R.S Pathak, J.:— This is a reference made by the Income-tax Appellate Tribunal under section 66(1) of the Indian Income-tax Act.

2. The assessee is a Hindu undivided family. Its karta was a partner in a firm, Dhanwantri Karyalaya, with a moiety share. The other partner was one Devi Sharan Garg, the karta of another Hindu undivided family. The firm carried on the business of preparing and marketing indigenous medicines and also publishing and selling literature relating to such medicines.

3. On July 27, 1946, the partnership was dissolved, and the business was taken over by the other partner as his sole proprietary business. The assessee was assessed by the Income-tax Officer for the assessment year 1947-48 (the relevant accounting period being the calendar year 1946) and was assessed to tax on capital gains under section 12B in respect of the gains upon the value of its karta's share in the assets of the firm. The assets of the firm, which included its goodwill, machineries, furniture, medicines as well as a library and the copyright in respect of certain publications were valued at Rs. 2,50,000 as on the date of dissolution. The Income-tax Officer estimated the valuation of the stock-in-trade, stores and raw materials at Rs. 80,000, and after deducting this value from the total value of the assets he determined the value of the capital assets at Rs. 1,70,000. Holding that the value of the assets disclosed in the books as on December 31, 1946, should be Rs. 30,000, he found that the capital gain was Rs. 1,40,000, of which the assessee's share was Rs. 70,000.

4. The assessee appealed against the assessment, but the Appellate Assistant Commissioner dismissed the appeal. Upon further appeal before the Appellate Tribunal, the quantum of the capital gains was reduced to Rs. 65,000. The Appellate Tribunal, however, rejected the contention of the assessee that by virtue of the third proviso to section 12B(1) it could not be said that any sale, exchange or transfer had taken place and that, therefore, no capital gains had accrued to the assessee. In the circumstances, the following question has been referred by the Appellate Tribunal to this court:

“Whether, on a true interpretation of sub-section (1) of section 12B of the Income-tax Act, the sum of Rs. 65,000 has been correctly taxed as capital gains?”

5. Now, what happened in the instant case was that the assets of the firm were taken over entirely by Devi Sharan Garg who agreed to pay the assessee a sum of Rs. 1,25,000 in respect of a half share in the assets. The assessee did not receive a share in the assets in kind but instead a sum representing the value of that share. It is contended for the assessee that it was entitled to the benefit of the third proviso to section 12B(1) because what the assessee received was a distribution of capital assets on the dissolution of the firm and by reason of the proviso this distribution could not be treated as a sale, exchange or transfer of capital assets, and that being so, the case did not fall within the mischief of section 12B(1). For the Commissioner, it is urged that the assessee did not receive a share in the assets of the firm but in lieu of that share received money value therefor, It is contended that, in order that the proviso should apply, the assessee should. have received its share of the assets in specie, and that the proviso can apply when the distribution of the firm's assets is made in specie. Reference is made to the decision in James Anderson v. Commissioner of Income-tax [1960] 39 I.T.R 123. That was a case where, upon the death of one Henry Gannon, the assessee was appointed as an administrator of his estate. In the course of administration, the assessee sold some shares and securities belonging to the deceased for the purpose of distributing the assets amongst the legatees. The Income-tax Officer treated the excess of the sale price over the cost price of the shares and securities as capital gains under section 12B. The Supreme Court held that the assessee was being taxed upon the sale proceeds and not upon any distribution of capital assets, and that it must be shown that capital assets were distributed in specie in order to escape the application of section 12B(1). The facts of that case are clearly distinguishable from the one before us.

6. In the instant case what the assessee received was the value in money of its share in the assets of the firm. There can be cases where it is not possible nor convenient to distribute an asset in specie. The goodwill of the firm cannot be divided between the partners. Apart from goodwill, there may be a case where the firm owns intangible property, e.g, the copyright in respect of certain publications. Where a firm owns a machinery or a motor vehicle or some single piece of property, which is employed for the purpose of its business, it is not easy to say that that property is capable of division between the partners. In all these cases it is not possible to conceive that the law contemplated distribution of the assets by physical division of the property. In the case of distribution of the assets of a firm upon its dissolution, it is a recognised mode of distributing the assets that one partner may be given the assets of the firm while the other receives its money value. In the absence of a clause in the partnership deed providing for the method of winding-up, or where effect cannot be given to the method prescribed, and failing an agreement between the partners, it is well established that the assets may be put to sale and the sale proceeds then divided between the partners. In either case, the receipt of money by a partner is nothing but a receipt of the distribution of the assets of the firm. In Syers v. Syers, Lord Cairns, L.C observed:

“My Lords, it is very true, as was said at the Bar, that on dissolving a partnership of this kind the ordinary course would be for the court to direct a sale of the assets, and, if necessary, a sale of the concern as a going concern, and to give liberty for proposals to be made by either party to purchase it before the judge in chambers……”

and the terms of the decree which he proposed make it abundantly clear that he considered that a proper mode of distributing the firm's assets would be to value the share of the plaintiff-partner, if the business was sold as a going concern, that value being paid by the defendant-partner, and that, if the latter defaulted in payment, the properties would be sold as a going concern and “a division of the assets of the partnership in the usual way” would be effected. The law has also been stated in Lindley on Partnership, 12th edition, page 453:

“Having provided for the events upon which a partnership is to cease, the next point is to specify the method by which its affairs are to be wholly or partially wound up.

Where the articles have prescribed no method of winding-up, or where the method prescribed cannot be carried into effect, then, unless the partners can come to some agreement as to what is to be done, there must, as a general rule, be a conversion of all the partnership property into money; and this money, after payment of the partnership debts, must be divided amongst the partners in the shares in which they may be entitled to it.

Agreement for fair division.

An agreement that on a dissolution the partnership property shall be fairly and equally divided, after payment of its debts, has been held to mean that the property shall be sold, and that the money produced by the sale shall be divided after the debts have been paid. Even if the agreement be for the division of the partnership property in specie, the court may order a sale if that appears to be most beneficial to the parties.”

7. It, therefore, appears to us that when it was agreed that the assessee would receive the value in money of its share in the assets of the firm, what it received consequent upon this agreement was merely a distributed share in the assets of the firm.

8. Learned counsel for the Commissioner has placed reliance upon Gowri Tile Works v. Commissioner of Income-tax. The decision in that case proceeded upon the assumption that the proviso in section 12B(1) applied only to a case where the capital assets were distributed in specie, and accordingly, it was held that the share in the price of the assets realised by their sale, so far as it was in excess of the original cost, was not exempted by the proviso from assessment as capital gains. With respect, we find ourselves unable to agree. It does not appear that the learned judges considered that it was not unusual for the assets of a partnership firm to be distributed in the manner described above. Indeed, it seems to us that it was in order to remove any doubt that such distribution of partnership assets could not be said to be a sale, exchange or transfer that the legislature inserted the proviso under consideration. Learned counsel also referred to Killick Nixon & Co. v. Commissioner of Income-tax [1963] 49 I.T.R 244., but there again the Bombay High Court merely followed the decision in James Anderson's case [1960] 39 I.T.R 123, which, to our minds, is a decision upon its own facts.

9. We are, therefore, of the view that the case of the assessee fell under the third proviso to section 12B(1) and must, therefore, hold that the sum of Rs. 65,000 could not have been taxed as capital gains. Accordingly, we answer the question referred in the negative.

10. A copy of this judgment under the seal of the court and the signature of the Registrar shall be sent to the Appellate Tribunal. The assessee shall be entitled to his costs which we assess at Rs. 200. Counsel's fee is also assessed at Rs. 200.

11. Question answered in the negative.