Bombay High Court
Commissioner Of Income-Tax, Bombay ... vs Walji Damji on 15 September, 1955
Equivalent citations: [1955]28ITR914(BOM)
Author: Chief Justice
Bench: Chief Justice
JUDGMENT 1. BY this application, the Commissioner of Income-tax, Bombay North, Kutch and Saurashtra, Ahmedabad, requires the Appellate Tribunal to refer to the High Court a question of law which is said to arise out of the Tribunal's Order in I. T. A. No. 1410 of 1953-54. In-asmuch as, in out opinion, a question of law does arise out of the aforesaid order of the Tribunal, we hereby draw up a statement of the case to which the parties agree and refer it to the High Court of Judicature at Bombay under section 66(1) of the Indian Income-tax Act, 1922. 2. The assessment year under consideration is 1948-49, the "previous year" being S. Y. 2003 (25th October, 1946, to 12th November, 1947). The assessee firm, which is unregistered in status, was constituted of the following two partners :- Share of profit or loss 1. Mr. Valji Damji 0 13 0 in the rupee 2. Mr. Thakersey Raiji 0 3 0 in the rupee Owing to differences between the partners, a suit, being Civil Suit No. 62/45, was instituted by partner No. 2 in the Court of Civil Judge, S. D. Jalgaon, for dissolution of the partnership, for rendition of accounts and for recovery of the plaintiff's share in the assets of the partnership. The said Court granted a decree dated 12th December, 1946, inter alia declaring that the suit partnership stands dissolved on and form 15th June, 1944. The plaintiff's share was declared to be 3 annas while that of defendant No. 1, 13 annas. Receivers were appointed to sell the partnership property detailed in the decree. A 3copy of this order passed on 12th December, 1946, is annexure "A" and forms part of the case. In pursuance of this order the receivers sold the partnership property on 10th March, 1947, by means of a public auction for a sum of Rs. 57,000. This date fell during the "previous year" under consideration. The Income-tax Officer found that the written down value of the assets sold came to Rs. 13,633 and the sale, therefore, resulted in a capital gain of Rs. 43,367. Section 12B was inserted by section 6 of the Income-tax and Excess Profits Tax (Amendment) Act, 1947 (22 if 1947). According to sub-section (1) of section 12B, an assessee was liable to pay tax under the head "capital gains" in respect of any profits or gains arising from the sale, exchange or transfer of a capital asset effected after the 31st day of March, 1946, and before the 1st day of April, 1948, and such profits and gains shall be deemed to be income of the "previous year" in which the sale, exchange, or transfer took place. The Income-tax Officer consequently included this sum of Rs. 43,367 in the assessment of the assessee. A copy of the Income-tax Officer's order is annexure "B" and forms part of the case. 3. In appeal before the Appellate Assistant Commissioner, the assessee raised the following two grounds :- (1) That the firm was dissolved on 15th June, 1944, and the receivers were appointed by the Civil Court to auction the firm's property and as the sale was effected after the dissolution of the firm the amount was not liable to be assessed under the head "capital gains." (2) That the amount of capital gains computed by the Income-tax Officer was erroneous. The Appellate Assistant Commissioner did not agree with the first contention of the assessee and held that the surplus was liable to be assessed under the head "capital gains" for the reasons mentioned in his order dated 25th March, 1953, which is made a part of the statement of the case and is marked as annexure "C". Regarding the quantum, however, the Appellate Assistant Commissioner came to the conclusion that, the surplus after taking into consideration the expenses etc. really came to Rs. 30,447 as against Rs. 43,367 taxed by the Income-tax Officer. 4. The matter coming up in second appeal before the Tribunal it was contended that in view of the third proviso to section 12B (1) the amount of Rs. 30,447 was not liable to be assessed. The relevant provisions of section 12B read as follows :- Section 12B. Capital Gains :- (1) : "The tax shall be payable by an assessee under the head "capital gains" in respect of any profits or gains arising from the sale, exchange or transfer of a capital asset effected after the 31st day of March, 1946. ........................... Provided........................................ Provided........................................ Provided further that any transfer of capital assets by reason of the compulsory acquisition thereof under any law for the time being in force relating to the compulsory acquisition of property for public purposes or any distribution of capital assets on the total or partial partition of a Hindu undivided family, or on the dissolution of a firm or other association of persons, or on the liquidation of a company, or under a deed of gift, bequest, will or transfer on irrevocable trust shall not, for the purposes of this section, be treated as sale, exchange or transfer of the capital assets," The Tribunal on a careful reading of these provisions came to the conclusion that the section only applied to capital gains arising as a result of sale; exchange or transfer of a capital effected after the 31st March, 1946, and that such sale, exchange or transfer of a capital asset if effected on the dissolution of a firm shall not for the purposes of this sub-section be treated as the sale, exchange or transfer of the capital asset. The Tribunal held that the language of section 12B referred to above led to the irresistible conclusion that a sale effected on the dissolution of a firm with the object of distribution of the capital assets of the firm was saved by the third proviso 12B (1) of the Indian Income-tax Act and the capital gain was not liable to the assessed. Consequently, the Tribunal accepted the assessee's appeal and deleted the addition of the sum of Rs. 30,447 included in the assessee's assessment. A copy of the Tribunal's order dated 8th July, 1947, is annexure "D" and forms part of the case. 5. On the above facts, the following question of law arises :- Whether on the facts and in the circumstances of the case the sum of Rs. 30,447 is exempt from assessment under the third proviso to section 12B (1) of the Indian Income-tax Act ? The Advocate-General, for the Commissioner. R. B. Kotwal, for the assessee. JUDGMENT Chagla, C.J.
6. The assessee is an unregistered firm and it was dissolved on the 15th June, 1944. Receivers were appointed to sell the partnership assets and they sold them on the 10th of March, 1947. The partnership assets realised a gain of Rs. 30,447, and the Income-tax department contended that this sale had resulted in a "capital gain" within the meaning of section 12B and that the firm was liable to be assessed to tax on this capital gain. The contention of the assessee was that its case fell within the third proviso to section 12B. This contention was rejected by the Tribunal and the matter comes before us on this reference.
7. The third proviso would only apply if the transfer is made on the dissolution of a firm or other association of persons, and the transfer is in the nature of distribution of capital assets. It is difficult to accept the contention that when the receivers sold the partnership assets on the 10th of March, 1947, they were distributing capital assets to the partners on the dissolution of the partnership firm. It was only after the partnership assets had been sold that the question of distribution of these capital assets to the partners would arise. What the receivers did was to sell the capital assets before the distribution of capital assets of the partnership. Therefore, in our opinion, the third proviso has no application to the facts of this case.
8. The position is identical with the position that arose in Commissioner of Income-tax, Bombay City v. James Anderson which we had to consider. There it was a case of an executor selling the assets of the testator and then distributing the sale proceeds to the legatees, and we pointed out in that case that the proviso does not apply where the testator or executor sells the capital assets and distributes the sale proceeds.
9. It was first contended that the tax is imposed not upon the receivers but upon the unregistered firm, and the answer to that contention is to be found in section 41(2) of the Income-tax Act which permits the taxing authorities to assess directly the person or persons on whose behalf income, profits or gains are received, and the amount in question was received by the receivers not in their own right but on behalf of the partnership firm. Therefore it was open to the taxing authorities either to proceed against the receivers and assess them to tax in respect of this capital gain or to assess this unregistered firm on whose behalf the capital gain was received by the receivers.
10. The next question of Mr. Kotwal is that under the partnership law a sale of partnership assets is part of the distribution of the assets, and therefore the case falls under the third proviso, and he has relied for this purpose on section 48 of the Partnership Act. Sub-section (b) of that section provides :
"The assets of the firm, including any sums contributed by the partners to make up deficiencies of capital, shall be applied in the following manner..............", and then the order is set out : payment of debts, payment of partnership dues to the partners for advances made by them by way of capital and so on; and Mr. Kotwal contends that in order to give effect to the provisions of this sub-section in the case of every dissolution the partnership assets have of necessity to be sold, and therefore the sale of the partnership assets is part of the distribution of the partnership assets. In our opinion that contention is not tenable. All that section 48 lays down is the order in which the assets of a firm have to be applied on dissolution. The section does not require that the assets of the firm should of necessity be sold. There may be a case where on a dissolution of the partnership there may be no debts and the partners may agree instead of selling partnership assets to divide them between themselves in specie. Therefore it would not be correct to say that the partnership law requires that in the case of every dissolution, partnership assets must be sold as a part of the machinery for distributing the partnership assets on dissolution.
11. The next contention urged by Mr. Kotwal is that the sale effected by the receivers here is not a sale contemplated by the Transfer of Property Act and that this sale is the result of the operation of law and therefore section 12B would not have any application to such a sale. It is pointed out by Mr. Kotwal that the Court directed the sale and it was under the order of the Court that the receivers sold the partnership assets, and Mr. Kotwal has drawn analogy between this sale effected by the Court in execution of a decree. In out opinion the two cases are not in pari materia. In the case of a Court sale the sale is effected by the Court and the Court issues a sale certificate when the sale becomes complete and the title vests in the auction purchaser. In the case of a sale by a receiver, although it may be a result of an order of the Court, it is not the order of the Court that vests the title in the purchaser. In order to vest the title in the purchaser and it would be that conveyance which would ultimately vest the title in the purchaser. Therefore the sale effected by the receivers was a sale as contemplated by the Transfer of Property Act. It was not a compulsory transfer of title as a result of any provision of the law.
12. In our opinion, therefore, the Tribunal was in error when it took the view that this case fell within the third proviso to section 12B.
13. We, therefore, answer the question submitted to us in the negative. The assessee to pay the costs.
14. Reference answered in the negative.