Income-tax---

----Business income---Partner of firm---Benefit or perquisite arising from business---Dissolution of firm---Amount received by partner on account of goodwill and as premium on revaluation of asset---Not a benefit or perquisite arising from business---Indian Income Tax Act, 1961, S.28(iv).

The assessee was a partner of a firm which was dissolved in December, 1972. On the dissolution of the firm, the assessee had received a sum of Rs.40,000 which represented goodwill amounting to Rs.20,000 and premium on account of revaluation of assets, Rs.20,000. The Income Tax Officer noticed that the firm came to be dissolved with effect from December 9, 1972, but, prior to that date, the assessee had received the above said amount of Rs.40,000 from the firm for which a credit entry was placed in the account books prior to the dissolution of the firm. Since the dissolution deed could be drawn up later on and it was actually drawn up only after finally adjusting the account of the partners, the Income Tax Officer had taken the view that the amount of Rs.40,000 received by the assessee was a benefit arising from the business within the meaning of section 28(iv) of the Income Tax Act, 1961: The Tribunal held that the amount was not assessable. On a reference:

Held, that the amount that had fallen to the share of the assessee as her share in the assets of the partnership firm could never be equated with the benefit accruing to, her under the provisions contained under section 28(iv). The amount of Rs.40,000 received by the assessee by way of her share in the goodwill and in the appreciation of the value of assets of the firm in which the assessee was admitted to the benefits was not eligible to tax as benefits or perquisites of business under section 28(iv).

Malabar Fisheries Co. v. CIT (1979) 120 ITR 49 (SC) applied.

CIT v. Bankey Lal Vaidya (1971) 79 ITR 594 (SC); CIT v. Bhavnagar Bone and Fertiliser Co. Ltd. (1987) 166 ITR 316 (Guj.); CIT v. Gangadhar Baijnath (1972) 86 ITR 19 (SC); CIT v. Keshavlal Chandulal (1966) 59 ITR 120 (Guj.) ref.

Mihir J. Thakore for Messrs R.P. Bhatt & Co. for the Commissioner.

JUDGMENT

S.D. DAVE, J: --The Income Tax Appellate Tribunal has referred the undermentioned question to this Court while exercising the jurisdiction under section 256(1) of the Income Tax Act, 1961:

"Whether, on the facts and in the circumstances of the case, the amount of Rs.40,000 received by the assessee by way of share in goodwill and in appreciation of the value of assets of the partnership firm of Messrs Security Equipment in which the assessee was admitted to the benefits is eligible to tax as benefit or perquisite under section 28(iv) of the Income Tax Act, 1961?"

The assessee in question was a partner in the firm of Messrs Security Equipment Manufacturers, which came to be dissolved from December 9, 1972. On the dissolution of the above said firm, the assessee had received an amount of Rs-.40,000 which represented the goodwill amount of Rs.20,000 and premium on account of revaluation of assets of Rs.20,000. The return of income was filed on March 6, 1975. In this connection, a show-cause notice was issued and served upon the assessee through the learned Advocate representing her. The notice required the assessee to show cause within a stipulated period as to why the amount as stated above should not be included in the assessable income of the assessee. The assessee had filed the reply to the above said show-cause notice, dated February 16, 1977, contending that the above said income cannot be taxed under section 28(iv) of the Income Tax Act, 1961, because it could not be said to be the value of the benefit arising from the business carried on by the firm, namely, Messrs Security Equipment Manufacturers, in which the assessee was a partner.. It, was noticed that the firm came to be dissolved with effect from December 9, 1972, but prior to the abovesaid date the assessee had received the abovesaid amount of Rs.40,000 from the firm for which the credit entry was placed in the account books prior to the dissolution of the firm. Since the dissolution deed could be drawn up later on and it was actually drawn only after finally adjusting the account of the partners, the Income Tax Officer had taken the view that the abovesaid amount of Rs.40,000 received by the assessee was a benefit arising from the business within the meaning of section 28(iv) of the Income Tax Act, 1961. On the basis of the abovesaid reasoning, the said amount was taken as includible in the income of the assessee which would again be taxable under section 28(iv) of the Act of 1961. Being aggrieved and dissatisfied with the abovesaid orders of assessment, the assessee had carried the matter in appeal before the Appellate Assistant Commissioner of Income-tax, Ahmedabad Range. On a consideration of the facts before the Commissioner, a view was taken, following a decision of the same office in Appeal No. IT/Co. Cir.IX/1009/7677, dated April 16, 1978, that there was no cause or case for the addition of the abovesaid amount as the income of the assessee. In view of this finding, the addition of the amount of Rs.40,000 was ordered to be deleted. The matter was proceeded with further by the Revenue by approaching the Income Tax Tribunal. Ahmedabad Range. On a consideration of the facts and also taking into consideration, the decision as mentioned above, the view. was taken that the Appellate Assistant Commissioner was justified in his order of deletion of the abovesaid amount from the taxable income of the assessee. Having taken this view, the Tribunal had preferred to dismiss the appeal filed by the Revenue. Later on, a reference application was made to the Tribunal for referring the above-mentioned question to this High Court under section 256(1) of the Income Tax Act, 1961. It is in the background of the abovesaid facts and circumstances that this question is required to be answered and replied to by us.

As noticed above, it was the contention raised on behalf of the assessee that the abovesaid amount in, a sum of Rs.40,000 could not have been taxed under section 28(iv) of the Income Tax Act, 1961, because the abovesaid amount cannot be said to be the value of the benefit arising to the assessee from the business carried on by the firm running in the name and style of Messrs Security Equipment Manufacturers in which the assessee was a partner. It is not in dispute that the abovesaid firm came to be dissolved with effect from December 9, 1972. But, prior to the abovesaid date, the assessee had received the abovesaid amount of Rs.40,000 from the firm, for which the necessary credit entry was posted in the accounts prior to the dissolution of the firm. On a consideration of these facts, the Income Tax Officer found that the abovesaid amount of Rs.40,000 should be treated as an assessable income in the hands of the assessee. When a reference is made to the orders pronounced by the Appellate Assistant Commissioner, it becomes clear that reliance was placed on the earlier decision dated April 16, 1978, and following the principle laid down in the abovesaid orders, the appeal came to be allowed and the addition of Rs.40,000 in the assessable income of the assessee was ordered to be deleted. Practically on the same footing, the Tribunal had proceeded to say that the orders pronounced by the Appellate Assistant Commissioner were completely justified, and, therefore, the appeal deserves to be dismissed. We have not been provided with the copy of the orders dated April 16, 1978, on which reliance has been placed by the Appellate Assistant Commissioner and the Tribunal.

The contention raised by Mr. Thakore, learned counsel who appears on behalf of the Revenue, is that the assessee was a partner in the abovesaid firm which came to be dissolved with effect from December 9, 1972, but, in fact, the assessee had received an amount of Rs.40,000 which comprised two components, firstly, one in a sum of Rs.20,000 representing the goodwill, while, secondly, an amount of Rs.20,000 representing the premium on account of revaluation of the assets. Placing reliance upon the provisions contained under section 28(iv) of the Income-tax Act, 1961, learned counsel has urged that the abovesaid amounts, represent the value of the benefit derived by the assessee, which again arose from the business of the firm in which she was a partner. It is broadly on these bases that learned counsel, Mr. Thakore, has urged that the view taken by the Tribunal is not a justifiable one and, therefore, the question referred to us requires to be replied and answered in favour of the Revenue and against the assessee.

The facts stated by us earlier are not in dispute and, therefore, in our opinion, the factual aspect of the matter should not detain us any more. It must be appreciated that the assessee was a partner in the abovesaid firm which came to be dissolved on the date as indicated above and the assessee had got the abovesaid amount of Rs.40,000. These facts are not in dispute, and, therefore, we are inclined to proceed ahead on the abovesaid facts.

A few decisions which have been brought to our notice by learned counsel, Mr. Thakore, require careful consideration. Firstly, a reference requires to be made to the Supreme Court decision in CIT v. Bankey Lal Vaidya (1971) 79 ITR 594. The facts which require some consideration are to the effect that the respondent was the Karta of a Hindu undivided family and he had entered into a partnership with one Devi Sharan Garg to carry on the business of manufacturing and selling pharmaceutical products and literature relating thereto. On July 27. 1946, the partnership came to be dissolved and the. assets of the firm which included goodwill, machinery, furniture, medicines, library and copyright in respect of certain publications were valued at the date of dissolution at Rs.2,50,000. The respondent was paid a sum of Rs.1,25,000 in lieu of the share and the business together with the goodwill was taken over by Devi Sharan Garg. The question was whether the sum of Rs.65,000 being part of the amount received by the respondent should be brought to tax as capital gains under section 12B(1) of the Indian Income Tax Act, 1922. On the basis of the abovesaid facts, it was held that the arrangement between the partners of the firm amounted to a distribution of assets of the firm on dissolution and that there was no sale or exchange of the respondent's share in the capital assets to Devi Sharan Garg. In the same way, it was further noticed and held that he had not transferred his share in the capital assets and, therefore, the sum of Rs.65,000 could not be taxed as capital gains. It was also pointed out that, in the course of the dissolution, the assets of a firm may be valued and the assets may be divided between the partners according to their respective shares by allotting either assets or paying the money value equivalent thereof. This being a recognised method of making up the accounts of a dissolved firm, the receipt of money by a partner is nothing but a receipt of his share in the distributed assets of the firm.

Some benefit can be derived from the abovesaid principle laid down by-the Supreme Court while deciding the present question referred to us. The assessee had received a certain amount on the dissolution of a partnership firm in which she was a partner. It is indeed true that the actual dissolution instrument was executed a little bit later. But the abovesaid amount came to the share of the assessee only on the principle of dissolution of the partnership business. Therefore, in view of the abovesaid principle laid down by the Supreme Court, we see no difficulty in adopting the view that in the instant case also the receipt of the share of the assessee on the distribution of the assets of the firm would not amount to taxable income within section 28(iv) of the Income Tax Act, 1961. In Malabar Fisheries Co. v. CIT (1979) 120 ITR 49, the question before the Supreme Court was in respect of dissolution of a firm followed by the distribution of the assets between the `partners, and the question was as to whether the assets can be said to have been transferred by the firm for the purpose, of deciding certain questions arising under sections 2(47), 34(3)(b) and section 155(5) of the Income Tax Act, 1961. In that case, before the Supreme Court, there was a firm consisting of four partners and the firm had six different businesses. During the accounting periods relevant to the assessment years 1960-61 to 1963-64, the firm had installed various items of machinery, in respect of which development rebate was allowed to them under section 33 of the Act of 1961. The firm came to be dissolved with effect from March 31, 1963, and under the deed of dissolution, one of the firm's businesses was taken over by one of the partners, and the remaining five by two of the other partners and the fourth partner had received a sum of Rs.3,81,082 in lieu of his share in the assets of the firm. The question which was on the anvil of the Supreme. Court was as to whether the rebate allowed to the firm could be withdrawn on the ground that there was a sale or transfer of the machinery within the meaning of section 34(3)(b) read with section 47 of the Act of 1961. The Supreme Court had held that the provisions contained under section 34(3)(b) of the Act of 1961, were not applicable to the case and that the development rebate allowed to the firm could not have been withdrawn. The reasons assigned by the Supreme Court while coming to the conclusion as indicated above in the background of the facts narrated by us earlier would be of some assistance to us in deciding the question referred to us. The reason assigned by the Supreme Court in support of the abovesaid conclusion is that, upon the dissolution, the firm ceased to exist and then follows the making up of the accounts, then the discharge of debts and liabilities and thereupon distribution, division or allotment of assets would take place inter se between the erstwhile partners by way of mutual adjustment of rights between them. The distribution, division or the allotment of her assets is not done by the dissolved firm. In this sense, there is no transfer of the assets by the assessee to any person. The said reasoning adopted by the Supreme Court while coming to the aforesaid conclusion that the development rebate allowed to the firm could not have been withdrawn would operate as a guiding feature in the instant reference also because on the analogy of the same, it can be accepted here in the instant case also that the abovesaid amount that had fallen to the share of the assessee as her share in the assets of the partnership firm could never be equated with the benefit accruing to her under the provisions contained in section 28(iv) of the Income-tax Act, 1961. In C.I.T. v. Gangadhar Baijnath (1972) 86 ITR 19 (SC), the facts were that the assessee, a firm consisting of three partners (the Baglas), carried on the business of financing money-lending, selling agencies, etc., and that the firm was the selling agent of the Swadeshi Cotton Mills Co. Another firm consisting of three partners (the Jaipurias) enjoyed some quota rights in that company. On April 29, 1946, the Baglas representing the assessee-firm formed a new firm. B.J. and Co., with the Jaipurias. However, no deed was executed. The Baglas and the Jaipurias were to invest equal amounts to acquire the share in Swadeshi Cotton Mills Company and enjoy the selling agency and quota rights jointly: On July 16, 1946, Swadeshi Cotton Mills Company had appointed B.J. and Co., its managing agents, for a period of twenty years. Thereafter, the partners of the assessee-firm had retired from the business of B.J. and Co., with effect from October 6, 1946, receiving from the Jaipurias, in addition to their capital investment and interest thereon, a sum of Rs.35,01,000 on account of compensation for surrendering their interest in B.J. and Co. This fact would go to show that the Baglas had received the above amount on account of the compensation for surrendering their interest in B.J. and Co. Upon the abovesaid facts, the Tribunal had found that the compensation was partly for the surrender of the share in the managing agency right, partly for giving up their selling agency right, and partly for their share in the goodwill and partly for their share in the profits. But there was no material on which the compensation could be allocated to several rights. The assessee, thereafter, had continued to carry on various business activities and, with the aid of the sum of Rs.35,01,000 received as compensation, it acquired the controlling shares in two other companies. The question, inter alia, was whether the abovesaid amount of Rs.35,01,000 constituted business income of the assessee-firm under section 10 of the Indian Income-tax Act, 1922, or whether it was a capital receipt as contended by the assessee. In the light of the abovesaid facts, it was held hat, since no deed of partnership had been entered into and the partnership being terminable at will and the possibility of the termination of the partnership being inherent in the very course of the business, the entire sum of Rs.35,01,000 received by the assessee-firm was a business receipt assessable to tax under section 10 of the Indian Income-tax Act, 1922.

Learned counsel, Mr. Thakore, appearing on behalf of the Revenue, had tried to gain some assistance from the abovesaid case-law on the basis that the entire sum received by the assessee-firm was treated as a business receipt assessable under section 10 of the Act of 1922. But, before the abovesaid contention raised by learned counsel can be accepted, a reference shall have to be made to the reason assigned by the Supreme Court in support of the abovesaid conclusion, namely, that the entire amount was a business receipt assessable under section 10 of the Indian Income-tax Act, 1922. It has been emphasised by the Supreme Court that the assessee-firm had various business activities and joining B. and J. Co. was only one such activity. The firm merely replaced one trading activity by another. What had really happened was that the partners representing the firm in B.J. and Co. had surrendered their, rights in partnership to the other partners and had obtained certain payments for surrendering their rights. According to the Supreme Court, this was a case of cancellation of contract, and such contracts were liable in the ordinary course of business to be altered or terminated on the terms of the payment to be received on the settlement of rights as a result of the termination of the contract. Thus from the abovesaid reasoning adopted by the Supreme Court, it becomes clear that it was noticed that it was a case of cancellation of a contract and that, on the cancellation of the contract, the payment in the sum of Rs.35,01,000 was received by the assessee as a result of the termination of the contract. It was also pointed out that the said amount represented profits which the assessee would have made, had the contract been performed. It is in view of the abovesaid facts and the reasoning that the Supreme Court has said that the abovesaid amount would be the business receipt of the assessee assessable under section 10 of the Indian Income-tax Act, 1922. The facts of the reference on hand being different, we are of the view that the abovesaid case-law on which learned counsel, Mr. Thakore, has placed heavy reliance would not assist him in his submissions before as, namely, that the amount of Rs.40,000 received by the assessee in the case on hard should be accepted as the business receipt assessable under section 28(iv) of the Income Tax Act, 1961. The salient difference between the two cases is that the abovesaid amount of Rs.35,01,000 in the aforementioned case was received by the assessee on the termination of a contract and that the said amount represented the profits which the assessee would have made had the contract been not cancelled but had been performed.

The High Court decision in C.I.T. v. Bhavnagar Bone and Fertiliser Co. Ltd. (1987) 166 ITR, 316 also, in our view, would not advance the case of the Revenue. It was .a case in respect of the benefit arising from certain arrangements made by two groups. The. facts of the case would show that one Jodhpur Bone and Fertiliser Company, a partnership firm, carried on a business at Jodhpur. The partners of the firm were the directors of the assessee-company which was a private. limited company. The firm was having a current account with the assessee-company. The firm had sold its entire plant, machinery and furniture, etc., to a foreign company on March 20, 1950, as a result of which the firm had to wind up its business activities and the only activity which was carried on thereafter was the realisation of debts and payment of various expenses. On March 31, 1957, there was a credit balance of Rs.3,82,905 in the firm's account in the books of the company. Initially, it was decided to issue shares of the company to the partners of the firm in lieu of the said credit balance and some resolution to that effect was also adopted in the meeting of the board of directors of the assessee-company. However, the shares were not issued and on June 22, 1970, the board of directors of the assessee-company had resolved that the aforesaid credit balance be transferred to the profit and loss appropriation account. Later: on, on the advice of the auditors of the company, by another resolution, it was resolved that the aforesaid credit balance which was transferred to the profit and loss appropriation account be, transferred to the capital reserve account. The question which had arisen before the Income-tax Officer in the course of the assessment proceedings for the assessment year 1971-72 was whether the abovesaid amount which was transferred to the capital reserve account was a revenue receipt in the hands of the assessee-company, The Income-tax Officer however, had rejected the assessee's contention and had held that the amount was income of the assessee-company under section 28(iv) of the Act of 1961. But, ultimately, it was held by the Tribunal that the abovesaid amount did not fall within the mischief of section 28(iv) of the Act of 1961. This High Court had pointed out that there was no infirmity in the reasoning of the Tribunal because the abovesaid amount was not received by the assessee-company as a result of any business transaction or transaction with the firm. The view expressed by the Tribunal, namely; that this amount had no connection or nexus with the business of the assessee-company vas also approved by the High Court. It was also further pointed out that it did not represent the; value of a benefit or perquisite arising from the business of the company and, therefore, this amount would not partake of the character of income .

The said decision of this High Court in C.I.T. v. Bhavnagar Bone and Fertiliser Co. Ltd. (1987) 166 ITR 316 would be of some assistance to us while reaching the conclusion that the amount received by the assessee had not represented the value of any benefit or perquisite arising from the business of the assessee company and, therefore, it would not partake of the character of income.????

Mr. Thakore, learned counsel for the Revenue, had pointedly drawn our' attention to this High Court decision in C.I.T. v. Keshavlal Chandulal (1966) 59 ITR 120. According to learned counsel, this is the decision which would be of some assistance to the Revenue in establishing their case before us. With a view to examine the correctness of the contention raised by learned counsel on the basis of this decision, a reference shall have to be made to certain facts as they appear from the decision. The main business of the assessee-firm with seven partners was purchase of open plots of land, construction of buildings thereon and the sale of the buildings. In the purchase of land and the construction of 40 shops thereon, the firm had spent an amount of Rs.1,64,909. In Samvat year 2014, the assessee had sold certain materials and some shops. During Samvat year 2015, the remaining groups were sold at a total value of Rs.89,000. After debiting certain expenditure, a surplus of Rs.4,831 was shown as profits and as the taxable income for Samvat year 2015. It was contended by the assessee that the distribution of 28 shops among the partners was 'not a commercial transaction. The Income-tax Officer held that the 28 shops were the stock-in-trade and the profit made from dealing with that stock-in-trade was liable to tax and, therefore, he estimated the value of the 28 shops at Rs.1,70,000 and computed the profits in this manner at Rs.85,754. The Appellate Assistant Commissioner and the Tribunal took the view that the transaction was one of a division and distribution of the assets. On a reference, it was held by this Court that the distribution of the 28 shops in specie amongst the partners by the assessee-firm amounted to a business transaction by the assessee-firm and its distribution of the assets was part of the transaction of dissolution, and what applies to dissolution of partnership must also equally apply to a transaction entered into by businessmen when they decide to discontinue the business. It is on these facts and findings that ultimately the question referred came to be answered and replied in favour of the Revenue.

Mr. Thakore, learned counsel, has emphasised the said decision before us for advancing his contention because of the fact that, in the abovesaid cast; the distribution of the assets was taken as part of the transaction of dissolution, and that the 28 shops' distribution amongst the partners was taken as amounting to a business transaction. But it must not be overlooked that the main business of the assessee-firm was purchase of open plots, the construction of buildings thereon and ultimately the sale of the same in the open market. Because of this peculiar aspect of the case, it was found that the 28 shops were nothing but stock-in-trade and the profit was made while dealing with the abovesaid stock-in-trade, which was liable to be taxed. The principle laid down by this Court in the said case would not apply to the present reference on hand, precisely because of the reason of the distinction in I~, the nature of the business, which included the construction on the open plots of II land, of some buildings and the subsequent sale thereof. The shops which came to be divided between the partners were nothing but stock-in-trade and if by', the transfer of the abovesaid shops among the partners, profit is being made, it definitely would come within the taxing net under the income-tax legislation. As pointed out by us earlier more than once the facts and circumstances of the reference on hand being entirely different from the facts in the abovesaid decision of this Court, the said decision would not further the case of the Revenue in establishing before us that the questioned amount going to the share of the assessee would be a benefit or perquisite under section 28(iv) of the Income-tax Act, 1961. In view of the abovesaid, the question referred to us requires to be answered and replied in the negative in favour of the assessee and against the Revenue. We, therefore, accordingly, answer the said question referred to us with no order as to costs.

H.B.T./143/T.F??????????????????????????????????????????????????????????????????????????????????? Reference answered.