 08-03-1979be and hereby is fixed at Rs.16,09,000/- (Rupees sixteen lakhsand nine thousand only) determining the value of the land atRs.300/- per square yard instead of Rs.200/- per square yard; iv) In case, the first defendant fails to execute the saledeed in favour of the plaintiff as per Clause No.iii, the plaintiffbe at a liberty to get the sale deed executed and registeredthrough Court; v) and that the defendants do pay a sum ofRs.21,357.75 ps. to the plaintiff towards suit costs and do beartheir own costs of Rs.7,497/- in this suit.” 4.Aggrieved thereby, the appellant filed A.S.No.2242 of 1983 in the High Court of Andhra Pradesh. On 18-07-1987, the saidappeal was allowed in part with the following directions: “ 1) That the total value of the property as on 08-03-1979be and hereby is fixed at Rs.16,09,000/- (Rupees sixteen lakhsand nine thousand only) determining the value of the land atRs.300/- per square yard instead of Rs.200/- per square yard; 2) That the first defendant liability to account is notdisputed. 3) That the clauses (iii) and (i) of the Decree passed bythe Trial Court shall be deleted and in place of clauses (iii) and(iv) of the decree, the following clauses namely “(iii) thepartnership property i.e. the cinema theatre, shall be put toauction between the parties herein and (iv) If for any reasonthis auction fails, proceeds distributed between the partiesequally subject to satisfaction of the debts outstanding if anyshall be substituted as clauses (iii) and (iv) respectively. 4) That, same as aforesaid, the decree of the trial Courtshall stand confirmed in other respects, and 5.Being aggrieved by the judgment and decree inA.S.No.2242 of 1983, Y.Kalyana Sundaram filed Civil Appeal No.2742of 1988. In the appeal, both parties filed a compromise memo and theSupreme Court disposed of the appeal by its judgment dated 08-09-1988 setting aside the judgment of the High Court and directing thatthe said judgment be replaced by an order in the following terms: “ 1. The decree passed by the trial Court in favour of theappellant/plaintiff is restored subject to the modification inclause (iii) of the decree as regards the sum to be paid by theappellant/plaintiff to respondent/defendant No.1 in regard to thevaluation of one half share of the defendant No.1 in thedefendant No.2 firm as per clause 18 of the Partnership Deedas indicated hereafter and to the said extent. Upon theaccounts as on 7[th] March 1979 being taken and the assets andliabilities being finally settled the assets will vest in theappellant/plaintiff and the liabilities as determined on takingaccounts will be the responsibility of the appellant/plaintiff; 2. The appellant/plaintiff shall pay to respondent(defendant) No.1 Rs.15.00 lakhs (Rupees fifteen lakhs only) inthe manner specified hereinafter. 3. Out of the amount of Rs.15.00 lakhs, a sum ofRs.10.00 lakhs shall be deposited in the trial Court on or beforeNovember 5, 1988 and the remaining amount of Rs.5.00 lakhsshall be deposited in the trial Court as early as possible but inany event before February 7, 1989. The sum of Rs.5.00 lakhswill carry interest at the rate of 10% per annum from November7, 1988 till the date of payment. 4. On deposit of this amount of Rs.15.00 lakhs (andinterest if any) being made in the manner indicated above, thesuit of appellant/plaintiff shall stand decreed and all the assetsand the liabilities of respondent No.2, firm shall vest inappellant (plaintiff) as and from 7 March 1979. Subject to themodification to the aforesaid extent the rest of the terms of thedecree passed, by the trial Court will thereupon standconfirmed. The amounts deposited can be withdrawn by the1[st] respondent. 5. In case, the aforementioned sum of Rs.10.00 lakhs isnot deposited latest by November 5, 1988 or the remainingamount is not deposited latest by February 7, 1989, the appealwill stand dismissed, and the order passed by the High Courtwill hold the field.” 4. On deposit of this amount of Rs.15.00 lakhs (andinterest if any) being made in the manner indicated above, thesuit of appellant/plaintiff shall stand decreed and all the assetsand the liabilities of respondent No.2, firm shall vest inappellant (plaintiff) as and from 7 March 1979. Subject to themodification to the aforesaid extent the rest of the terms of thedecree passed, by the trial Court will thereupon standconfirmed. The amounts deposited can be withdrawn by the1[st] respondent. 5. In case, the aforementioned sum of Rs.10.00 lakhs isnot deposited latest by November 5, 1988 or the remainingamount is not deposited latest by February 7, 1989, the appealwill stand dismissed, and the order passed by the High Courtwill hold the field.” 6.The appellant received the sum of Rs.15.00 lakhs fromSri Y.Kalyana Sundaram in November/December 1988. According tothe appellant this sum was paid towards his share in full and finalsettlement of the amount due to him on the dissolution of the firm inlieu of his 50% share in the firm and the assets of the partnership weretaken over by Sri Y.Kalyana Sundaram. 7.The appellant as an individual filed his return for theassessment year 1989-90 on 08-04-1991 declaring a total income ofRs.50,760/-. This income comprised of income from business atRs.48,864/- and other source Rs.15,989/-. Out of this, the appellantclaimed deduction under Sections 80-C and 80-L of Rs.14,094/-. Thereturn of the assessee was processed by the respondent underSection 143 (1) (a), on 25-10-1991. 8.Subsequently, the respondent felt that the appellant hadsold away his right and title in 50% share in the Theatre Radha to hispartner Y.Kalyana Sundaram in November 1988 for Rs.15.00 lakhs,that the appellant did not admit any capital gain out of this transaction,that there is reason to believe that income chargeable to tax hasescaped assessment and issued a notice under Section 148 on 27-12-1993. The appellant filed a letter on 13-01-1994 stating that the returnalready filed by him on 08-04-1991 admitting a total income ofRs.50,760/- may be treated as a return filed in response to the abovenotice. 9.The respondent then passed an order dated 29-03-1994holding that under the compromise recorded in the Supreme Courtmentioned above, there was a sale of an asset by the appellant toY.Kalyana Sundaram, that the appellant’s contention that it was only acase of distribution between one partner and the other on thedissolution of the firm is not correct, that there was a sale by the appellant to Y.Kalyana Sundaram for Rs.15.00 lakhs, that the sale tookeffect on the date of payment of the 1[st] instalment i.e.07-11-1988 to the appellant, that on payment of second and finalinstalment, the transfer dated back and took effect from the date ofpayment of the 1[st] instalment i.e. 07-11-1988. He therefore, computedthe net long term capital gain as Rs.3,51,050/- on the site and shortterm capital gain as Rs.4,98,450/- on the assets and determined thatthe total income of the appellant for the assessment year 1989-90 asRs.9,00,260/-. He also proposed to initiate penalty proceedings underSection 271(1) (c) of the Income Tax Act 1961. 10.Aggrieved thereby, the appellant filed an appeal to theCommissioner of Income Tax (Appeals), Vijayawada. The appeal wasnumbered as I.T.A.No.33/V/CIT(A)/94-95; and was dismissed on 05-08-1994. 11.Challenging the appellate order, the appellant filedI.T.A.No.1529/Hyd/94 before the Income Tax Appellate Tribunal, “B”Bench, Hyderabad. 12.Before the Tribunal, the appellant filed writtensubmissions on 04-02-2000 specifically contending that anyarrangement between the partners relating to the distribution of theassets consequent on dissolution of the partnership is not an incomeand not liable to tax as capital gains. He cited C.I.T Vs. Dewas CineCorporation[1]and C.I.T. Vs. Bankey Lal Vaidya[2]in support of hisplea. He contended that consequent to the dissolution of the firm,there will be in specie distribution of assets between the partners andthis could be done in any of the following ways: 11.Challenging the appellate order, the appellant filedI.T.A.No.1529/Hyd/94 before the Income Tax Appellate Tribunal, “B”Bench, Hyderabad. 12.Before the Tribunal, the appellant filed writtensubmissions on 04-02-2000 specifically contending that anyarrangement between the partners relating to the distribution of theassets consequent on dissolution of the partnership is not an incomeand not liable to tax as capital gains. He cited C.I.T Vs. Dewas CineCorporation[1]and C.I.T. Vs. Bankey Lal Vaidya[2]in support of hisplea. He contended that consequent to the dissolution of the firm,there will be in specie distribution of assets between the partners andthis could be done in any of the following ways: a)one partner takes assets and pays the other partner or partner or b)both of them distribute the assets in their profit ratios or c)sell the assets and distribute the proceeds. In all these transactions any surplus realized by the partner in excessof this capital balance or book balance cannot be subjected to tax ascapital gains. He contended that the compromise in the SupremeCourt and the consequent judgment passed by the Supreme Court isone of the ways of settlement of accounts consequent to thedissolution of the firm and there was no transfer at all involved in thetransaction. He further contended that even if any transfer hadoccurred, it is in the assessment year 1979-80 and not in theassessment year 1989-90. He contended that a sale deed was to beexecuted by the appellant in favour of the other partner on thedissolution and in fact, till that day, no such sale deed is executed andregistered in favour of the other partner. Lastly he also contended thatup to the assessment year 1987-1988, Section 47 (ii) of the IncomeTax Act, 1961 excluded these transactions. From assessment year1988-89, in the case of dissolution of a firm, only the firm is taxable oncapital gains on dissolution under Section 45 (4) of the Income TaxAct, 1961 and not the partner. 13.The I.T.A.T. did not consider the above contentions raisedby the appellant before it and dismissed the appeal by order dated 08-02-2000. Aggrieved thereby the appellant has filed the above appealunder Section 260-A of the Income Tax Act, 1961. 14.Heard Sri Y.Ratnakar, learned counsel for the appellantand Sri J.V.Prasad, Senior Standing Counsel for the respondent. 15.The counsel for the appellant reiterated the contentionsraised by the appellant before the I.T.A.T and cited the followingdecisions: C.I.T Vs. Dewas Cine Corporation (supra 1) and C.I.T.Vs. Bankey Lal Vaidya (supra 2), C.I.T. Vs. Raghu Kumar[3], and C.I.T. Vs. Patel[4]. 16.The Standing Counsel for the respondent contended thatthe appellant had not raised these contentions before the I.T.A.T. butwhen the written submissions dated 04-02-2000 of the appellantbefore the I.T.A.T. were pointed out by this Court, he accepted thatthese points were indeed raised before the I.T.A.T. by the appellant. 17.A reading of the impugned order shows that the I.T.A.T.did not refer to the contentions raised by the appellant in his writtensubmissions dated 04-02-2000 filed before the I.T.A.T. It also did notrefer to the case law cited by the appellant in the written submissions. It merely adopted the reasoning of the C.I.T. (Appeals) and opined thatthe half share enjoyed by the appellant in the properties of the cinematheatre stood transferred to Y.Kalyana Sundaram only on the receipt ofconsideration as stipulated in the compromise decree of the SupremeCourt and that for the purpose of income tax, capital gains areassessable in the assessment year 1989-90. 18.In C.I.T. Vs. Dewas Cine Corporation (supra 1), theSupreme Court of India held as follows: 17.A reading of the impugned order shows that the I.T.A.T.did not refer to the contentions raised by the appellant in his writtensubmissions dated 04-02-2000 filed before the I.T.A.T. It also did notrefer to the case law cited by the appellant in the written submissions. It merely adopted the reasoning of the C.I.T. (Appeals) and opined thatthe half share enjoyed by the appellant in the properties of the cinematheatre stood transferred to Y.Kalyana Sundaram only on the receipt ofconsideration as stipulated in the compromise decree of the SupremeCourt and that for the purpose of income tax, capital gains areassessable in the assessment year 1989-90. 18.In C.I.T. Vs. Dewas Cine Corporation (supra 1), theSupreme Court of India held as follows: “On dissolution of the partnership, each theatre must bedeemed to be returned to the original owner, in satisfactionpartially or wholly of his claim to a share in the residue of theassets after discharging the debts and other obligations. Butthereby the theatres were not in law sold by the partnership tothe individual partners in consideration of their respectiveshares in the residue. The expression “sale” and “sold” are notdefined in the Income-tax Act : those expressions are used insection 10 (2) (vii) in their ordinary meaning . “Sale”, accordingto its ordinary meaning, is a transfer of property for a price, andadjustment of the rights of the partners in a dissolved firm isnot a transfer, nor it is for price.” It further held that a partner, may, in an action for dissolution insist thatthe assets of the partnership be realized by sale of its assets, butwhere satisfaction of the claim of the partner to his share in the value of the residue determined on the footing of an actual or notional sale ofproperty is allotted, the property so allotted to him cannot be deemed inlaw to be sold to him. 19.In C.I.T. Vs. Bankey Lal Vaidya (supra 2), the SupremeCourt held that a partner in a firm (carrying on business ofmanufacturing and selling pharmaceutical products and literaturerelating thereto) whose assets (which included good will, machinery,furniture, medicines, library and copy right) were valued atRs.2,50,000/-, was paid towards his half share, on the dissolution ofthe firm, a sum of Rs.1,25,000/- in lieu of his share, the arrangementbetween the partners of the firm amounted to a distribution of theassets of the firm on dissolution. It held that there was no sale orexchange of the respondent’s share in the capital assets to the otherpartner. The Supreme Court of India further held as follows: “In the course of dissolution the assets of a firm may bevalued and the assets divided between the partners accordingto their respective shares by allotting the individual assets orpaying the money value equivalent thereof. This is arecognized method of making up the accounts of a dissolvedfirm. In that case the receipt of money by a partner is nothingbut a receipt of his share in the distributed assets of the firm. The respondent received the money value of his share in theassets of the firm : he did not agree to sell, exchange ortransfer his share in the assets of the firm. Payment of theamount agreed to be paid to the respondent under thearrangement of his share was therefore not in consequence ofany sale, exchange or transfer of assets.” The Supreme Court upheld the contention of the assessee that no partof the amount of Rs.1,25,000/- received by the assessee representedcapital gains and relied on C.I.T. Vs. Dewas Cine Corporation (supra1) referred to above. It held that adjustment of the rights of the partnersin a dissolved firm by allotment of its assets is not a transfer for a price. The facts of the instant case are identical with the facts of the case inC.I.T. v. Bankey Lal Vaidya ( 2 supra). The Supreme Court upheld the contention of the assessee that no partof the amount of Rs.1,25,000/- received by the assessee representedcapital gains and relied on C.I.T. Vs. Dewas Cine Corporation (supra1) referred to above. It held that adjustment of the rights of the partnersin a dissolved firm by allotment of its assets is not a transfer for a price. The facts of the instant case are identical with the facts of the case inC.I.T. v. Bankey Lal Vaidya ( 2 supra). 20.In C.I.T. Vs. Raghu Kumar (supra 3), a Division Bench ofthe Andhra Pradesh High Court followed the judgment of the GujaratHigh Court in C.I.T. Vs. Mohanbhai Pamabhai[5]and held that notransfer is involved when a retiring partner receives at the time ofretirement from the firm, his share in the partnership assets either incash or any other asset. It further held that for the purpose of Section45 of the I.T. Act, no distinction can be drawn between an amountreceived by the partner on the dissolution of the firm and that receivedon his retirement, since both of them stand on the same footing. 21.In C.I.T. Vs. Patel (supra 4), a Division Bench of the APHigh Court noticed that the judgment in C.I.T. Vs. MohanbhaiPamabhai (supra 5) was approved by the Supreme Court inAdditional C.I.T. Vs. Mohanbhai Pamabhai[6], and following thejudgment in C.I.T. Vs. L.Raghukumar (supra 3) held that when apartner retires from a partnership firm taking his share of partnershipinterest, no element of transfer of interest in the partnership asset bythe retiring partner to the continuing partner was involved. 22.In the light of the above decisions, which are binding onus, we hold that the I.T.A.T. was not correct in confirming the orderspassed by the C.I.T. (Appeals) and the respondent. When theappellant was paid Rs.15.00 lakhs by Y.Kalyana Sundaram in full andfinal settlement towards his 50% share on the dissolution of the firm,there was no “transfer” as understood in law and consequently therecannot be tax on alleged capital gain. The appellant was correct inlaw in contending that the amount he received from Y.KalyanaSundaram is towards the full and final settlement of his share and suchadjustment of his right is not a “transfer” in the eye of law. It is arecognized method of making up the accounts of the dissolved firmand the receipt of money by him is nothing but a receipt of his share in the distributed asset of the firm. The appellant received the moneyvalue 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 theamount agreed to be paid to the appellant under the compromise wasnot in consequence of any share, exchange or transfer of assets toY.Kalyana Sundaram. Moreover , as rightly contended by theassessee, up to the assessment year 1987-1988, Section 47 (ii) of theIncome Tax Act, 1961 excluded these transactions. From assessmentyear 1988-89, in the case of dissolution of a firm, only the firm istaxable on capital gains on dissolution under Section 45 (4) of theIncome Tax Act, 1961 and not the partner. S.45(4) states as follows: “S.45(4) The profits or gains arising from the transfer of acapital asset by way of distribution of capital assets on thedissolution of a firm or other association of persons or bodyof individuals ( not being a company or a co-operativesociety) or otherwise, shall be chargeable to tax as theincome of the firm, association or body, of the previous yearin which the said transfer takes place and, for the purpose ofsection 48, the fair market value of the asset on the date ofsuch transfer shall be deemed to be the full value of theconsideration received or accruing as a result of thetransfer.” “S.45(4) The profits or gains arising from the transfer of acapital asset by way of distribution of capital assets on thedissolution of a firm or other association of persons or bodyof individuals ( not being a company or a co-operativesociety) or otherwise, shall be chargeable to tax as theincome of the firm, association or body, of the previous yearin which the said transfer takes place and, for the purpose ofsection 48, the fair market value of the asset on the date ofsuch transfer shall be deemed to be the full value of theconsideration received or accruing as a result of thetransfer.” Thus it is clear that the legislature, even though it was aware of theabove decisions, did not choose to amend the law by making thepartner liable when it amended the I.T Act,1961 by introducing clause(4) to s.45 by the Finance Act,1987 w.e.f 1.4.1988 and made only thefirm liable. Therefore the contention of the assessee has to beaccepted and that of the Revenue is liable to be rejected. 23. In this view of the matter, this appeal is allowed and the orderof the I.T.A.T., confirming the orders of the C.I.T (Appeals) and therespondent is set aside. No costs. __________________________ JUSTICE GODA RAGHURAM Date: 03 -08-2012Note:Mark the L.R. copy. B/o. Kvr[1](1968) 068 I.T.R. 0240 (S.C.)[2](1971) 079 I.T.R. 0594 (S.C.)[3](1983) 141 ITR 0674[4](1988) 171 ITR 0128[5](1973) 91 ITR 393 (Guj)[6](1987) 165 ITR 166 (SC) _________________________________ JUSTICE M.S.RAMACHANDRA RAO