Income-tax---

----Income---Business income---Capital gains---Adventure in the nature of trade ---Assessee partner in firm and contributing land as his share of capital in firm---Land treated as stock-in-trade and became asset of firm---Amount received by assessee on retirement from firm---Not assessable to tax under S.28(iv)---Not assessable as business income from adventure in the nature of trades--Does not involve transfer of capital asset resulting in accrual or receipt of income chargeable to tax as capital gain---Indian Income Tax Act, 1961, Ss.28 (iv) & 45.

On December 1, 1971, the assessee was admitted to the benefits of a partnership which was constituted under the deed, dated December 4, 1971. The business of the firm was to purchase and sell immovable properties, to construct buildings on lands purchased and to sell the same. On December 23, 1974, a fresh partnership deed was drawn up by which five new partners were taken in the firm. On February 14, 1975, a deed of retirement was executed whereby the five new partners who were inducted under the partnership deed, dated December 23, 1974, took over the business of the firm as a going concern and the other partners went out of the firm. The stock-in-trade was determined and after adjusting the opening value thereof, the balance was credited to the accounts of the outgoing partners as a result of which the assessee got his share of Rs.1,25,092. The Income-tax Officer held that the amount of Rs.1,25,092 was an income from adventure in the nature of trade and that the induction of new partners was merely a device to transfer their assets to the new partners, that the said amount credited to the assessee's account was liable to tax as business income from an adventure in the nature of trade or in the alternative, it was taxable under section 28(iv) of the Income Tax Act, 1961. The Commissioner of Income -tax (Appeals), however, accepted the assessee's case and held that the amount could not be taxed as. business income from an adventure in the nature of trade, nor could it be taxed under section 28(iv) of the Act. In the appeal filed by the Revenue before the Tribunal, it was held that the provisions of section 28(iv) of the Act were not applicable to the case of the assessee and that the said amount was not exigible to capital gains tax. The Tribunal also held that the amount was not taxable as business income from an adventure in the nature of trade. On a reference:

Held, that when at the time of retirement the only thing which the partner got was the share in the partnership firm, which he received in terms of money, the amount so received could under no circumstances be said to be a benefit received by the assessee from business under section 28(iv) of the Act.

CIT v. Alchemic (Pvt.) Ltd. (1981) 130 ITR 168 (Guj.) and CIT v Chetanaben B. Sheth (1993) 203 ITR 24 (Guj.) fol.

(ii) That when a partner retires from a firm and receives an amount in respect of his share in the partnership, there is no transfer of interest of the assessee in the goodwill of the firm and no part of the amount so received by him would be assessable to capital gains tax under section 45 of the Act. Therefore, the Tribunal was right in holding that the amount of Rs.1,25,092 was not liable to tax on capital gains.

CIT v. Anant Narhar Nimkar (HUF) (1997) 224 ITR 221 (Guj.) and CIT v. Mohanbhai Pamabhai (1973) 91 ITR 393 (Guj.) fol.

(iii) That the assessee had contributed the land in the partnership firm by treating it as stock-in-trade and thereafter, it had become the asset of the firm. The assessee was given the amount in question as his share in the firm, which he was entitled to get on his retirement and which at that point of time was directly relatable to the land which he had contributed as stock-in-trade at the time of his entry into the firm. The Tribunal was, therefore, right in holding that the said amount was not liable to tax as income from an adventure in the nature of trade.

B. B. Nayak with Manish R. Bhatt for the Commissioner.

J. P. Shah with Manish Shah for the Assessee.

JUDGMENT

R. K. ABICHANDANI, J.---The Income-tax Appellate Tribunal, Ahmedabad, has referred the following three questions for the opinion of this Court under section 256(1) of the Income Tax Act,, 1961:

"(1) Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in coming to the conclusion that the amount of Rs.1,25,092 received by the assessee on retirement from the partnership firm of Arun Corporation (Estate Division) was not liable to tax under section 28(iv) of the Act?

(2)Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in coming to the conclusion that the sum of Rs.1,25,092 received by the assessee on retirement from the partnership firm of Arun Corporation (Estate Division) was not liable to tax under section 45 of the Act?

(3)Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in coming to the conclusion that the sum of Rs.1,25,092 was not liable to tax as being the adventure in the nature of trade?"

The relevant assessment year is 1975-76. The assessee was an owner of 202 sq. yards of land at Kalupur, Ahmedabad. On December 1, 1971, the assessee was admitted to the benefits of partnership, which was constituted under the deed, dated December 4, 1971. The business of the firm was to purchase and sell immovable properties, to construct buildings on lands purchased and to sell the same. On December 23, 1974, a fresh partnership deed was drawn, by which five new partners were taken in the firm. On February 14, 1975, a deed of retirement was executed as per which the five new partners who were inducted under the partnership deed, dated December 23, 1974, took over the business of the firm as a going concern and the other partners went out of the firm. The stock-in-trade was determined and after adjusting the opening value thereof, the balance was credited to the accounts of the outgoing partners as a result of which the assessee got his share of Rs.1,25,092. In this connection, the Income-tax Officer held that the said amount was an income from adventure in the nature of trade and that induction of new partners was merely a device to transfer their assets to the new partners. It was held that the said amount credited to the assessee's account was liable to tax as business income being adventure in the nature of trade or in the alternative, it was taxable' under section 28(iv) of the said Act. The Commissioner of Income-tax (Appeals), however, accepted the assessee's case and held that the impugned amount cannot be taxed as business income being adventure in the nature of trade, nor could it be taxed under section 28(iv) of the Act. In the appeal filed by the Revenue before the Tribunal, it was held that in view of the decision of this Court in CIT v. Alchemic (Pvt.) Ltd (1981) 130 ITR 168, the provisions of section 28(iv) of the Act, were not applicable. Relying upon the decision of this Court in CIT v. Mohanbhai Pamabhai (1973) 91 ITR 393, the Tribunal held that the said amount was not exigible to capital gains tax. It was also held that the amount was not taxable as business income as an adventure in the nature of trade. The appeal was, therefore, dismissed.

There is no dispute about the fact that the land in question was treated as stock-in-trade of the firm. The value of the land was credited to the capital account of the assessee at the time when it was contributed by the assessee as his share in capital in the said firm. The deed of retirement was executed on February 14, 1975, as a result of which the assessee, as a retiring partners, received the said amount in his share. The question for our consideration is whether the said amount was taxable either as benefit in the course of business under section 28(iv) of the Act or as capital gains under section 45 or as business income of adventure in the nature of trade. In CIT v. Alchemic (Pvt.) Ltd. (1981) 130 ITR 168, this Court while construing the provisions of section 28(iv) of the Act, held that it is only if the benefit or the perquisite is not in cash or money, but is non-monetary benefit or non- monetary perquisite that the question of including the value of such benefit or perquisite would ever arise. It was held that section 28(iv) would not apply when the amount .received is in cash or is considered in terms of money. In the case of CIT v. Smt. Chetanaben B. Sheth (1993) 203 ITR 24, it was held by this Court that the amount that had fallen to the share of the assessee-partner on dissolution in the assets of the partnership firm, could never be equated with the benefit accruing to the partner under the provisions contained in section 28(iv) of the Act. The question similar to the aforesaid questions Nos. l and 2 were also dealt with by this Court in Income-tax Reference No. 111 of 1974, decided on September 4, 1975, in which it held that when at the time of retirement the only thing which the partner gets, was the share in the partnership firm, which he receives in terms of money, the amount so received can under no circumstances be said to be a benefit received by the assessee from business under section 28(iv) of the Act. In view of the settled legal position, we hold that the Tribunal was right in concluding that the amount in question received by the assessee on retirement from the firm was not liable to tax under section 28(iv) of the Act and question No. 1 is answered in the affirmative against the Revenue.

The question whether such amount received by a partner on retirement from the firm would be liable to tax for capital gains under section 45 of the Act, is also no longer res integra. In CIT v. Anant Narhar Nimkar (HUF) (1997) 224 ITR 221, it was held by this Court that the receipt of any sum by a partner on his retirement from the firm or on dissolution of the firm as the value of his share in the assets of the firm, does not involve any transfer of a capital asset resulting in accrual or receipt of income chargeable to tax as capital gains in the hands of the retiring partner. This Court had already settled this point in CIT- v. Mohanbhai Pamabhai (1973) 91 ITR 393, in which it was held that when an assessee retires from a firm and receives an amount in respect of his share in the partnership, there is no transfer of interest of the assessee in the goodwill of the firm and no part of the amount so received by him would be assessable to capital gains tax under section 45 of the Act. In view of this settled legal position, we are of the opinion that the Tribunal was right in concluding that the said amount was not liable to capital gains tax and question No.2 is accordingly answered in the affirmative against the Revenue.

As regards the third question, admittedly, the assessee had contributed the land in the partnership firm by treating it as stock-in-trade and thereafter, it had become the asset of the firm. The assessee was given the amount in question as his share in the firm, which he was entitled to get on his retirement and which at that point of time was directly relatable to the land which he had contributed as stock-in-trade at the time of his entry in the firm. The Tribunal was, therefore, right in holding that the said amount was not liable to tax as income from an adventure in the nature of trade. Question No.3 is accordingly answered in the affirmative against the Revenue.

The reference stands disposed of with no order as to costs.

M. B. A./21/FC

Order accordingly.