- Bookmark
- Share
- CaseIQ
Tribhuvan Das G. Patel v. Commr. Of Income Tax, Bombay .
Factual and Procedural Background
The assessee was one of three partners in the firm “Kumar Engineering Works.” On 5 December 1960 he gave notice of his intention to dissolve the firm with effect from 31 December 1960. When the other partners refused, he instituted Suit No. 72 of 1961 in the Bombay High Court seeking a declaration of dissolution, rendition of accounts and ancillary reliefs. The dispute was ultimately compromised by a deed of settlement dated 19 January 1962 under which the assessee was treated as having retired from 31 August 1961. Pursuant to that settlement:
- He received Rs 1,00,000 as his share of profits for the period ending 31-8-1961.
- He received Rs 8,00,000 towards his share in other assets, of which Rs 50,000 represented goodwill (Question 2) and Rs 4,77,941.47 represented his share in the firm’s assets (Question 3).
In the firm’s assessment proceedings the assessee’s share of profit was computed at Rs 1,72,155 (subsequently reduced to Rs 1,36,930). The assessee contended in his personal assessment that only the Rs 1,00,000 actually received was taxable. Three questions of law were referred by the Income-tax Appellate Tribunal to the High Court under Section 256(1) of the Income-tax Act, 1961. The High Court answered Question 1 against the assessee and Questions 2 and 3 in his favour. The assessee appealed to the Supreme Court.
Legal Issues Presented
- Whether, on the facts and circumstances, Rs 1,72,182 (later Rs 1,36,930) or only Rs 1,00,000 was liable to be included in the assessee’s total income as his share of profit from the firm.
- Whether the sum of Rs 50,000 received as the assessee’s share in goodwill was chargeable to capital-gains tax.
- Whether the sum of Rs 4,77,941 (or any part thereof) was chargeable to capital-gains tax in view of Section 47(ii) of the Income-tax Act.
Arguments of the Parties
Assessee/Appellant
- Question 1: Only the Rs 1,00,000 actually received should be treated as income; any amount notionally computed in the firm’s assessment but not received should not be taxed.
- Question 3: By virtue of Section 47(ii), the amount received on retirement representing his share in the firm’s assets is not a transfer giving rise to capital gains. Reliance was placed on CIT v. Mohanbhai Pamabhai (1987 Supp SCC 704) and Sunil Siddharthbhai v. CIT (1985 4 SCC 519).
Revenue/Respondent
The opinion does not contain a detailed account of the Revenue’s legal arguments.
Table of Precedents Cited
| Precedent | Rule or Principle Cited For | Application by the Court |
|---|---|---|
| CIT v. B.C. Srinivasa Setty (1981) 2 SCC 460; 128 ITR 294 | Transfer of self-generated goodwill does not give rise to a taxable capital gain because the asset has no ascertainable cost of acquisition. | Ground for affirming the High Court’s answer to Question 2 in favour of the assessee; the Rs 50,000 received for goodwill was held non-taxable. |
| CIT v. Mohanbhai Pamabhai 1987 Supp SCC 704; 165 ITR 166 | Amount received by a retiring partner towards his share in partnership assets is covered by Section 47(ii) and is not a taxable capital gain. | Followed to answer Question 3 in favour of the assessee, holding the Rs 4,77,941 not taxable as capital gains. |
| Sunil Siddharthbhai v. CIT 1985 4 SCC 519; 156 ITR 509 | Clarified treatment of a partner’s interests when capital assets are introduced or withdrawn from a firm. | Cited within Mohanbhai Pamabhai and reaffirmed as supporting authority for non-taxability under Section 47(ii). |
Court's Reasoning and Analysis
Question 2 (Goodwill): The Court noted that B.C. Srinivasa Setty is directly on point. Since goodwill lacks an ascertainable cost of acquisition, its transfer cannot be subjected to capital-gains tax. The High Court’s answer in favour of the assessee was therefore correct.
Question 3 (Retirement amount): Relying on Mohanbhai Pamabhai, which in turn followed Sunil Siddharthbhai, the Court accepted that amounts paid to a retiring partner towards his share in the assets do not constitute a “transfer” under Section 45 and fall within the exemption in Section 47(ii). The entire Rs 4,77,941 is consequently not taxable as capital gains.
Question 1 (Share of profit): The Court agreed with the High Court that the assessee’s taxable income must reflect the share of profits ultimately determined in the firm’s assessment, not merely the Rs 1,00,000 actually received. The additional amount had accrued to him by operation of law; his choice not to recover it did not prevent taxability.
Holding and Implications
Appeal DISMISSED in respect of Question 1; ALLOWED in respect of Question 3. (Question 2 was not in dispute before the Supreme Court.)
Consequently, the assessee must include his full assessed share of partnership profits in his taxable income, but the sums received for goodwill and for his share in partnership assets on retirement are not chargeable to capital-gains tax. The decision affirms existing precedent without establishing new principles; its practical effect is limited to the parties, clarifying the computation of taxable income when a partner retires.
1. Heard counsel for the parties.
2. The following three questions were stated by the Tribunal for the opinion of the High Court under Section 256(1) of the Income Tax Act, 1961:
“1. Whether on the facts and in the circumstances of the case, Rs 1,72,182 or Rs 1,00,000 were liable to be included in the total income of the assessee as his share of profit from the firm of Kumar Engineering Works?
2. Whether on the facts and in the circumstances of the case, sum of Rs 50,000 received by the assessee as his share of the value of the goodwill or any part thereof was liable to tax as capital gain?
3. Whether on the facts and in the circumstances of the case, sum of Rs 4,77,941 or any part thereof was liable to tax as capital gain by reason of Section 47(ii) of the Act?”
3. So far as Question 2 is concerned, it has already been answered in favour of the assessee. In view of the decision of this Court in CIT v. B.C Srinivasa Setty (1981) 2 SCC 460, (1981) 128 ITR 294 the said questions must be held to have been rightly answered in favour of the assessee.
4. So far as Question 3 is concerned, the assessee invoked clause (ii) of Section 47 to contend that the said sum of Rs 4,47,941 does not represent a capital gain. Mr Sharma, learned counsel for the appellant-assessee, has brought to our notice the decision of this Court in CIT v. Mohanbhai Pamabhai 1987 Supp SCC 704 (1), (1987) 165 ITR 166 where it has been held, following the decision in Sunil Siddharthbhai v. CIT (1985) 4 SCC 519, (1985) 156 ITR 509 that even where a partner retires and some amount is paid to him towards his share in the assets, it should be treated as falling under clause (ii) of Section 47. Therefore, following this decision, this question has to be and is answered in favour of the assessee and against the Revenue. Now survives Question 1. A few facts need to be stated in that behalf:
The assessee was a partner with two others in a partnership firm, Kumar Engineering Works. On 5-12-1960, the assessee served a notice of his intention to dissolve the firm with effect from 31-12-1960. Since the other partners refused to agree with the said demand, the assessee filed a suit being Suit No. 72 of 1961 in the Bombay High Court for a declaration that the firm was dissolved with effect from 31-12-1960 and for accounts and other ancillary reliefs. Ultimately, the dispute was settled between the parties under a deed dated 19-1-1962. Under this deed of settlement, the assessee was deemed to have retired from the firm with effect from 31-8-1961 and the remaining partners were authorised to continue to carry on the business of the firm. The assessee was paid a sum of Rs 1,00,000 as his share of profits of the firm for the period ending 31-8-1961. In addition to this Rs 1,00,000, he was also paid Rs 8,00,000 including the sum of Rs 50,000 representing the share in the goodwill (Question 2) and Rs 4,77,941.47p. representing his share in the assets of the firm (Question 3). In his assessment proceedings, the assessee himself contended that only the sum of Rs 1,00,000 should be brought to tax and not the other amounts. In the assessment proceedings of the firm, however, the share of the assessee in the profits was arrived at Rs 1,72,155, later reduced to Rs 1,36,930. The assessee's contention was that notwithstanding the said fact, only a sum of Rs 1,00,000 should be treated as his income. This was not agreed to by the authorities. When the matter came before the High Court, it answered the said Question 1 in the following words:
“In view of the above discussion, the first question is answered thus: on the facts and in the circumstances of the case, not Rs 1 lakh but the assessee's share of profit that may ultimately be determined in the assessment of the firm as his share of profit from the firm is liable to be included in his total income.”
5. In our opinion, the answer given by the High Court is the correct one in law. We cannot agree with Mr Sharma that inasmuch as he has actually received only a sum of Rs 1,00,000, only that amount should be taken as his share of profits and not the actual amount worked out in the assessment of the firm. The amount over and above Rs 1,00,000 is also his income in law. It has accrued to him. It is immaterial that he may choose not to recover it.
6. We, therefore, reiterate that the answer given by the High Court extracted hereinabove is the correct one in the facts and circumstances of the case.
7. The appeal is accordingly dismissed so far as Question 1 is concerned but allowed so far as Question 3 is concerned. (Question 2 is not an issue before us.)
8. No costs.
Alert