TaxTMI 
TaxTMI 
1982 (7) TMI 33
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....ided that the death or retirement of any partner shall not dissolve the partnership and the partnership shall continue with the remaining partners. Sorab Pestonji Patel died on 23rd October, 1961. On his death, his interest in the partnership was valued in accordance with cl. 14 of the deed. Clause 14 of the deed, in so far as it is relevant, reads as follows : "The death or retirement of any of the partners shall not dissolve the partnership as to the remaining of them. On the death or retirement of any of the partners a general account shall be taken by and between the surviving partners and the legal representatives of the deceased partners, or between the continuing partners and the retiring partner as the case may be, of the capital assets (excluding the goodwill) credits, liabilities and transactions of the partnership ....... .." The effect of this clause is that the retirement of any of the partners does not dissolve the partnership as to the remaining partners. It provides that on the death of a partner the accounts shall be prepared by the auditors of the firm and on the amount payable to the legal representatives of the deceased partner or to the retiring partne....
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....luded that in the assessment. In appeal by the assessee, the AAC also took the same view and held that the cost of the shares with the firm could not be enhanced by a mere book adjustment, as according to him, it could not be said that a firm has got any additional right in the shares on the death of one of the partners. The assessee took the matter in appeal before the Appellate Tribunal. The question before the Appellate Tribunal was whether the payment made by the continuing partners to the estate of the deceased partner towards his share in the appreciation of the shares should be added to the original cost of acquisition of the shares for the purpose of ascertaining the capital gains. The Tribunal found that the partnership which continued with changed constitution after the death of the partner remained the owner of the shares without any break. On the basis of the two decisions of the Supreme Court in Kalooram Govindram v. CIT [1965] 57 ITR 335 and in Miss Dhun Dadabboy Kapadia v. CIT [1967] 63 ITR 651, the Tribunal took the view that the original cost of acquisition need not remain the same and the subsequent events which have a bearing on the cost will have to be taken ....
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....acquired by the firm because the firm continued to own the same asset. It is argued that the firm being a legal entity and the assets having belonged to the same firm, notwithstanding the death of a partner, the revaluation of the assets at the time of the death of one of the partners is made only for the limited purpose of determining the value of the share of the outgoing partner. What happens according to the learned counsel, on the death or retirement of one of the partners is, where the firm continues, there is a mere adjustment of the rights between the partners, and the amount payable to the retiring partner, or to the estate of the deceased partner, is really a debt due from the surviving partners. The revaluation of the assets made for the purpose of determining the value of the shares of the outgoing partner, according to the learned counsel, has no effect on the actual cost. The proposition that the firm was a legal entity having an independent existence apart from its partners and that the same firm continued notwithstanding the retirement or death of one of the partners, where, under the partnership deed, the dissolution does not occur on the death of a partner, was....
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....t rate or those rates shall be charged for that year in accordance with, and subject to the provisions of the Act in respect of the total income of the previous year or previous years, as the case may be of every person; having regard to the definition of " person " and " partnership ", the income of the partnership firm will be subjected to tax. Indeed, Chap. XVI of the Act contains special provisions in ss. 182 to 189 which are applicable to firms and s. 182 and s. 183 specifically deals with assessment of firms. Coming to the relevant provisions with regard to capital gains tax, s. 45 of the Act provides as follows : " (1) Any profits or gains arising from the transfer of a capital asset effected in the previous year shall, save as otherwise provided in sections 53, 54, 54B, 54D and 54E be chargeable to income-tax under the head 'Capital gains' and shall be deemed to be the income of the previous year in which the transfer took place." Section 48. provides for the mode for computation of income chargeable under the head capital gains and it reads as follows: " The income chargeable under the head 'Capital gains' shall be computed by deducting from the full value of t....
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....Court was whether a document relinquishing interest of a partner in partnership assets which also comprised of immovable property was compulsorily registrable under s. 17(1) of the Indian Registration Act and the Supreme Court held that the interest of the outgoing partner was movable property. After referring to several provisions of the Partnership Act, the Supreme Court observed as follows (p. 1303): " From a perusal of these provisions it would be abundantly clear that whatever may be the character of the property which is brought in by the partners when the partnership is formed or which may be acquired in the course, of the business of the partnership it becomes the property of the firm and what a partner is entitled to is his share of profits, if any, accruing to the partnership from the realisation of this property, and upon dissolution of the partnership to a share in the money representing the value of the property. No doubt, since a firm has no legal existence, the partnership property will vest in all the partners and in that sense every partner has an interest in the property of the partnership, During the subsistence of the partnership, however, no partner can deal....
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....ership property, the partnership must be understood as owning the property and the partnership must, therefore, be treated as an independent legal entity. Now it is no doubt true that a partnership firm is made an assessable entity under the Act but under the Partnership Act a partnership has not been given any legal status. It is not a juristic person and the independent status given to the partnership firm under the Act has to be limited only for the purposes of that Act. This becomes clear from the decision of the Supreme Court in CIT v. R. M. Chidambaram Pillai [1977] 106 ITR 292. The question in that case was whether the salary paid to a partner of a firm, which grew and sold tea, was exempt under r. 24 of the Indian I.T. Rules, 1922, to the extent of 60% thereof, representing agricultural income. In that context the Supreme Court dealt with exclusively the concept of a partnership firm and quoted with approval a paragraph from Lindley on Partnership, 12th edn., p. 28 (14th edn., p. 29) and has observed (p. 297 of the report) as follows: " Is the firm a person or a mere shorthand name for a collection of persons, commercially convenient but not legally recognised ? Under....
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....n partnership. According to the principles of English jurisprudence, which we have adopted, for the purposes of determining legal rights 'there is no such thing as a firm known to the law' as was said by James L.J. in Ex parte Corbett: In re Shand [1880] 14 Ch D 122, 126 (CA). In these circumstances to import the definition of the word ' person ' occurring in section 3(42) of the General Clauses Act, 1897, into section 4 of the Indian Partnership Act will, according to lawyers, English or Indian, be totally repugnant to the subject of partnership law as they know and understand it to be. ' " In Chidambaram Pillai's case [1977] 106 ITR 292, the Supreme Court also pointed out that this view accorded with the view taken by the Supreme Court in Narayanappa's case, AIR 1966 SC 1300. These authorities, therefore, clearly establish that a partnership cannot be treated as a " person " owning property and as pointed out by Lindley, any change amongst the partners destroys the identity of the firm. The same position is reiterated by the Supreme Court in Malabar Fisheries Co. v. CIT [1979] 120 ITR 49. The Supreme Court in that decision noticed the different notions which the commercial ....
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....s and Co. (1953] 24 ITR 405, does not decide anything to the contrary and it is difficult for us to see what support the learned counsel for the Revenue can draw from that decision, in support of his argument. As a matter of fact, that decision clearly lays down that a firm has no legal entity apart from its partners though under the Indian I.T. Act the position is somewhat different. This would be clear from the observations on p. 408 (of 24 ITR) : " It is true that under the law of partnership a firm has no legal existence apart from its partners and it is merely a compendious name to describe its partners but it is also equally true that under that law there is no dissolution of the firm by the mere incoming or outgoing of partners. partner can retire with the consent of the other partners and a person can be introduced in the partnership by the consent of the other partners. The reconstituted firm can carry on its business in the same firm's name till dissolution. The law with respect to retiring partners as enacted in the Partnership Act is to a certain extent a compromise between the strict doctrine of English Common Law which refuses to see anything in the firm but a coll....
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....ss and full depreciation had been allowed on the buses. The decision of the ITO was confirmed by the Tribunal. In the accounts of the firm the written down value of the buses was shown as Rs. 18,328. On these facts this court held that T and H were the real owners of the business. The assets of the business vested in them and the permit was in the name of one of them. This state of affairs continued during the existence of all three alleged partnerships. There was no evidence of the dissolution of the two previous firms and on facts this court took the view that no new firms were constituted but there Were mere changes in the constitution of the firm. Thus, it was held that the excess realised over the written down value of the buses was taxable. It was in that context that this court observed as follows (p. 191) : " In other words, there was a structural alteration in the constitution of the firm from time to time by some partners retiring and others coming in, resulting in a consequent re-distribution of the shares of the partners. As observed by the Supreme Court in CIT v. A. W. Figgies and Co. [1953] 24 ITR 405, 408, ' a mere change in the constitution of the partnership doe....
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....m, one in respect of the income derived by it before reconstitution, and the other in respect of the income derived by it after reconstitution. To the same effect is the earlier decision of another Full Bench of the Allahabad High Court in Dahi Laxmi Dal Factory v. ITO [1976] 103 ITR 517, where it has observed, at p. 522, that, as a result of retirement of a partner also, change takes place in the constitution of the firm but the firm as such continues to be in existence as before. The position that a reconstituted firm is not treated as if it is the same assessable entity under the Act appears to be clear from the provisions of s. 184 of the Act. Section 184 provides for the registration of firm and s. 184(7) provides as follows : " Where registration is granted to any firm for any assessment year, it shall have effect for every subsequent assessment year : Provided that (i) there is no change in the constitution of the firm or the shares of the partners as evidenced by the instrument of partnership on the basis of which the registration was granted; and.... (8) Where any such change has taken place in the previous year, the firm shall apply for fresh registration for ....
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....roportions in which they were entitled to share profits." Under cl. (a), losses including deficiencies of capital have to be first paid out of profits and then out of capital, if necessary, and lastly, if necessary, by the partners individually in the proportions in which they are entitled to share profits. How the assets of the firm are to be applied is specified in cl. (b). The assets of the firm including any sums contributed by the partners to make up deficiencies of capital have first to be applied in paying the debts of the firm to third parties; then in paying to each partner rateably what is due to him from the firm for advances as distinguished from capital; then each partner has to be rateably paid what is due to him on account of capital and if there is any residue, then that residue has to be divided amongst the Partners in the proportions in which they are entitled to share the profits, In the case of a retiring partner or an outgoing partner or even in the case of death of a partner, all that the outgoing or the retiring partner or estate of the deceased partner would be entitled to, as pointed out by Lindley, is the proportion of the partnership assets after havin....
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....ise bundles of rights which have inherent in them the prospect of an increase in value which will result from the death or retirement of that partner. Accordingly, when that partner retires, there is neither a disposal by him, nor an acquisition by the other Partners, and a charge to capital gains tax cannot arise, even though a payment has Non made by the continuing Partners. (Emphasis supplied) We may usefully refer to the decision of the Supreme Court in CIT v. Dewas Cine Corporation [1968] 68 ITR 240. Dealing with the provisions of s. 48 of the partnership-Act, the Supreme Court observed as follows (p. 243) : "Section 48 of the Partnership Act provides for the mode of settlement of accounts between the partners. It prescribes the sequence in which the various outgoings are to be applied and the residue remaining is to be divided between the partners. The distribution of surplus is for the purpose of adjustment of the rights of the partners in the assets of the partnership : it does not amount to transfer of assets. " That was no doubt a case of dissolution of partnership but what is important is that the manner in which the rights of a partner on dissolution has to be ....
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.... is made on account of the value of a share of a retiring or deceased partner. We shall later consider the argument of Mr. Dastur that it is not his contention that there is any transfer and that these cases would, therefore, not be apposite. A point of considerable importance in our view fell for the decision of the Gujarat High Court in Velo Industries v. Collector, Bhavnagar [1971] 80 ITR 291 [FB]. That decision no doubt did not directly arise out of the provisions of the I.T. Act but the Full Bench was called upon in that case to deal with the nature of the transaction in the form of a deed evidencing retirement of a partner from partnership. A deed of retirement was executed by and between the partners on 24th October, 1963. When the deed was submitted for registration at the office of Registrar of Assurances, he took the view that it was a conveyance on sale and was, therefore, chargeable to stamp duty under art. 25 of Sch. I of the Bombay Stamp Act, 1958, and since the stamp of Rs. 30 was affixed on the instrument, he impounded the instrument under s. 33 and sent it to the Collector under s. 37(2) of the Stamp Act. The Chief Controlling Revenue Authority to whom the case ....
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....ip, were equally applicable where a partner retires from the partnership. It was then observed by the Full Bench as follows (p. 297 of 80 ITR): " What is given to him by way of his share in the partnership, whether it be cash or some property of the partnership, is received by him as his share in the net partnership assets, after deducting liabilities and prior charges on settlement of accounts and there is no transfer of any interest in property from him to the continuing partners nor is it for a price. It is merely an adjustment of the rights between the retiring partners and the continuing partners in the assets of the partnership ; the share of the retiring partner in the partnership is made over to him." These observations have our respectful concurrence. This decision of the Full Bench of the Gujarat High Court was followed in that same court later in CIT v. Mohanbhai Pamabhai [1973] 91 ITR 393. The assessees in that case retired from the partnership firm leaving the other seven partners as continuing partners. The terms and conditions were recorded in a document dated 18th February, 1962, and the document was in the form of minutes of the proceedings of a meeting he....
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....at the interest of a partner in the partnership is not interest in any specific item of the partnership property, but as pointed out by the Supreme Court and the Fall Bench of this court, it is a right to obtain his share of profits from time to time during the subsistence of the partnership and on dissolution of the partnership or his retirement from the partnership, to get the value of his share in the net partnership assets which remain after satisfying the debts and liabilities of the partnership. When, therefore, a partner retires from a partnership and the amount of his share in the net partnership assets after deduction of liabilities and prior charges is determined on taking accounts on the footing of notional sale of the partnership assets and given to him, what he receives is his share in the partnership and not any consideration for transfer of his interest in the partnership to the continuing partners. His share in the partnership is worked out by taking accounts in the manner prescribed by the relevant provisions of the partnership law and it is this and this only, namely, his share in the partnership which he receives in terms of money. There is in this transaction no....
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....as G. Patel [1978] 115 ITR 95, a Division Bench of this court was concerned with the question as to whether the amount paid to a partner for his share of goodwill gives rise to a capital gain and whether the amount paid to the retiring partner for his share of assets of the firm amounts to a distribution of assets on dissolution. On the facts of that case the Division Bench took the view that the amount paid was for transfer of rights of a partner and was capital gain and was liable to tax. It is necessary to refer to the relevant facts of that case. The assessee had retired from the firm with effect from 31st August, 1961, and the remaining partners continued to carry on the business of the firm. Among payments made to the retiring partner was a sum of Rs. 50,000 as his share as the value of goodwill and Rs. 4,77,941 as his share in the remaining assets of the firm. The Tribunal in that case had taken the view that the sum Rs. 50,000 being the assessee's share in the value of the goodwill, it was not liable to capital gains tax. With regard to the sum of Rs. 4,77,941 the Tribunal held that this amount was received on retirement and not upon dissolution and the case was, therefore,....
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....out by the Division Bench as follows (p. 116 of 115 ITR) : " A couple of things emerge clearly from the aforesaid passages. In the first place, a retiring partner while going out and while receiving what is due to him in respect of his share, may assign his interest by deed or he may, instead of assigning his interest, take the amount due to him from the firm and give a receipt for the money and acknowledge that he has no more claim on his co-partners. The former type of transactions will be regarded as sale or release or assignment of his interest by a deed attracting stamp duty while the latter type of transaction would not. In other words, it is clear, the retirement of a partner can take either of two forms, and apart from the question of stamp duty, with which we are not concerned, the question whether the transaction would amount to an assignment or release of his interest in favour of the continuing partners or not would depend upon what particular mode of retirement is employed and as indicated earlier, if instead of quantifying his share by taking accounts on the footing of notional sale, parties agree to pay a lump sum in consideration of the retiring partner assigning....
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....e deceased partner or the continuing partners and the retiring partner as the nature of the case shall require ". We need not be detained by this stipulation in cl. 14 because we must take the facts, for the purposes of this reference, as they have now been found. No document, in fact, has been executed and, therefore, we are not called upon to consider any document which might have been executed between the parties because then the terms of the document would have been required to be considered. It does appear that the effect of the decision in Patel's case [1978] 115 ITR 95 (Bom) is, as has been very clearly stated by the Division Bench, that it is the mode in which the retirement has been brought up which will determine the question as to whether there is transfer or not. Strictly speaking, we are not called upon to go into the correctness or otherwise of that view. As already observed, the crucial question in the instant case is what is the nature of the transaction of retirement when the retiring or the deceased partner receives the value of his share in cash on the basis of the value of the assets on the date on which the partner retired or the deceased partner died. There ap....
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....r continuing partners. Mr. Dastur has referred us to certain cases which were mainly in support of the contention that the two surviving partners in the instant case must be treated as having acquired the interest of the deceased partner even though they formed a partnership and that the two partners must be considered independent of the partnership firm. Two of these cases arose under the W.T. Act and, in our view, they have really no relevance to the question as to whether there is acquisition of an asset on the death of a partner or on the retirement of a partner by the surviving partners. In CWT v. Mrs. Christine Cardoza [1978] 114 ITR 532 (Kar), the question was whether, where agricultural land was owned by a firm, the exemption to the extent of Rs. 1,50,000 is available to each of the partners separately, and the Karnataka High Court held that where agricultural land is owned by a partnership, in computing the net wealth of a partner, the method of deducting the sum of Rs. 1,50,000 in the computation of the net wealth of the firm under r. 2 of the W.T. Rules, 1957, is not warranted by the terms of s. 5(1)(iv-a) of the W.T. Act and that the deduction contemplated by that pr....