TRIBHUVANDAS G. PATEL. VS COMMISSIONER OF INCOME-TAX
1999 P T D 3252
[236 I T R 5151
[Supreme Court of India]
Present: B. P. Jeevan Reddy and K. S. Paripoornan, JJ
TRIBHUVANDAS G. PATEL.
Versus
COMMISSIONER OF INCOME-TAX
C. A: No. 2053 of f979, decided on 14/02/1996.
(Appeal from the judgment and order, dated September 8, 1977 of the Bombay High Court to I.T.R. No. 188 of 1973).
(a) Income-tax---
----Capital gains---Firm---Partner---Goodwill---Retirement of partner from firm---Amount paid as his share in, goodwill of firm---Amount paid towards his share in assets of firm---Not assessable as capital gains---Indian Income Tax Act, 1961, Ss.45 & 47(ii).
(b) Income-tax---
----Income---Firm---Partner---Accrual of income---Deed of settlement under which one of partners, retired from firm while other, partners continued business of firm---Certain amount paid to retiring partner as his share of profits---Actual share of profits till date of his retirement accrued to partner and assessable in his hands---Indian Income Tax Act, 1961---[CIT v. Tribhuvandas G, Patel (1978) 115 ITR 95 partly affirmed and partly reversed].
The assessee was a partner in a firth. Disputes arose among the partners. Ultimately the dispute was settled. Under the deed of settlement, the assessee was deemed to have retired from the firm with effect from August 31, 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 August 31, 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 and Rs.4,77,941,47 representing his share in the assets of the firm. The assessee 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, which was 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 at his income. This was not agreed to, by the authorities. The, High Court upheld this decision. On appeal to the Supreme Court:
Held, (i) that the sum of Rs.50,000 received by the assessee as his share of the value of the goodwill was not assessable as capital gains.
CIT v. B C. Srinivasa Setty (1981) 128 ITR 294 (SC) fol
(ii)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. Hence the sum of Rs.4,77,941 was not assessable as capital gains.
CIT (AddI) v. Mohanbhai Pamabhai (1987) 165. ITR 166 (SC) fol
(iii) that 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 was liable to be included in his total income. The amount over and above Rs.1,00,000 was also his income in law. It had accrued to him. It was immaterial that he might choose not to recover it.
CIT v. Tribhuvandas G. Patel (1978) 115 ITR 95 partly affirmed and partly reversed.
Sunil Siddharthbhai v. CIT (1985) 156 ITR 509 (SC) ref.
G. C. Sharma, Senior Advocate (P.H. Parekh and S. S. Fazl Advocates with him) for Appellant.
A. Raghbir, Senior Advocate (Ms. Laxmi Iyengar and S. N. Terdol Advocates with him) for Respondent.
JUDGMENT
Heard counsel for the parties.
The following three questions were stated by the Tribunal for the opinion of the High Court (1978) 115 ITR 95 (Bom.)) under section 256(1) of the Income-tax Act, 1961 (page 99):
"(1) Whether, on the facts and in the circumstances of the case, R.s.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, the 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, the 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 ?"
So for as question No. 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) 128 1TR 294 the said question must be held to have been rightly answered in favour of the assessee.
So far as question No. 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 (Addl.) v. Mohanbhai Pamabhai (1987) 165 ITR 166 where it has been held, following the decision in Sunil Siddharthbhai v. CIT (1985) 156 ITR 509 (SC), that even where a partner retires and some amount is paid to him towards his snare 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 the question No. 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 December 5, 1960, the assessee served a notice of his intention to dissolve the firm with effect from December 31, 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 December 31, 1960, and for accounts and other ancillary reliefs. Ultimately, the dispute was settled between the parties under a deed, dated January 19, 1962. Under this deed of settlement the assessee was deemed to have retired from the firm with effect from August 31,1961, and the remaining partners were authorised to continue to carry on the business of the firm. The assessee was paid a sum of its. 1,00,000 as his share of profits of the firm for the period ending August 31, 1961. In addition to thisRs. 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 No. 2) and Rs. 4,77,941.47 representing his share in the assets of the firm (question No. 3). In his assessment proceedings, the assessee himself contended that only the sum of Rs. 1,00,000 should be brought to tax arid 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 (No. 1) in the following words (page 109):
"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."
Inour 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.
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.
The appeal is accordingly dismissed, so far as question No. 1 is concerned but allowed so far as question No. 3 is concerned. (Question No. 2 is not an issue before us).
No costs.
M.B.A./3310/FCAppeal dismissed.