Punjab-Haryana High Court
Mahavir Parshad Jain And Others vs I.T.O.Ward :1, Yamunagar on 17 September, 2014
Author: Surya Kant
Bench: Surya Kant, Lisa Gill
HIGH COURT OF PUNJAB AND HARYANA AT
CHANDIGARH
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ITA-127-2000 (O&M)
Date of Decision: 17.09.2014
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Mahavir Prasad Jain . . . . Appellant
VS.
ITO, Ward:B, Yamuna Nagar . . . . Respondent
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CORAM: HON'BLE MR.JUSTICE SURYA KANT
HON'BLE MRS.JUSTICE LISA GILL
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1. Whether Reporters of local papers may be allowed to see the judgment?
2. To be referred to the Reporters or not?
3. Whether the judgment should be reported in the Digest?
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Present: Mr. Pankaj Jain Senior Advocate with
Mr. Divya Suri, Advocate for the appellants
Mr. Yogesh Putney, Advocate for the respondent
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SURYA KANT, J.
(1) This appeal under Section 260A of the Income Tax Act, 1961 (in short, 'the Act') is directed against the order dated 11.01.2000 passed by the Income Tax Appellate Tribunal, Chandigarh Bench (in short, 'the Tribunal') in ITA No.673 & 675 of 1972-73 pertaining to the Assessment Year 1967-68. The following substantial question of law was formulated while admitting this appeal:-
"Whether under the facts and circumstances of the case the Tribunal was justified that in case of dissolution of the firm where a lumpsum consideration is being paid to the outgoing partners and in the present case being Rs.10 lacs V.VISHAL 2014.09.30 14:34 I attest to the accuracy and authenticity of this document ITA-127-2000 -2- for all the moveable and immoveable assets and other rights etc. Rs.4 lacs be estimated as revenue receipts as an income of the outgoing partners in lieu of future profits in the ratio of their shares which will be paid at Rs.1 lac in the hands of Shri Mahavir Prasad and Rs.75,000/- in the hands of Shri Sukhbir Prasad."
(2) The case has a chequered history. The two appellants were amongst the eight partners who constituted the parternship firm M/s Kewal Ram Ujaggar Sain vide deed dated 30.06.1951. The appellants and two other partners retired from the partnership on 19.01.1967 on receipt of `10 lacs which were to be divided amongst the retiring partners as per their shares held in the partnership. The first appellant (Mahavir Prasad Jain) received `2.50 lacs and the second appellant Sukhbir Prasad Jain (deleted from the array of appellants vide order dated 04.02.2001) received `1.87 lacs. The balance amount went to the share of other two retiring partners. The remaining four partners executed an instrument of Partnership on 28.01.1967. Thereafter, the four retiring partners (including the appellant) as well as eight partners of the re-constituted firm and one Smt. Sarupi Devi executed a Memorandum of Settlement whereby the terms of the oral agreement regarding retirement of four outgoing partners were recorded.
V.VISHAL 2014.09.30 14:34 I attest to the accuracy and authenticity of this document ITA-127-2000 -3- (3) The appellants' case was that `2.50 lacs and `1.87 lacs received by them represented the value of their share in the assets of the partnership firm. The Assessing Officer (AO) did not accept that claim of the Assessees though allowed their plea in part to the extent that the received amount also included the value of Assessee's share of firm's goodwill. The AO estimated the value of firm's goodwill as on 19.01.1967 at `50,000/- and `37,500/-, falling to the share of two appellants respectively while balance were treated as their profits and gains from the business.
(4) The Appellate Assistant Commissioner reversed the view taken by AO and held that the entire amount received by appellants was a capital receipt in the hands of outgoing partners and no part of it could be brought to charge as business income in their hands. (5) On further appeal, the Tribunal set-aside the order passed by Appellate Assistant Commissioner and restored that of the AO in both the cases. The Tribunal referred the question for opinion of this Court in ITR Nos.39&40 of 1976 as to "whether the sum received by the outgoing partner is a business receipt and as such includible in the computation of the Assessees' income?". Both the References were considered by this Court along with ITR No.48 of 1976 made at the instance of newly constituted partnership firm who claimed deduction of `10 lacs paid to the outgoing partners as a revenue expense.
V.VISHAL 2014.09.30 14:34 I attest to the accuracy and authenticity of this document ITA-127-2000 -4- (6) The Tribunal had in ITR No.48 of 1976 referred to the following questions for the opinion of this Court:-
"i) Whether on the facts and circumstances of the case, the Tribunal was right in restricting the claim of the assessee to Rs.10 lakhs as a whole and in not going into the question whether any part of it was allowable as a revenue expense?
ii) Whether on the facts and circumstances of the case, the Tribunal was right in holding that there is no material on record on the basis of which it may be possible to split up the quantum of compensation in respect of each of the various items?
iii) Whether on the facts and circumstances of the case and on the construction of (i) partnership deed dated
20.01.1967 Annexure A; (ii) Memorandum dated 28.01.1967 Annexure C; and (iii) account book entries, the Tribunal was right in holding that the payment of Rs.10 lakhs or any part thereof was not a revenue expense allowable to the assessee-firm?"
(7) No arguments were addressed on question No.(i) & (ii) on behalf of the Assessee(s) hence the same were answered in favour of the Revenue. As regards question No.(iii), this Court vide order dated
21.03.1980 called for a supplementary Statement from the Tribunal on the following points:-
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"1. Did the compensation, paid to the outgoing partners, relate to the capital assets? If so, what is the amount of compensation payable in that regard?
2. Did the compensation also represent the capitalized profit? If so, what is the amount of compensation payable in that regard?"
(8) The Tribunal vide order dated 29.12.1980 expressed its inability to send the supplementary Statement for the reason that it involved a fresh investigation into facts which was not permissible under the law. This Court, however, did not agree with the Tribunal's view and held that there was sufficient material on record for the Tribunal to give its opinion on the two points, referred to above. Nevertheless, this Court decided to answer the question with reference to the material which formed part of the Statement of the case already submitted to it by the Tribunal and vide its order dated 13.08.1982 held that the amount of `10 lacs paid to the outgoing partners be treated as revenue expenses allowable to the Assessee- firm as revenue expenditure and not as capital expenditure. (9) The aggrieved Assessee(s) took the matter to Hon'ble Supreme Court in Civil Appeals No.3433-44 of 1983 primarily on the plea that the decision of this Court on the question of law referred for its opinion in ITR Nos.39-40 of 1976 as to 'whether the amount received by the outgoing partners is a business receipt and as such V.VISHAL 2014.09.30 14:34 I attest to the accuracy and authenticity of this document ITA-127-2000 -6- includible in the computation of their income', was largely influenced by its answer given to question No.(iii) formulated in ITR No.48 of 1976. It was urged that a capital receipt in the hands of the payee may not always be a capital expenditure in relation to the payer. (10) The Hon'ble Supreme Court vide judgement dated 15.01.1997 viewed that for the purpose of deciding the question referred to in the case of the assessees, the two points on which this Court had asked for Supplementary Statement from the Tribunal required consideration though the Tribunal was equally justified in pointing out that this would involve fresh investigation into the facts. The Apex Court, therefore, remitted the case to the Tribunal for re- consideration in the light of the two points formulated by this Court, leaving it for the Tribunal to permit additional evidence to be adduced for the purpose of deciding the whole matter, if need be. (11) The Tribunal has vide its order under appeal dated 11.01.2000 noticed the mutual stand taken by the parties that they have no other evidence except what had been led earlier and that the issue(s) may be decided in the light of the documents already on record. The Tribunal further held that as per the order dated 13.08.1982 of this Court, no part of the amount paid to the outgoing partners could be ascribed towards purchase of any goodwill, yet the Assessee could not be placed at a worse position, for the Assessing Officer had already allowed them the benefit of goodwill to the extent of `50,000/- and `37,500/-, respectively and reduced the total amount V.VISHAL 2014.09.30 14:34 I attest to the accuracy and authenticity of this document ITA-127-2000 -7- received by them from the firm to tax it as income in lieu of future profits.
(12) Adverting to point No.(i) of the order dated 21.03.1980 of this Court, namely, did the compensation paid to the outgoing partners relate to the 'capital assets', and if so, what is the amount of compensation payable in that regard, the Tribunal has held that the sum of `10 lacs received by the outgoing partners pertained to the capital assets as a lumpsum consideration. There was no bifurcation of that amount with reference to various assets mentioned in the Schedule to the Memorandum dated 28.01.1967.
(13) The Tribunal has further observed that some of the assets mentioned in the Schedule are "capital assets". In the absence of allocation of any specific amount relatable to those assets out of the lumpsum consideration of `10 lacs paid to the outgoing partners, the Tribunal has on estimation held that receipt of `6 lacs by the outgoing partners be treated on account of the 'capital assets' including the goodwill (estimated by the Assessing Officer at `2 lacs) and the balance amount of `4 lacs be treated as 'profits' received by them on account of raw material already in stock but transferred on its book value or to be acquired against 'quota rights' and 'import licence' of the Firm. The Tribunal has thus concluded that a sum of `4 lacs alone be treated as income of the outgoing partners in lieu of future profits and the amount of `6 lacs relatable to the capital assets has to be exempted being 'capital receipt' in the hands of V.VISHAL 2014.09.30 14:34 I attest to the accuracy and authenticity of this document ITA-127-2000 -8- outgoing partners. The Tribunal has consequently directed the AO to bring the profit of `4 lacs to tax and allocate the same in ratio of shares of the appellant(s) in the earlier Firm.
(14) The aggrieved appellant(s) assail the Tribunal's order urging that where the consolidated amount is paid as a consideration for the sale of entire business, no separate consideration can be earmarked and the lumpsum price cannot be attributed to individual assets to estimate the business profits. The inclusion of receipt against future material to be acquired against 'quota rights' or 'import licence' etc. as an estimated profit is also questioned. (15) It was urged by learned senior counsel for appellants that in view of Section 47(ii), the transaction re.distribution of capital assets on the dissolution of a Firm cannot be regarded as 'transfer' within the meaning of Section 45 of the Income Tax Act, 1961 and is thus not chargeable to Income Tax under the head 'Capital Gains'. He relied upon Addanki Narayanappa and another vs. Bhaskara Krishnappa (dead) & Ors. AIR 1966 SC 1300, which holds that the concept of partnership is to embark upon a joint venture by brining in as 'capital money' or 'property' including 'immovable property' and once that is done, whatever has been brought ceases to be the exclusive property of the person who brought it in. It was further held that it would be the trading asset of the partnership in which all the partners would have interest in proportion to their share in the joint venture of the business of V.VISHAL 2014.09.30 14:34 I attest to the accuracy and authenticity of this document ITA-127-2000 -9- partnership hence the person who brought it in would not be able to claim or exercise any exclusive right over such property. The Court further ruled that on dissolution of the firm, the outgoing partner shall get the value of his share in the net partnership assets as on the date of dissolution after deduction of liabilities and prior charges. (16) Sh. Jain referred to Commissioner of Income Tax Madhya Pradesh vs. Dewas Cine Coroporation, 1968 (2) SCR 173 where on the dissolution of partnership, it was held on facts that each Theatre must be deemed to be returned to the original owners, in satisfaction partially or wholly of his claim to a share in the residue of the assets after discharging the debts and other obligations of partnership and that the return of Theatre would not amount to 'sale' in the eyes of law as adjustment of the rights of the partners in a dissolved firm is not a 'transfer' nor it is for a price. Similar view was taken by Gujarat High Court in Velo Industries vs. Collector, Bhavnagar, [1971] 80 ITR 291.
(17) The Supreme Court decision in Commissioner of Income Tax, UP vs. Bankey Lal Vaidya, (1971) 1 SCC 355 is also relied upon to emphasize that the amount paid in lieu of his share of assets to a partner on dissolution of partnership, does not amount to 'sale' or 'exchange' or 'transfer' of assets of the firm and as such it cannot be taxed as Capital Gains. The decision of this Court in Raman Lal Khanna vs. Commissioner of Income-Tax, Punjab, [1972] 84 ITR 217, interpreting Section 47(ii) of the Income Tax Act, V.VISHAL 2014.09.30 14:34 I attest to the accuracy and authenticity of this document ITA-127-2000 - 10 -
1961 is relied upon to say that where the partnership has been dissolved, the receipt of the value of their shares amount by the outgoing partners is not Capital Gain in their hands. (18) We have given our thoughtful consideration to the rival submissions. It may be seen that according to Section 45 of the Act, any profits or gains arising from a transfer of capital assets effected in the previous year is chargeable to income tax under the head "Capital Gains" and shall be deemed to be income of the previous year in which the transfer took place save as otherwise provided in certain other provisions of the Act. Section 47(ii) is an exception to Section 45 and it illustrates those transactions which are not to be regarded as 'transfer' for the purpose of income tax under the head "Capital Gains".
(19) The true meaning and import of these provisions has been well understood in a catena of decisions some of which have been cited above. It is thus well settled that when the outgoing partner is paid the amount representing his shares in the assets of the firm such transaction is nothing but distribution of capital assets on the dissolution of a firm and falls within the exception of Section 47(ii) to be exempted from tax as 'capital gains'. However, if such outgoing partner is paid certain sum as a share of 'profits' of the firm, in addition to the amount representing his share in the assets of the firm, the amount so paid to him towards his share of profit, is liable to addition to his total income under Section 45 of the Act. Such a V.VISHAL 2014.09.30 14:34 I attest to the accuracy and authenticity of this document ITA-127-2000 - 11 -
notable difference has been aptly approved by the Supreme Court in Tribhuvan Das G. Patel vs. Commissioner of Income Tax, Bombay, (1998) 8 SCC 509.
(20) The afore-stated fine distinction alone led this Court to call upon the Tribunal vide its order dated 21.03.1980 to submit a supplementary statement on the points as to (i) whether the compensation paid to the outgoing partners related to the capital assets, and if so, what was the amount of compensation payable in that regard? and (ii) whether the compensation paid to the outgoing partners also represented the capitalized profit, and if so, what was amount of compensation payable towards profit? Hon'ble Supreme Court while remitting the case to the Tribunal for its re- consideration has unequivocally held that for the purpose of deciding the question referred to in the case of appellants, "two points on which the High Court had asked for supplementary statement from the Tribunal require consideration" and that the Tribunal must re-consider the matter "in the light of the two points mentioned by the High Court".
(21) From the settled principles noticed above coupled with the order dated 15.01.1997 passed by the Supreme Court, it goes without saying that the Tribunal was obligated to determine the amount paid to the outgoing partners towards their share of profits in the re-constituted firm as also the amount paid to them in lieu of V.VISHAL 2014.09.30 14:34 I attest to the accuracy and authenticity of this document ITA-127-2000 - 12 -
their respective share in the assets of the firm. While the first component of payment was taxable, the other was not. (22) The Tribunal faced a piquant situation for segregation of the amount paid to the outgoing partners with reference to point Nos.(i) & (ii) formulated by this Court as the parties expressed their inability to produce any evidence to that effect except what was already on record. The Tribunal was left with no other choice but to decide both the points in the light of the documents already on record. The Tribunal has relied upon the Memorandum of Settlement dated 28.01.1967 (Annexure A3) to estimate that out of lumpsum consideration of `10 lacs paid by the re-constituted firm to the outgoing partners, the amount of `6 lacs was on account of 'capital gains' while the balance amount of `4 lacs was towards 'profits' on raw material lying in stock or against 'quota rights' and 'import licences' of the Firm which find enlisted in the Schedule appended to the Memorandum of Settlement.
(23) The recourse adopted by the Tribunal is based upon the principle of 'best judgement assessment' well known under the Taxing Statutes. The scope of determination of issues through estimation in a given situation has since been enlarged and it now encompasses the cases under the laws other than Taxing Statutes also. [please see ESI Corpn. CC Santhakumar, (2007) 1 SCC 584].
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(24) The parties failed to adduce any additional evidence
though permitted by Supreme Court to do so. The Tribunal, thus, had to undertake the guess work for the segregation of lumpsum amount of `10 lacs paid to the outgoing partners as per Point Nos.(i) & (ii) formulated by this Court on 21.03.1980. The exercise carried out by the Tribunal essentially falls in the realm of fact-finding. Answer to the substantial question of law formulated while admitting this appeal too hinges around the fact-finding exercise completed by the Tribunal following the 'Best Judgement Assessment' practices. It is permissible in law to determine and segregate the sums paid to an outgoing partner of a firm under the heads (i) his share of profits in the firm; and (ii) his share in the assets of the firm. The first part of income being a taxable incident, the question of law formed while admitting this appeal, stands answered against the appellant(s).
(25) For the reasons afore-stated, we do not find any merit in this appeal, which is accordingly dismissed but no order as to costs.
(Surya Kant) Judge 17.09.2014 (Lisa Gill) Gill) vishal shonkar Judge V.VISHAL 2014.09.30 14:34 I attest to the accuracy and authenticity of this document