TaxTMI 
TaxTMI 
1988 (8) TMI 121
X X X X Extracts X X X X
X X X X Extracts X X X X
....r, 1983 whereby the last three partners retired and the first three partners carried on the business with all the assets and liabilities. On that day of dissolution, the following assets were revalued: Rs. (1) Office Furniture & Equipments 4,50,000 (2) Library books 3,50,000 (3) Tenancy rights and goods will 2,00,000 10,00,000 The appreciated value of the assets were distributed among the partners as follows: Rs. D.C. Gandhi 3,00,000 M.J. Sheth 2,30,000 S.E. Rangwala 1,92,600 B.B. Vakil 1,00,000 P.N. Sheth 95,000 H.C. Gandhi 82,500 10,00,000 3. The ITO in the course of the assessment proceedings issued a show cause notice to the assessee whereby he proposed to bring to tax the aforesaid sum of Rs. 10,00,000 resulting out of the appreciation in the value of the various assets. It was however claimed by the assessee that the revaluation of the assets did not give rise to any income. For this proposition, reliance was placed on the unreported decision of the Gujarat High Court in the case of Jayanti Lal Laxmichand IT Ref. No. 1111 of 1974 dt. 4th Se....
X X X X Extracts X X X X
X X X X Extracts X X X X
....oncerning themselves not merely with the genuineness of a transaction but within the intended effect of it on fiscal purposes. No one can now get away with a tax avoidance project with the mere statement that there is nothing illegal about it". "Tax planning may be legitimate provided it is within the framework of law. Colourable devices cannot be part of tax planning and it is wrong to encourage or entertain the belief that it is honourable to avoid the payment of tax by resorting to dubious methods. It is the obligation of every citizen to pay the taxes honestly without resorting to subterfuges". (2) Workmen of Associated Rubber Industry Ltd. vs. Associated Rubber Industry Ltd. & Anr. reported in (1985) 48 CTR (SC) 355 : (1986) 157 ITR 77 (SC). In this case, their Lordships of the Supreme Court have followed the ratio laid down in McDowell & Co.'s. Their Lordship of the Supreme Court have held, in the above cited case, that colourable devices to avoid the tax liability cannot be encouraged or entertained. In the present case, with the discussion the foregoing paragraphs it is evident that the act of dissolution and paying Rs. 10,00,000 to partners under the shadow of ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....es are very old and naturally their market value cannot appreciate but rather depreciate. Regarding the books, they can also have depreciated value and not appreciated value since these books and law journals become out dated with the passage of time and old books do not fetch the same price if sold after 20-30 years. Regarding the valuation of the goodwill, it may be pointed out that the goodwill in the case of firm, consisting of professionals is personality criented. If the eminent person, upon whose eminence the professional firm has been built up, retires then the goodwill declines substantially. Thus, the goodwill in the case of professional firm is not a self generating asset in the sense it is so in case of any business producing goods under a brand name. Thus the valuation of the above three assets is artificial and fictitious in my opinion. Secondly, as pointed out by the ITO the goodwill has been apportioned to the retiring partners in violation of the original partnership deed of 1980. The appellant has not given the exact working of the apportionment of the assets. If it is pleaded that no goodwill was apportioned of the retiring partners, then it may be questioned wha....
X X X X Extracts X X X X
X X X X Extracts X X X X
....he case of McDowell that where a device has been adopted to evade tax, the authority is entitled to unravel the device is definitely applicable in this case. Further, it appears palpably absurd that the retiring partners would be interested in taking their share of some depreciated and obsolete assets like books and furniture while leaving the real asset, viz., the advances received from clients (which is nothing but unadjusted income) to the existing partners. In my opinion their real claim pertained to this asset and the transaction of revaluation of other assets was only a garb and colourable device to cover it up. Lastly, I may point out that the decision of the Gujarat High Court is the case of Jayanti Lal Laxmichand, relied on by the learned Assessee's Representative is not at all relevant, in my opinion since the question decided by the Gujarat High Court in that case was entirely different. In that case, the Hon'ble Gujarat High Court decided the question of taxability of the share received by the partners on dissolution of the firm in the hands of the partners. Since this is not the issue before us, the ratio of that case is of no use in the present case. As a res....
X X X X Extracts X X X X
X X X X Extracts X X X X
....s received in advance from various clients. That the aforesaid sum was transferred to the income account in various subsequent years, viz., S.Y. 2040, S.Y. 2041 and S.Y. 2042 and that also after the cases had been concluded. That the expenditure incurred on behalf of the clients totalling Rs. 1,00,362 had also been debited to this account. (6) That whereas the ITO's case was that the provisions of s. 28(iv) were attracted, the CIT(A) was of the view that this was a device to distribute the unadjusted income of the firm (17,20,285) to the partners in their profit sharing ratio. (7) That the unreported decision of the Gujarat High Court squarely applied to the facts of the case specifically when it followed another decision of the same High Court in the case of CIT vs. Mohabhai Pamabhai (1973) 91 ITR 393 (Guj) subsequently confirmed by the Supreme Court in Addl. CIT vs. Mohanbhai Pamabhai (1987) 165 ITR 166 (SC). The learned counsel for the assessee finally made an impassioned plea for the addition in question to be deleted as according to him no behalf had resulted to the assessee firm. In support of his arguments he also cited the following authorities : (i) CIT vs. Dew....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... that revaluation of assets is a natural corollary to any change in a partnership whether it be on account of dissolution or otherwise. On every such occasion, the accounts of the partners have to be settled and such settlement takes into account the market value of the various assets. 15. We would also like to mention that the case sought to be made out by the CIT(A) is farfetched. The inference that the revaluation being undertaking for the purpose of 'ascertaining the unadjusted income of the firm and thereafter distributing it to the partners' is not called for since it appear to be a figment of his imagination. The system of maintaining accounts by the assessee is an accepted one and consistently followed all along in the past and in the future. There was even a suggestion aired by the assessee's counsel that if what had been brought to tax (Rs. 10 lakhs) was the unadjusted fees (as per the CIT(A), then the assessments of subsequent years be modified by excluding a similar sum since that would amount to 'double taxation'. 16. Before we part we would like to observe that the decision of the Supreme Court in the case of McDowell & Co. would not apply since we do not find a....