Income Tax Appellate Tribunal - Bangalore
Mrs. Arathi Shenoy & Ors. vs Joint Commissioner Of Income Tax on 31 July, 2000
Equivalent citations: [2000]75ITD100(BANG)
ORDER
A. Kalyanasundharam, Vice-President
1. These eight individuals have filed their appeals aggrieved by the order of the Commissioner of Income-tax (Appeals) [CIT(A)] for shrot] in regard to the income that was assessed in their hands under the provisions of the IT Act, 1961 (hereinafter referred to as the Act). All these individuals have been assessed of their income on the same set of facts and accordingly all these appeals involve common issues, for which reason these appeals have been grouped together. Hearing of these appeals also were done on they being grouped together and the parties representing their respective clients made arguments in their support and by complementing one another, excepting for Mr. M. Ananda Rao for whom Mr. Venkatesan submitted that his power of attorney has been withdrawn and he remained unrepresented.
2. The common issue that is involved in all these appeals concern itself with the amounts that were received by them in accordance with the provisions of cl. 16 of the partnership deed of the firm M/s Mangalore Ganesh Beedi Works [MGBW for short]. These persons had received the amount in pursuance to the provisions of cl. 16 of the partnership deed for allowing the remaining partners to continue to carry on the business of the firm as it used before some of the partners invoked the plea of dissolution of the firm MGBW, i.e., as a going concern.
3. One other partner of the firm MGBW, Mr. Ramanatha Shenoy had received similar amounts for agreeing to allow the remaining partners to continue to carry on the business of the firm as a going concern. His appeal before the Tribunal was captioned as ITA No. 258/Bang/1997. The Bangalore Bench of the Tribunal heard this appeal and passed its order on 10th July, 1997.
4. In this order of the Tribunal the conclusion was that cl. 16 of the partnership deed contained a special provision permitting dissolution of the firm with the option of the business being carried on as a going concern by one or more of the partners who pay the remaining partners their share of interest. The Tribunal found that this clause provided for extinguishments of their right in the firm and this resulted in a transfer. Giving consideration to the fact that this extinguishments of right occurred consequent to the dissolution of the firm, it was concluded that such a transfer took place in the course of retirement of the partner from the firm. Consequently, it was held that the amount received for extinguishments of right was not exigible to tax either as a long-term or a short-term capital gain.
5. The other part of the issue was concerning the nature of receipt of the broken period of 234 days. This was considered in a separate appeal by the same assessee as above. The Tribunal concluded that the amount received for the broken period of 234 days represented revenue income and held it as taxable.
6. The Joint Commissioner of Income-tax (Assessment) [JCIT(Asst.) for short] Special Range, Mysore submitted an application dated 17th March, 1999 to the Hon'ble President of the Tribunal praying that a special bench be constituted to resolve the complicated issues that involve huge tax implications and that the decision taken in the above cases would have effect for the subsequent assessment years. JCIT had in the above mentioned submission has raised the following six questions that he felt require the consideration by the special bench.
(1) Whether the business undertaking as a going concern is a capital asset ?
(2) When an auction sale is conducted in respect of the business of a partnership firm as per the directions of the High Court in the proceedings arising out of the dispute amongst the partners, whether it can be considered to be a case of a retirement of a partner from the partnership firm ?
(3) When at the instance of the High Court the sale is preceded by a distinct valuation of the overall assets of the partnership business, whether it could be held to be an instance of slump sale ?
(4) Whether it could be held that there is no occasion for levy of capital gains tax on the grounds of non-ascertainment of cost of acquisition when, in fact, the cost of acquisition was capable and susceptible as ascertainment ?
(5) Whether the concept of reallocation of state of affairs amongst partners arising as a sequel to retirement of any partner or partners, as explained by the Gujarat High Court in the case of CIT vs. Mohanbhai Pamabhai (1973) 91 ITR 393 (Guj) could be extended to the case of partnership business being sold in entirety in Court held auction ?
(6) Whether interveners have a 'locus standi' to intervene in an appeal on the ground that such interveners are likely to have similar issues in their own cases which are not already before that Bench of the Tribunal and whether Tribunal is justified in entertaining such interveners ?
7. Hon'ble President of the Tribunal framed the constitution of the special bench to examine the issues involved in all these eight appeals with direction to hear these appeals on 1st November, 1999. The above appeals were accordingly posted before us for hearing on 1st November, 1999 and we had heard them on 1st and 2nd November, 1999 and hence the present order.
8. Mr. Venkatesan, Chartered Accountant submitted his arguments for Mrs. Arathi Shenoy, Mrs. Pushpalatha, Mrs. Vatsala Shenoy and Mr. Suresh Rao. Mr. K. R. Prasad, senior Advocate submitted his arguments for the estate of Mr. Raghuramaprabu through his L/R Mrs. Kaveribai, Mr. Janardhana Rao and Mrs. Hemalatha. Mr. Ananda Rao remained unrepresented because Mr. Venkatesan had submitted that the authority given to him earlier had been withdrawn. Mr. Indrakumar, the standing counsel for the IT Department before the High Court and other authorities submitted his arguments on behalf of the Department covering all the eight assessees.
9. At the outset, we would like to place on record our appreciation to the assistance provided by the counsels for the assessees and the standing counsel. Both Mr. Venkatesan and Mr. Prasad placed lucid and relevant arguments with reference to the facts of the issues involved in these appeals with all nuances for our appreciation. They had placed reliance on various case laws that have a bearing on the issues in these appeals. Mr. Indrakumar was an equal match for both the counsels on the various points made and raised by them and equally matched them by referring to the case laws that support the view point of the Department. The order that flows in the following paragraphs is after due consideration of the submissions by the parties evaluating them with the facts of the case and respectfully considering the ratios laid down by the High Courts and the Supreme Court that were extensively deliberated upon by the parties during the hearing.
10. We shall begin with stating the facts involved in the instant cases under appeal before us in brief. Two persons in a partnership understanding started MGBW on 28th March, 1940 for a specified period. The deed of partnership provided for continuation of the partnership for further specified periods on mutual consent basis. The business of the firm was manufacture of beedis at Mysore, Mangalore, parts of Karnataka and Tamil Nadu. By mutual consent of the partners the business of the firm was extended for specified periods several times and the last of extensions expired on 6th June, 1987. The partners who over the years had grown in number agreed to extend the business for a further specified period of six months, i.e., till 5th December, 1987. Mr. Janardhana Rao, a partner of the firm gave a notice for the dissolution of the firm on 18th December, 1987 and all the partners agreed that the firm be dissolved w.e.f. 6th December, 1987.
11. Mr. Janardhana Rao and Mr. Suresh Rao, two of the partners of the firm filed a Company Petition No. 1/1988, under the provisions of s. 439(1)(a) of the Indian Companies Act, 1956 [Companies Act for short] seeking winding up of the partnership firm as an unregistered firm as provided for in ss. 582 and 583 of the Companies Act before the High Court of Karnataka [HCK for short]. HCK examined the provisions of the cl. 16 of the partnership deed and expressed that in the interest of one and half lakh employees who were spread all over Karnataka State whose livelihood depended on the business of the firm a Chartered Accountant [CA for short] should examine the records of MGBW and determine the value of the assets and liabilities of the firm. Accordingly a CA was appointed by the High Court and was directed to submit his report to HCK. CA submitted his report to HCK in which he had determined the value of all fixed assets including goodwill at Rs. 28 crores.
12. HCK considered the report of the CA along with other factors contained in the deed of partnership especially concerning the dissolution process. HCK considering the cl. 16 of the deed of partnership that provided for the business being taken over by one or more of the partners as a going concern ruled that the partner or partners who are interested in the taking over of the business to submit their tenders indicating that the base price shall be Rs. 30 crores. A few years had passed by before the above ruling of HCK could take effect. This was because there were allegations by some against the remaining of fraud being perpetrated and misuse of the property, assets, bank accounts, etc., of the firm by some. Finally HCK laid down the procedure for the dissolution of the firm in accordance with the provisions contained in cl. 16 of the partnership deed in its order dated 14th June, 1991. The portion that contained the essence is reproduced below for the sake of continuation of the facts of the instant cases.
"The dissolved partnership firm - Mangalore Ganesh Beedi Works as a going concern shall be sold to such of its partner/s, who makes an offer of a highest price, the same not being less than the minimum (reserved) price of Rs. 30 crores (Rupees thirty crores) within 11th July, 1991 accepting further liability to pay interest at 15 per cent per annum towards the amount of the price payable to partner/s from 6th December, 1987 till the date of deposit."
13. HCK simultaneously appointed on Official Liquidator for the conduct of the auction. He was to receive the amounts from the bidders, submit his report of the amounts so received and the amounts paid over to the respective other persons in satisfaction of their interests in the firm based on which the bidders were to be allowed to carry on the business of the erstwhile firm.
14. Mr. Vinod Rao, Mr. Jagannatha Rao and Mr. Jagannath Shenoy, three of the partners of the erstwhile firm MGBW submitted their tender at Rs. 92 crores and this was the highest of the various bids that were placed before HCK on three dates, 19th, 21st and 24th September, 1994. This bid of Rs. 92 crores was accepted by HCK and it passed its order accordingly. The crucial element of the order is reproduced below for the sake of continuity.
"The highest bid amount of rupees ninety two crores is accepted and the group of persons offering the said amount are directed to deposit within 60 days from today with the Official Liquidator the entire amount of ninety two crores together with actual profits earned from 6th December, 1987 till 31st March, 1994 and proportionate profit from 1st April, 1994 till the date of deposit in terms of the orders of this Court issued in CA No. 370 of 1994."
15. There were some objections to the above ruling of HCK by parties to the dispute. The objection was with reference to the amount to be deposited by the bidders covering their share. The other proposal was for substitution of the terms of the order that was on the method of calculation of the profit for the period of 1st April, 1994 to the date of deposit. HCK found their pleas to be reasonable and accepted them and modified its order as reproduced in para 11 above. The modified portion of the order is reproduced below :
"(v) If the sale of the dissolved partnership firm as a going concern in favour of any partner or partners of any outsider as accepted by the Court, such offer shall, within 60 (sixty) days from the date of acceptance of the offer, deposit with the Official Liquidator the price or such part of the price together with the actual profits earned from 6th December, 1987 till 31st March, 1994 and the profits from 1st April, 1994 till the date of deposit (after adjusting the income-tax payable on pending assessment for the portion of the asst. yr. 1995-96) on the basis of the average profits for the last two years. Proportionate profits from 1st April, 1994 shall be calculated on the basis of number of days from 1st April, 1994 to the date of deposit."
16. The final order on the acceptance of the tender was made by HCK on 21st September, 1994 and this reads as under :
"The highest bid amount of rupees ninety two crores is accepted and the group of persons offering the said amount are directed to deposit that part of the bid amount of rupees ninety-two crores which is proportionate to the shares held that the outgoing partners together with profits on the same basis from 6th December, 1987 till the date of deposit, within a period of 60 days from 29th September, 1994 in any of the nationalized banks in the name of the Official Liquidator. The rest of our order dated 21st September, 1994 remains intact."
17. Three persons whose bid of Rs. 92 crores was accepted by HCK submitted the statement of amount payable by them in accordance with the terms of the order of HCK. These three persons prayed to the Court that the bid amount that included their share too, might not be deposited with the Official Liquidator. HCK finding it to be fair proposition accepted it and allowed them to retain their share but deposit the remaining as directed. The statement as submitted by the three partners indicating the amounts payable to the outgoing partners of the erstwhile firm is given below :
Statement showing the amount payable by successful bidders in terms of C.A. No. 313/1994 dated 21st September, 1994 as amended by order in Company Application No. 392/94, dated 29th September, 1994 in Co. P. No. 1 of 1988 Rs. Rs.
1. A. Bid amount 92,00,00,000.00 Outgoing partner's share being 87.45 per cent thereof 60,45,40,000 B. Fixed Capital (con-
tributories 'A' account) 12,00,000.00 Outgoing partner's share being 87.45 per cent thereof 10,49,400 C. Undistributed profits
(i) As on 31st March, 1994 68,94,34,272.62
(ii)Proportionate profit for the period from 1-4-1994 to 20-11-1994-
234 days
Profit for the year
ended 31-3-1993 24,87,75,912.01
Profit for the year 24,91,05,963,86
ended 31-3-1994
------------------
49,78,81,875.97
------------------
Average profits for one
year 24,89,40,937.93
Less : Income-tax @ 40
per cent 9,95,76,375.17
------------------
Profit after tax 14,93,64,562.76
------------------
Proportionate profit
for 234 days 9,57,57,007.36
------------------
Total of (i) and (ii)
i.e. undistributed
profits up to 20-11-1994 78,51,91,279.97
------------------
Outgoing partner's share
being 87.45 per cent 68,66,49,760
thereof
------------------
Total amount 149,22,39,100
Less : Debit balance in
contributors 'B' account
as on 31-3-1994 20,31,93,200
------------------
Total amount payable to
outgoing partners 128,90,35,852
------------------
Profits sharing ratio of partners after assignment of Mr. Vinoda Rao's share in favour of the following assignees Rs.
1. Estate of Mr. B. Raghuramaprabhu 16.059
2. Mr. M. Janardhana Rao 8.472
3. Mrs. M. Pushpalatha 13.843
4. Mrs. M. Hemalatha 13.843
5. Mr. M. Suresh Rao 8.361
6. Mrs. M. Vatsala Shenoy 8.361
7. Mrs. M. Arathi Shenoy 8.361
-----------
Total 77.300
-----------
Statement showing the amount payable to the individuals Total of A+B+C Bid amount and 131,90,40,459.41 accumulated profits Less : Debit balance in account 4,44,34,468.98 of Mr. M. Vinoda Rao
-------------------
Balance amount 127,46,05,990.43
-------------------
Name of partners Ratio Share in Debit Net amount bid amount balance payable and profits as on 31-3-1994
------------------------------------------------------------------------ Rs. Rs. Rs. ------------------------------------------------------------------------ Estate of Raghurama Prabhu 16.059 26,47,96,158 2,72,00,967 23,75,97,191 Mr. Janardhana Rao 8.472 13,96,95,497 1,53,35,230 12,43,60,259 Mrs. Pushpalatha 13.843 22,82,58,354 2,50,62,848 20,31,95,508 Mrs. Hemalatha 13.843 22,82,58,354 2,44,02,530 20,38,55,824 Mr. Suresh Rao 8.361 13,78,65,209 1,51,15,887 12,27,49,322 Mrs. Vatsala Shenoy 8.361 13,78,65,209 1,39,35,935 12,20,19,274 Mrs. Arathi Shenoy 8.361 13,78,65,209 1,50,00,580 12,28,64,629 ---------------------------------------------------- 77.300 1,27,46,05,990 13,70,63,985 1,13,75,42,005 ---------------------------------------------------- Mr. Ananda Rao 7.650 13.05,38,927 1,68,08,633 11,37,30,294 Mr. Ramanatha Shenoy 2.500 4,26,59,782 48,88,121 3,77,73,661 ---------------------------------------------------- 87.450 1,44,70,04,000 15,87,58,739 1,28,90,45,960 ----------------------------------------------------
18. The controversy raised by the various assessees is about the nature of receipt of the above amounts by them that the Official Liquidator in accordance with the directions of HCK paid them. The Tribunal examined the controversy about the nature of receipt in the hands of Mr. Ramanatha Shenoy earlier as was stated in the initial paragraphs of this order. Tribunal in Mr. Ramanatha Shenoy's case had held that there was extinguishments of interest that resulted in a transfer but, such transfer was in the course of retirement by a partner from the firm and therefore it did not result in any capital gains. Tribunal also examined the notional profit for 234 days from 1st April, 1994 to 20th November, 1994 and concluded that it was revenue income and upheld the action of the authorities in bringing the receipt to tax. Tribunal had noted that Department had accepted the dissolution of the firm as effective from 6th December, 1987 and because there was no agreement between the partners to continue the firm further, he treated the erstwhile partners of MGBW carrying on the business in joint venture and brought to tax the income as Association of Persons (AOP for short). The decisions of the Tribunal on the question of nature of receipt of share value and accumulated profits till 31st March, 1994 and the receipt of notional profit for the broken period of 234 days is a subject-matter of reference made to the High Court of Karnataka within the meaning of s. 256(1) of the Act and the reference is pending.
19. The Joint CIT (Asst.) Special Range, Mysore (referred to as AO) was entrusted with the assessment of these eight assessees. AO had the benefit of both the orders of the Tribunal in the case of the other partner of MGBW Mr. Ramanatha Shenoy. All assessees insisted that there case being identical to that of Mr. Ramanatha Shenoy and that he should follow the order of the Tribunal.
20. AO was not satisfied with the pleas of the appellants because on money issues he felt that the decision of the Tribunal could be otherwise. For one he felt that the Tribunal having come to the conclusion that consequent upon the partners being paid for surrendering their interest in the firm that resulted in extinguishments of their interest that involved transfer, the consequential conclusion should have been that it resulted in capital gain both long-term and short-term.
21. For expressing this feeling of his, he had mentioned in his order of assessment that the entire sale was monitored by HCK with the sole intention that the bidders are allowed to carry on the business on payment to the other partners with all fixed assets, goodwill, copyrights, trade marks. He further observed that consequent upon the sale as ordered by HCK rights of some got extinguished and rights of some others got further strengthened and this involved passing of shares of some to the others for valuable consideration and this was taxable. He further noted that trade mark, trade name, copyright, etc., are nothing but extension of goodwill of the firm for which the Chartered Accountant had placed the value of Rs. 26 crores, their transfer obviously resulted in capital gains.
22. These eight appellants had placed before the AO their that after 6th December, 1987 there being no firm in existence and an AOP had come into being that had 13 members, it must be held that the sale was effected by AOP of 13 members to another AOP of 3 members. The appellants also had pleaded that the notional profits for 234 days had suffered tax and its inclusion in their hands would result in being taxed the second time.
23. AO on the plea that the transfer was to be treated as by AOP of 13 members only was of the opinion that the partners who conjoin to carry on the business with the base as contract amongst them do not lose their individuality and merely because they conjoint it does not give rise to a collective body. He further observed that the collective character of the partners is recognized under the Indian Partnership Act, 1932 as a firm retaining within it the individual characters of the partners which was why their liability is stated to be several and joint. He also observed that the property owned by a firm, which is a legal person in commercial circles, the partners could be said to be owners of the said property in their individual right only that is equal to their share in the profit and the loss of the firm.
24. He made detailed observation on the ownership by making reference to the provisions of the Indian Partnership Act, 1932. He observed that the extent of ownership depended upon the equitable and legal principle as contained in s. 45 of the Transfer of Property Act, 1882. He also observed that partner bringing in money for purchase of an asset by the firm the share of each partner in the said is in proportion of capital brought in by him. He noted that where a partner brings into the firm an asset owned by him, his interest in the assets of the firm would be equal to the value of the asset brought in by him. He observed that the concept of mutual adjustment of rights is discussed in the Indian Partnership Act, 1932. He observed that s. 14 of the Indian Partnership Act, 1932 r/w s. 45 of the Act describe the property of the firm to be (a) the property and rights and interest in the property brought in and (b) property acquired by purchase or otherwise including goodwill of business.
25. He observed that ss. 14 and 37 of the Indian Partnership Act touch upon the option to purchase the interest of a partner in case of his death or of the outgoing partner by the continuing partners. On the exercise of the option to purchase the interest by the continuing partners, the outgoing partners would be liable for capital gains on the excess amount received. He further observed that where the asset of the firm in which the partners have their share or share their interest in it and is sold at a market price that exceeds the cost, it results in capital gains and tax is leviable. He drew support from the article by Raj Krishna Mittal 'Ownership rights in the partnership property'.
26. He also observed that the growth in the various capital assets like goodwill, etc., was not as a result of any capital contribution by the partners and the indicator of the share of the partners in the assets of the firm is their profits sharing ratios only. This share of profit being definite and it is only to this extent any partner could be given the asset or its value, the amounts received by him in excess of his capital contribution is liable to capital gains. He rejected the plea of assessment should be framed on AOP on the capital gains, if any on the following reasoning :
"Neither the erstwhile AOP consisting of 13 members transferred the assets to the AOP consisting of 3 partners/members, i.e., the successful bidders nor erstwhile partners in their individual capacities have sold business instead it is a case of retirement of 10 erstwhile members of the business which was being run as AOP.
There was never distribution of assets and ownership of assets never came to any members, only rights of partners have been transferred.
Though Income-tax Law distinguishes between an AOP and its members, in General Law there is no distinction between an AOP and its members and hence decisions of the Supreme Court in the case of Mohanbhai Pamabhai is not applicable."
"MGBW had claimed the status of AOP from asst. yr. 1989-90; Department has accepted the same in these assessment years without any discussion on the validity of the claim.
When Karnataka High Court in its final sale order dated 22nd December, 1994 confirmed the sale of MGBW to the successful bidders, it did not consider the word 'firm' to mean that the assessment ought to be made in the status of the firm by the IT Department. This issue of status was not the subject-matter before the High Court.
Under the special circumstances of dissolution and sale of the firm, the position of the outgoing partners including assessee should be viewed in the context of representative-assessee under s. 160(1)(iii) because for the asst. yr. 1995-96 pertaining to previous year for the period of 1st April, 1994 to 17th November, 1994 the matter of sale of MGBW was a going concern was handled by the Official Liquidator attached to the High Court.
Therefore, viewed from that angle, the correct status of the assessee for asst. yr. 1995-96 will be under s. 160(1)(iii). The AO, therefore, can assess the income directly in the hands of the beneficiary under ss. 165 & 166 specifically provides for direct assessment of the person on whose behalf or for whose benefit income is received.
The sale proceedings have shown the beneficiaries in the instant case are out-going members including the assessee. It was the Official Liquidator who received the sale amount of Rs. 92 crores and other amounts and further distributed the amounts to the outgoing members."
27. AO considered the capital contribution in the firm by each of the abovementioned appellants and compared it with the amounts received by them from the Official Liquidator. He had also observed that the growth in the value of the assets of the firm was not by an equal contribution of capital by the partners. He observed that the amounts that were paid or deposited with the Official Liquidator was after adjustment of the debit balances in the accounts of MGBW and this amount on receipt by the outgoing partners was nothing but excess over capital and hence attracts the provisions of capital gains tax. He observed that the assets comprised of tangible and intangible assets and intangible assets like trade name, trade marks, copy-right are not exactly extensions of goodwill because their cost could be computed and that they are enforceable by law. He referred to the decision of the Supreme Court in CIT vs. Finlay Mills Ltd. (1951) 20 ITR 475 (SC) where it was ruled that expenditure on trade mark is capital in nature. He finally observed that the decision of the Supreme Court in CIT vs. B. C. Srinivasa Setty (1981) 128 ITR 294 (SC) is inapplicable to these two items because they had a cost at the start of being granted to the firm unlike the goodwill that grew over the time without any initial cost. He proceeded to compute the short-term and long-term capital gains with reference to the various assets that are reproduced hereunder :
"Net price received by the assessee consists of value of goodwill and assets - A detailed discussion regarding method of computation of capital gains has taken place in the order of asst. yr. 1989-90 under s. 143(3) r/w s. 263 in the case of MGBW. In that assessment order capital gains was taxed in the hands of the firm under s. 45(4) taking a stand that dissolution and distribution has taken place and capital gains short-term (fixed assets) and long-term capital gains on account of goodwill has arisen. Appropriation of short-term capital gain and long-term capital gain was arrived at one on the basis of the valuation report given by Auditors Rao & Swamy, Chartered Accountants appointed by the Karnataka High Court."
28. The CA's in their report had fixed the values of various assets, i.e., fixed assets and goodwill etc., as on 18th December, 1987.
29. In order to arrive at the value of goodwill super profit method was adopted. From their record it was clear that the total sale price/value of firm as such consisted of goodwill and fixed assets both liable for capital gains tax. The very purpose of the appointment of these CA's by the Karnataka High Court was to fix a minimum price for the entire firm so that the minimum bid amount could be fixed by the High Court. Based on this minimum price consisting of goodwill and fixed assets etc., the Court in their order dated 14th June, 1991 fixed the minimum bid at Rs. 30 crores for the entire firm.
30. It is important to note that the valuation and appropriation of assets into long-term, short-term/depreciable assets is very much possible and it is not without any basis. Karnataka High Court order dated 14th June, 1991 has in fact, in a way handed down fairly rational, scientific method which in turn has been based on sound accountancy principles adopted by CA's (Rao & Swamy). It is this method that is being applied in this case. The same method was also adopted in the case of 2 partners i.e., M. Ramanatha Shenoy (asst yr. 1995-96) & M. Vinod Rao (asst. yr. 1994-95). Therefore, I need to emphasise that there is a rational and scientific basis and also consistency in the method that is being followed now.
31. Detailed study and analysis of balance sheet of MGBW (AOP) for asst. yr. 1995-96 shows falsity in the assessees claim of his/her liability to appropriate long-term and short-term capital gains. This new concern has, in its balance sheet for asst. yr. 1995-96 shown following appropriation in the matter of addition to its assets of Rs. 92 crores.
Rs. Rs.
Goodwill (this has been termed 72,00,00,000 78.30 per cent
as value of trade marks & copyrights)
Fixed assets 20,00,00,000 21.70 per cent
-------------- ----------------
Total 92,00,00,000 100 per cent
-------------- ----------------
32. The concern MGBW also submitted detailed valuation report of land & building as prepared by a registered valuer H. S. Sheshagiri as on 15th September, 1994. These details are contained in the table below. As per this table following is the appropriation of market values in forms of goodwill, land & building and plant & machinery.
Rs. Rs.
Goodwill (this has been termed 70,72,10,000 76.90 per cent
as value of trademarks & copyrights)
Land 17,47,90,000 19.00 per cent
Buildings 3,80,00,000 4.10 per cent
-------------- ----------------
Total 92,00,00,000 100 per cent
-------------- ----------------
33. Further, in a separate computation, based on super profits method M/s. MGBW has given value of its goodwill (though termed as trade mark & copyrights) at Rs. 71 crores which is close to the above value of Rs. 70.72 crores. Even M/s. Rao & Swamy Court appointed CA's had appropriated goodwill and fixed assets as on 18th December, 1987 as under :
Rs. Rs.
Goodwill 26,10,00,000 87.00 per cent
Fixed assets 1,89,30,000 6.30 per cent
Other tangible assets 2,00,70,000 8.70 per cent
-------------- ----------------
Total 30,00,00,000 100 per cent
-------------- ----------------
34. The above Rs. 30 crores was fixed by the Karnataka High Court as minimum bid amount in its order dated 14th June, 1991.
35. The above only shows that fixation of sales/market value of assets of the firm indeed has rational, scientific and factual basis. After careful study and analysis of Court orders, balance sheet figures, valuer's report following appropriation of market value of MGBW concern in terms of various assets is prepared -
TABLE-2 Appropriation of sales/market value of different assets in the case of concern M/s MGBW, for the asst. yr. 1995-96.
------------------------------------------------------------------------
No. Asset Percentage Sales/market Amount
value in assessees
case
(1). Land as per
H. S. Seshagiri Registered
valuer 19.00 17,47,90,000 2,41,97,564
(2). Buildings -do- 4.10 3,80,00,000 *included in
3 below
(3). Plant & Machinery
estimated on the basis
of Swamy & Rao's report 0.30 25,00,000 *56,03,646
(4). Goodwill-being balan-
cing figure remaining
out of total figure of
92,00,00,000 also being
almost same figure if
super profit method is
adopted 76.60 70,47,10,000 9,75,54,390
------------------------------------------------------------------------
From the above table it is also clear that the above ratios or percentages can be rationally adopted to quantify the value of goodwill (long-term), land (long-term), building and plant & machinery (depreciable assets) in the case of net value of assets, rights etc., to Rs. 12,73,55,600-received by the assessee. As a matter of clarification, it is noted that there is not much time gap between above valuation and time when assessee received the share.
TABLE-3 Appropriation of sales/market value of different assets in case of for the asst. yr. 1995-96
------------------------------------------------------------------------
No. Asset Percentage Sales/market 1981 value
value
------------------------------------------------------------------------
1. Land 19.00 2,41,97,564 21,24,212
2. Buildings* 4.40 56.03,646 *2.09.224
3. Plant & Machinery*
4. Goodwill 76.60 9,75,54,390 Nil Total 100 % 12,73,55,000 23,33,436
------------------------------------------------------------------------
36. The appellants in their appeal to the Commissioner of Income-tax (Appeals) [CIT(A) for short] had one common plea that was that the order of the Tribunal in the case of Ramanatha Shenoy should be followed insofar as the capital gains aspect. CIT(A) was of the opinion that the order of the Tribunal in the abovementioned case could not be followed because of the two decisions of the Supreme Court, namely, CIT vs. Artex Mfg. Co. (1997) 227 ITR 260 (SC) and CIT vs. Electric Control Gear Mfg. Co. (1997) 227 ITR 278 (SC) both of which were pronounced on 8th July, 1997. He observed that the Tribunal when passing its order on 10th July, 1997 had not known about these two orders and that they had a vital effect to the conclusion of the Tribunal. He observed that the two decisions of the apex Court were pronounced with reference to a situation that attracted the provisions of s. 41(2) of the Act and capital gains when the price of the different assets could be identified and attributed to. He observed that the above two decisions of the apex Court had considered its earlier decision in CIT vs. Mugneeram Bangur & Co. (1965) 57 ITR 299 (SC). CIT(A) noted that in the case of one other partner of MGBW on identical facts the amounts received by him for assigning his shares in favour of certain other partners thus increasing their share in the firm, was assessed to capital gains and in the light of the abovementioned two decisions of the Supreme Court, he observed that the decision of his predecessor and of the Tribunal required review.
37. On considering the orders of HCK that mentioned over and over again the business as a going concern and the assets of the firm, he felt that the above two decisions of the apex Court clearly applied to the case of the appellants. He observed that the decision of the apex Court in Addl. CIT vs. Mohanbhai Pamabhai (1987) 165 ITR 166 (SC) was not attracted to the facts of the case because in the case before the apex Court the issue was that of a retirement of a partner or dissolution of the firm and consequent distribution of the assets of the firm in the course of dissolution. He upheld the orders of the AO on all counts.
38. The appellants aggrieved by the orders of both the lower authorities have preferred their appeal before the Tribunal. As observed earlier not only the facts apply to all the appellants uniformly, their pleas are also uniformly the same and identical. Mr. Venkatesan raised one additional ground and pleaded that it was a legal ground and the same be admitted. The additional ground reads -
"The appellants beg to submit that they may be awarded costs in prosecuting the appeal and also order for the refund of the institution fees as part of the costs in view of the fact that the appellants have prosecuted the appeal on account of the authorities below in not following the decisions of the Hon'ble Tribunal."
39. This additional ground shall be dealt with at its appropriate place later in this order.
40. Both Mr. Venkatesan and Mr. Prasad, the counsels of the appellants submitted that the entire event as was processed by the HCK must be examined in its true light. It was submitted that HCK was more concerned with the welfare of one and a half lakh employees of MGBW which compelled them to consider the provisions of cl. 16 of the partnership deed that permitted one or more of the partners to opt to continue the concern as a going concern by satisfying the remaining partners who did not desire to continue the firm as it used. It was insisted that the event of minimum bid amount, the bid, the terms of settlement as directed by HCK, the amounts paid over to the Official Liquidator who in turn distributed to the various persons should be appreciated in their proper perspective and not in the literal sense. It was insisted that all that the partners of MGBW desired was dissolution of the firm and the manner of dissolution was described in the deed of partnership and the actions that were taken was for the dissolution of the firm as it stood on 6th December, 1987 followed by the distribution of the assets by adjustment between the partners inter se.
41. It was submitted that Mr. Vinoda Rao on 3rd July, 1993 had assigned his interest in the firm in favour of seven other partners of the firm and thus the firm that had 13 partners at the time of seeking of dissolution stood reduced to 12 only at the time of actual settlement. It was submitted that three out of the twelve partners jointly placed their bid before HCK and are presently carrying on the business of MGBW.
42. The counsels for the appellants submitted that all that cl. 16 of the partnership states is that the firm that had a beginning at some has to come to an end at a time that is mutually agreed to and that at the time they mutually decided to close the firm, the manner of taking care of the interest of each of the partners. This is nothing more than adjustment of interest inter se between the partners. Some may take the assets and some may accept the money equivalent. It was argued that the Courts are unanimous in their view that during the subsistence of a firm no partner could claim ownership in his individual capacity on any of the assets of the firm and all that the partners have in common is their common interest in the assets of the firm and no one has any specific share in any of the assets of the firm. Referring to the decision of the apex Court in Sunil Siddharthbhai vs. CIT (1985) 156 ITR 509 (SC), it was submitted that the Court had clearly laid down that a partner by bringing in any of his individually owned asset as his capital contribution to the firm, no longer can claim any ownership right on that property in spite of the fact that such contribution did not result in any transfer of an asset.
43. The counsels for the appellants submitted that the situation of distribution of assets consequent to dissolution of the firm is exact opposite to the one that was considered by the apex Court in Sunil Siddharthbhai's case (supra). It was pleaded that the partners who had only interest on the assets, they become defined and specific on such assets being allotted to them in settlement of their rights in the firm's assets. The right that existed all the time is only magnified and therefore, the receipt of their existing rights in the firm does not result in any transfer and consequently no capital gains is attracted. It was contended that the settlement of the account of the partner on dissolution is by considering his capital account, drawing account and other factors and is carried out through partners adjustment account.
44. It was contended by the counsels for the appellants that the dissolution of a firm may involve total disruption of the business or one of them taking over or the business being sold to a third party. All these are various methods of dissolution of an existing firm. The manner of adjustment of partners' interest inter se is usually defined in the deed to avoid any disputes at a future point of time. It was contended by the counsels for the appellants that in the instant cases the deed of partnership provided a method of settlement of account inter se between the partners by allowing one or more to make a bid which if found to be the highest, he/they would be given over the firm in exchange of equivalent money value being paid to the remaining. It was insisted that HCK in the proceedings before it for dissolution had touched upon cl. 16 for the sole purpose of finding a solution and settling the interest of the partners inter se in the course of winding up or dissolution of the firm. It was emphasized that the interest of the partners on the assets continued to run during the continuance of the firm and therefore, it is incorrect to hold that when the firm is closed and the partners receive their existing share in the firm on its dissolution, results in some capital gain by giving it a colour of transfer within the meaning of the Act.
45. It was also the submission of the counsel that the cl. 16 of the deed of partnership though had provided for one more of the partners if could bid an amount that is higher and that is accepted by the remaining, the bidding partners would get the firm as a going concern and they may carry on the business without any interruption from the remaining partners, it was the other way of putting the desire of some of the partners to retire from the firm. It was contended that the Tribunal in Ramanatha Shenoy appreciated this plea of theirs and it was also so ruled by the Tribunal. It was contended that in a retirement of a partner similar situation develops by him allowing the continuing partners the right to carry on the business without his interference.
46. It was contended that consequent upon two partners issuing a notice to the remaining partners calling for the dissolution of the firm, followed by a company petition being filed before HCK for winding up, the firm comprising of a compendium of partners ceased. It was at the instance of HCK that the partners of the erstwhile firm had agreed to remain united till the final picture is pronounced by HCK and it was this feature that brought about the concept of AOP. AOP in view of HCK's direction became in a way owner of the business and the assets of the erstwhile firm and they were trustees of the firm because the AOP could not appropriate anything amongst them and they were functioning as any other receiver would function during the winding up of a company. The property was that of the firm and it is only the firm that could have parted with it. Because of the strange situation of firm not being continuing and because the partners did not wish to carry on the business in the same manner as they did till 6th December, 1987 and it was in the course of winding up that during the intermittent period the erstwhile agreed at the instance of HCK to carry on as it used be till the winding up or the dissolution.
47. It was also contended that the apex Court very well appreciated the concept of partnership in Addanki Narayanappa vs. Bhaskara Krishnappa AIR 1966 SC 1300. In this case the right of firm to hold property, the sale property during dissolution for settlement of account between the partnership inter se were all deliberated upon extensively. It also touched upon the concept of partner and his rights on the assets of the firm and it was ruled that during the subsistence of the firm no partner has any right to deal with any property or its part in a manner as he would with his personal property. The firm, a compendium of persons is a recognized entity in the business and commercial circles and can hold property, deal with it in a manner that is accepted by the partners. During the continuation of the firm all that the partners are entitled to is a share in the profits of the business. When they decide to discontinue the business of the firm and dissolve it, at that point the partners would be entitled to the profit that accrues to the firm the sale of the property of the firm. It was in this context that the apex Court had held that the profit on sale of the property accrued to the firm and hence the firm is liable to capital gains tax.
48. It was contended that the erstwhile partners who had only the right to the profits on sale of property of the firm and had only a joint ownership rights on the assets, merely because the settlement of account was made with reference to the value of the assets, it would be incorrect to conclude that there was any transfer by the appellants in favour of three others who placed the bid. It was also contended that it is a recognized fact that a property that is in the name of a partner may continue to stand in his name even after it is contributed by him as his capital into the firm but, to claim it as his own property, all requirements of the Transfer of Property Act, 1882 would come into operation. In the instant case the properties of the erstwhile firm remained in the name of the firm and it was not transferred in favour of the partners and hence, the partners could not have transferred it to the three bidders.
49. It was submitted that it was AOP that was being assessed on the income of the firm from the asst. yr. 1989-90 and this AOP comprised of 13 members till July, 1993 when one of the members assigned his interest in the AOP to 7 other members of the AOP bringing down the number of the members to 12. Of these 12 members 3 jointly placed the bid and the remaining 9 also placed their joint bid but, the bid of the 3 was higher HCK accepted it. This joint bidding brought with it the AOP of 3 members and AOP of 7 and two members individually. Therefore, the AOP of 7 members had received the amount on behalf of its members and it is only this AOP of 7 members could perhaps be called as having agreed to give over the rights of its 7 members in favour of AOP of 3 members. It was also contended that the Official Liquidator had received on behalf of the outgoing partners and if at all any proceeding could be initiated under the Act, it could be on him only. It was pleaded just like a receiver appointed by a Court to carry on the business till it is wound up and assessments of income are made on him as a representative, the Official Liquidator is the representative-assessee of the above appellants. It was on this basis the plea made was that the assessments framed on the appellants deserve to be quashed.
50. Mr. Indrakumar, the standing counsel for the Department supported the orders of the two authorities. He laid emphasis on the fact that what all transpired before the High Court with reference to the parties who agitated before it could not be lost sight of. He contended that it is only the partners of MGBW who could claim dissolution of the firm and it is only they who could settle the accounts inter se. He referred to the order of HCK and submitted that the direction of HCK to the bidders was to deposit the bid amount with the Official Liquidator and the Official Liquidator was to submit his report to HCK on the amounts so received and it being distributed to the parties along with the respective amounts so paid to each of them. He pleaded that it was because of the outgoing persons/partners having accepted the amounts on settlement that they had to surrender all their rights on the assets and the business of the firm with the bidders given a free hand to carry on the business as it used to earlier. The amount received in satisfaction of their interests is always equated to the value of the assets because they are depriving themselves of the property of the firm. Because the value of the property had gone up over the years and the partners are entitled to a share on the profit or gain on sale of the property either to an outsider or to the remaining partners by surrender of their share in favour of the buyers, the outgoing partners in fact had received an amount that is equivalent to the value of the property of the firm. Interest on property or rights over a property are very assets in their own right and these are transferable as any other asset or property. Consequent to the outgoing partners agreeing to move out of the firm after being paid for their interests on the firm and its property, there is extinguishments of right which is a capital asset as is defined in the Act.
51. The above deliberations by the counsels on both sides are indicative of the need of clear interpretation of cl. 16 of the deed of partnership. The Department accepts MGBW the firms was dissolved w.e.f. 18th December, 1987. The dissolution is normally followed by the distribution of the assets of the firm amongst the partners. In order to go about such distribution of the assets of the firm that petition to HCK was filed that was called winding up petition. Winding up or the dissolution lead to total disruption of the business and the distribution of the assets between the members or partners. The Indian Partnership Act, 1932 permits the partners to specify the manner in which the dissolution of the firm would be done along with the distribution of the assets of the firm in the partnership agreement between the partners. A firm is bound by the agreement or contract entered into by the partners and such agreement binds the partners too inter se. One of the point on which the partners may express their agreement is about the dissolution of the firm and manner in which the assets of the firm, business, etc., shall be distributed amongst them. In the instant case, the partners of MGBW had expressed their agreement on the dissolution of the firm and the consequent settlement of accounts inter se and this is so expressed in cl. 16 of the deed of partnership and this is reproduced hereunder as it is the basis on which the appellants became entitled to make their claim and get it.
"It the partnership is dissolved, the going concern carried on under the name of the firm Mangalore Ganesh Beedi Works and all trade marks used in the course of the said business by the said firm and under which the business of the partnership is carried on shall vest in and belong to the partner who offers and pays or two or more partners who jointly offer and pay the highest price therefore as a single group to a sale to be then held as among the partners at which sale nobody other than partners shall be entitled to bid. The other partners shall execute and complete in favour of the purchasing partner or partners at his/her or their expense all such deed, instruments and applications and otherwise aid in his/her name or their names of all such trade marks and do all such deed, acts and transactions as are identical or necessary to the said transferee or assignee partner or partners."
52. HCK considering this clause ruled that one or more partners of MGBW should come forward by placing their bid and it was in this connection that it appointed a CA to value the assets so that a minimum reserve price could be fixed. The minimum reserve price was accordingly fixed at Rs. 30 crores and HCK directed that the one or more of the partners could make the bid that shall not be higher than the minimum reserve price fixed by it. It also ruled that in the event of any partner or partners unable to make the bid, it would call for the bid from persons unconnected with firm. All of the parties to the petition accordingly took steps to comply with this direction of HCK.
53. Three partners joined together and placed their bid and the seven other partners jointly placed their bid. HCK found that the bid by three was higher at Rs. 92 crores accepted it and directed the bidders to deposit the bid amount within 60 days along with the profits of the business from 6th December, 1987 till 31st March, 1994 and for the period from 1st April, 1994 till the date of deposit that was 20th November, 1994. HCK in its direction to deposit the amount had directed that deposit be made in any nationalized bank in the name of the Official Liquidator. It further directed the Official Liquidator to submit to it a report of the amounts so received and distributed to the entitled persons according to a table or scheduled submitted to it. The Official Liquidator acted according to the directions of HCK and on the amounts being deposited with the bank, paid to the respective persons who are entitled to receive the amount and submitted his report to HCK accordingly. The amounts that were to be deposited and to be distributed amongst the entitled persons had been brought out in the earlier paragraphs. The appellants and two other partners, namely, Mr. Ramanatha Shenoy and Mr. Vinoda Rao had accordingly complied with the remaining part of cl. 16 of allowing the three a free hand in carrying the business along with the trade marks.
54. HCK before giving its final ruling on the bid had considered the allegations made by some directed that the business be continued as it used to be. This aspect was taken into account by HCK in its final ruling that is why it contained that part of the amount representing the actual profits for the period from 6th December, 1987 till 31st March, 1994 and for the period from 1st April, 1994 till 20th November, 1994 also to be deposited by the bidders.
55. There was no agreement amongst the partners to extend the life of the firm on from 6th December, 1987. Two of the partners had called for the dissolution from 18th December, 1987. They filed a petition for winding up before HCK. HCK considering the livelihood of one lakh fifty thousand employees depended on the business of the firm had directed the business to be continued. This business was carried on without there being any agreement between the partners from 6th December, 1987 and hence the profits of the business came to be assessed on an entity AOP up to asst. yr. 1994-95.
56. In dissolution of a firm there is distribution of assets of the firm between the partners inter se. The manner of mutual adjustment of the assets of the firm between the partners is always by they mutually agreeing to it. Some may take over the assets while some others may take the cash equivalent of the assets. But, invariably all the partners receive only that much that they are entitled to that is to the extent of their profit sharing ratios together with the balance in their capital account after settlement of all outsiders liabilities. Retirement of one or more partners infers that one or more wish to severe their connection with the other partners of the firm and the business of the firm and by this process the remaining partners continue the business of the firm. The main difference between the dissolution of a firm and retirement of partner or partners of the firm lies in the fact that the former involves total disruption of the firm and the latter does not result in any disruption of the firm but only a change in its constitution.
57. In the instant case, three of the partners made the bid that was accepted and they were given the right to carry on the business of the firm MGBW without any intervention from the remaining 9 partners. Clause 16 of the deed of the partnership deed had clearly provided for a condition for allowing the business to be carried on with all trade marks by a partner or partners if he or they is or able to pay the remaining the highest amount, failing which the firm's business would be closed.
58. During the period of dispute amongst the partners as observed earlier the partners had alleged on some for misuse of the firm's property and HCK had ruled that the business shall be carried on without there being any disadvantage to any of the partners. The petition for winding up that was filed in 1988 was carried till 1991 when the initial order for bid reserve amount was fixed. Because, there was no extension of the partnership but, dissolution was sought for and during the period till the dissolution could be effected the partners joint manner of carrying on the business without any disturbance to their respective rights brought in the concept of AOP. This AOP as observed earlier had 13 members at the start of the dissolution, reduced to 12 when Mr. Vinoda Rao assigned his interest in the firm in favour of 7 other partners 3 members out of this 12 members made a joint bid of Rs. 92 crores and the remaining 7 members made their joint bid. But because the bid of 3 members was higher the same was accepted.
59. The question that needs our consideration is, does this bid by 3 and acceptance by 7 and 2 others bring about the concept of AOP of 3 members, AOP of 7 members and 2 individuals. In order to provide an answer to this question it needs to be appreciated the events that transpired from the time of dissolution. The firm MGBW was yet to be dissolved and from the time it was sought to be dissolved till the time 9 members/partners of AOP/firm were paid through the Official Liquidator, the AOP that was carrying on the business did not get any ownership rights on any of the assets of the erstwhile firm. All that happened was that there being no firm in existence and during the pendency of the settlement the business that was carried on by all was classified as AOP, i.e., members remaining together for a common purpose and that was settlement as desired before HCK. HCK had directed that the bidder must deposit the amounts into a nationalized bank in the name of the Official Liquidator. HCK also defined the role of the Official Liquidator to receive the amounts and pay to the litigants of the respective amounts that is due to be paid to them according to the statement prepared by the parties. Official Liquidator had paid to the 9 individuals their respective dues.
60. As far as HCK is concerned, it had known that 13 partners were in litigation and by 1993, the litigants got reduced to 12 and in 1994 it was dealing with 12 individual litigants only. HCK was concerned with the implementation of clause 16 of the partnership deed, by one or more placing the highest bid for carrying on the business and the others receiving their dues for giving a free hand to the bidders to carry on the firm with all its trade marks. It had known that 3 of the partners jointly placed their bid that was the highest and on it being accepted by it, it directed the amount of bid along with profits for the period till its date of order is deposited with a nationalised bank. It had appointed the Official Liquidator for the sole purpose of receiving the amount from the bidders and distributes it amongst the other 9 partners/members in accordance with the statement showing the amount payable to each and submits his report to HCK. It is thus clear that as far as HCK was concerned it had only to deal with 12 litigants and had nothing to do with any AOP, or the assessment of income, etc., by the IT authorities. To put it in simple words, the litigants before HCK were 12 individual persons in their own rights which right was derived from being the partner of the MGBW and such right being limited to the share in MGBW only. This is obvious because, the 12 partners called for the dissolution and they had the basic and fundamental right in the firm's assets, profits, etc., on their distribution consequent to the dissolution.
61. The fact of the instant case is in real life situation of settlement of dispute on the firm's property and its business the litigants are individuals that is clearly evident from the order of HCK of 14th June, 1991. The finding on various issues especially as to the litigants are the partners, the business being allowed to be carried on under the direction of the Court, rights of partners being settled inter se, partners receiving the money for their share being absolved and that they would have no right or interest are brought out below :
"No doubt, the partners of the partnership firm, who are the real combatants in this litigation, are fighting each other because of certain irreconcilable differences which have arisen between them .............. As could be seen from the very statement of the learned company Judge as to his view of cl. 16 of the partnership deed and the submission of the learned counsel for the respondents 2 to 7, referred to therein, all that could be said is that there was on the part of the learned company Judge an endeavour to bring about an amicable settlement among the partners of the partnership-parties to the present Company Petition ................ Coming to the interlocutory order dated 3/5/11/1988 made by the learned company Judge on Company Application No. 764/1988, it is an order made to restrain respondents 2 to 7 from carrying on their newly started 'beedi' business under the name and style of 'New Mangalore Ganesh Beedi Company', pending final disposal of the present company petition, having taken the view that if such business is allowed to be carried on, the same would jeopardize the interest of the business of the dissolved partnership firm, the winding up of which is sought, particularly when that business is allowed to be carried on by the Court ................ The very object of cl. (16) is to enable the firm to carry on its business till the rights of the parties inter se were all settled after the dissolution of the firm ............. To remove ambiguities regarding rights and liabilities of the partners purchasing the firm as a going concern, the rights and liabilities of the partners who may go out of the firm taking their share of the sale proceeds, certain clarifications are made. Documents needed be executed by all or any of the partners to show that partner/s purchasing the firm as a going concern have succeeded to it and the partners taking their share of purchase money with interest are absolved of their liabilities to their parties relating to transactions of the firm and they will have no right or interest whatsoever in the trade marks of the firm and its name shall be executed."
62. When the facts as to the litigants for sale and purchase of the business as a going concern were the partners in their individual capacity, could for the purpose of Income-tax proceeding concerning the transfer by 9 litigants of their interest in favour of 3 other litigants who made the highest bid, in given the garb of AOP of 7, 2 individuals and AOP of 3 because, 3 partners and 7 partners joined together and made the bid before HCK ?
63. It is an accepted position by the parties that the 12 partners were in litigation in their individual rights and in fact it had to be so because none else could seek for the dissolution followed by the distribution of the assets amongst the partners. Basically it is for the partners in their individual capacity to receive and pay for their rights in a situation such as the one in the instant case. Only the persons who initiated the firm could bring the firm to its end. A partner may have dual capacity is an accepted position in view of a recent decision of the apex Court. However, a partner who had joined in a capacity that is known and accepted by the other partners could be changed only with the concurrence of the other partners. This appears to be the requirements especially when the partners are at the verge of separation. The persons, who were partners at the time dissolution is sought for, could not be different till the dissolution is completed.
64. In order that the concept of AOP of 3 and AOP of 7 is probable, it is necessary that it existed at the time dissolution is sought and if it did not exist at that time, it is to mean it never existed. This is because settlement always has to be between partners inter se though they may bring in an outside agency to settle their dispute. The outside agency is no more than an arbitrator and therefore, has no interest in the dispute. It is only the interested parties to the dispute could receive their claim. Because 3 and 7 persons joined together to place their bid, it does not bring in new parties of 3 and 7 as AOP and this is obvious for they were not parties to the dispute at the start of the dissolution. Accepting this proposition would mean and result in situation of dissolution started with 12 but settled with a group of 3 and 7 and 2 individuals but not with those 12 persons.
65. Though, it may be argued that the group 3 and 7 were satisfied through the AOP, it is not the same as settlement between the 12 persons. In other words it would mean that though HCK ruled that it is only partners could make the bid and the partner did make their bid and the remaining partners had to give their undertaking to the bidders that they would give a free hand to the bidders for carrying on the business along with the trade marks, this AOP concept would go contrary to the real life facts, i.e., AOP that was nowhere in the picture at the time of initiation and proceedings of the dispute, surfaces up merely because 3 and 7 jointly placed their bid. This concept of AOP leads to another state of disorder because the persons to the dispute and the persons who settled it were totally different persons and in that event it would mean that is no settlement of the dispute between the persons who had initiated it. This adds a further puzzle and that though, HCK allowed only partners to make the bid and by this concept of AOP it would mean outsiders or parties other than the partners had placed their bid.
66. When the parties to the dispute before HCK were individuals, and carry on a transaction in the manner ruled by HCK, and get satisfied or settle their dispute, this real life situation could not change for evaluation under any of the laws of this country. When for the Indian Partnership Act, 1932, the settlement of dispute was between the partners inter se, all that the provisions of the IT Act does it is to fit this actual happening or event. No doubt there are certain special provisions that are exclusive to the Act but the actual transaction as it happened only gets evaluated. Unless at the time of settlement of dispute the concept of AOP of 3 and 7 existed and the dispute that is brought before HCK is also on that basis, the mere action of 3 and 7 coming together to place their bid is only similar to joining action retaining the individual concept with it. The partners are joint or co-owners of the property in the firm is an accepted proposition. When a property of the firm in which the partners have joint ownership is dealt with in such a way that some of the partners relinquish their share in the property in favour of some of the partners for a valuable consideration, it results, in a transfer by each of the partners or co-owners or joint owners and the capital gains is earned by each of them individually and not by any body of individuals or the AOP.
67. Therefore, in our considered opinion because the concept of AOP of 3 and 7 was nowhere in the picture in the deed of partnership and it was never envisaged at any time, and because, the settlement could be sought by the partners alone and only they could pay and receive on settlement, the amounts received by 7 was in their individual rights only. We may further observe that the Official Liquidator was concerned with the amounts to be paid to the respective individuals according to the amounts against their respective names and he had made the payments to the individuals and not to pay AOP of 7 because neither HCK nor the Official Liquidator was aware of any AOP at all.
68. The transfer of interests in the firm was by some of the partners to the other partners and it is not a case of firm distributing the assets or the proceeds of the assets amongst the partners. It is also not a case of dissolution of an AOP and distribution amongst its members because, there was no transfer from the firm to AOP and it is a well known proposition that no one can give a better title than he had at the time of sale. When AOP was not the owner of the assets, it could not have sold any thing. As the facts shows that the partners had acted as agreed to by them in their deed of partnership of paying off the uninterested partners for their rights an shares for being allowed a free hand to carry on the business.
69. The plea of the appellants that the assessments should have been on the AOP of 7 is accordingly without any basis of hence, rejected. In view of our above conclusion, the proceedings under the Act initiated against the appellants are hereby upheld as proper initiations.
70. One of the partners to the dispute Mr. Vinoda Rao had assigned his interest in the firm to 7 persons whose share of interest in the firm's asset had gone up. His assignment was considered and it was assessed as capital gains. This was correctly processed by the Department because, in a situation where a partner allows his share in a firm to be reduced for allowing a new partner to be admitted, the consideration if received or if no consideration is received would have been assessed to capital gains or under the GT Act as transfer without receipt of any valuable consideration.
71. The situation in the instant cases is not any different except that the 9 of the existing partners move out of the firm by giving up their share in the firm for valuable consideration. Interest in a firm is an asset as any other asset and this is so recognized by the Act that defined a capital asset to include extinguishments of interest. The partners by surrendering their rights and interest in the firm have extinguished their rights and interest in the firm, which was a capital asset under the Act, and the transfer of such asset is exigible for tax on capital gains. Surrender of rights and interests in a firm may result in the case of a retirement from the firm that too is relinquishment of his rights and interests in the firm that leads to extinguishments of interest. In our view in situations where like the one before us a partner receives for giving up his rights and interest in the firm at a price that is equated with reference to the market value of the assets of the firm, his rights and interests have been valued at the market price. When this market price exceeds the cost, s. 45 of the Act comes into operation, the difference between the market price and the cost being gains is treated as on account of transfer of capital asset leading to levy of tax on such capital gain.
72. In the instant case too, the assets and the business of the firm was put to auction by HCK fixing the reserve price at Rs. 30 crores with the limitation that the bidders could be only the partners of the firm and it is only when the partners are unable to place their bid higher than Rs. 30 crores, that HCK would have called for a tender from outsiders. The partners rose to the occasion and placed their highest bid that was accepted by HCK and consequently by the parties to the litigation, is indicative that the rights and interest of the partners of the firm has to be evaluated with reference to this highest bid. This was what the authorities below did and the authorities found that the price received by the parties for their interests in the firm exceeded the cost and because, there was a transfer of capital asset, tax on capital gains was levied. In our considered opinion the authorities had proceeded on right and proper lines in all these cases and by invoking or applying the provisions of the Act that was attracted, namely, transfer resulting in capital gains.
73. The counsel for the appellant had insisted that the Tribunal should follow their earlier decision in Ramanatha Shenoy because, it was pronounced on the same set of facts and he was one other partner who had received the payment for giving up his rights and interests in the firm as was held by the Andhra Pradesh and the Gujarat High Court. The two decisions of the Andhra Pradesh High Court in CIT vs. P. H. Patel (1988) 171 ITR 128 (AP) and CIT vs. G. Seshagiri Rao (1995) 213 ITR 304 (AP) and that of the Gujarat High Court is in CIT vs. Balvantrai Vithaldas Shah (1992) 196 ITR 379 (Guj). It was also insisted that relinquishment of interest did not result in any transfer as was ruled by the apex Court in Mohanbhai Pamabhai's case (supra). The counsels for the appellants also insisted that in the light of the ruling by the apex Court in Malabar Fisheries Co. vs. CIT (1979) 120 ITR 49 (SC), on the distribution of the assets of a firm on its dissolution no transfer was involved and hence the transaction did not attract the provisions of the tax on capital gains.
74. Apex Court in Mohanbhai Pamabhai's case (supra) dealt with the extended definition of transfer as in s. 2(47) of the Act and had observed that "Firstly, it had included 'extinguishments of any interest' and 'compulsory acquisition' of the asset within the definition of transfer for the purposes of ss. 45 to 55; and secondly, it had made the definition an 'inclusive' definition. This definition gives an artificially extended meaning to the term by including within its scope and ambit two kinds of transactions which would not ordinarily constitute 'transfer' in an accepted connotation of that word, namely, relinquishment of the capital asset and extinguishments of any rights in it". This clearly goes to show that there should be no doubt at all that in a case that results in relinquishment of capital asset or extinguishments of right in it, the effect is that there is a transfer because, it involves two parties, one the person who relinquishes or extinguishes his interest and two, the person who pays for such relinquishment or extinguishments of rights in it.
75. The Special Bench has been constituted to evaluate the issues involved in these cases and come to a fair and reasonable conclusion and if the process involves reviewing of the decision of the division bench, the bench has to necessarily carry on this judicial function for the sole purpose of carrying the justice to its proper conclusion. Every decision of every Court or Tribunal is intrinsically connected to the facts and the arguments that are placed for consideration. When there are changes in law, the implementers of the Act, like the appellate authorities have the bounden duty to give the provisions the conclusion in accordance with the intention of the lawmakers. Certain transactions that are transfers in the ordinary course are continued to be exempted from capital gains tax like properties received consequent to the partition of HUF and so on. Till the asst. yr. 1987-88, the assets received by the partner on dissolution of the firm was not taxed but, from the asst. yr. 1988-89, the distribution of assets by a firm consequent to its dissolution attracts capital gains tax. Sec. 47(ii) of the Act has been amended effective from 1st April, 1988 and 'distribution of assets of dissolution of firm, BOI or other AOP' that was regarded not as transfer till asst. yr. 1987-88 was deleted.
76. The Act could indicate some of the transactions as not liable to capital gains tax and so on and unless the transaction is such that it squarely falls within the exempted clause, the transaction would be liable to tax. Stretching of any provisions of the statute that would make the application of the section and its provisions ineffective would not be proper implementation of the provision. Apex Court had ruled that no Court has any authority to add or remove any word to the provisions as enacted so as to frame its conclusion. The Courts have necessarily to realize the boundaries of the provisions of law and ensure their decision is within those boundaries.
77. Retirement in the normal course also involves the same concept of relinquishment of capital asset that is the interest or rights in the firm's property and consequent extinguishment of rights therein and this involves transfer from one to the other. There are divergent views of Court on retirement resulting in a transfer or not for some had held it resulted in a transfer and some others had held otherwise. In the instant case, could it be said that the statement of the partners in their deed of partnership that any one or more who is willing to pay the highest price would be permitted to carry on the firm as a going concern, is similar to retirement or is it an offer to the others to buy his share at the highest price. It is obviously an offer and on acceptance of the offer and the bid having been made and accepted by the initial proposer, it gives to a live contract of purchase and sale. Interest or rights in the firm's assets are assets capable of being sold and purchased and such sale and purchase transaction involves transfer from one to the other. We find overselves unable to accept the conclusion of the bench in Ramanatha Shenoy and with due respect to it, we have to hold that the transaction in the instant cases involve transfer of interest or rights in the firms assets by the appellants in favour of the bidders and their surrender of the interests or rights is not in the course of retirement but consequent upon their offer to pay the highest price having been accepted and paid to them.
78. In Syndicate Bank Ltd. vs. Addl. CIT (1995) 155 ITR 681 (Kar) the Karnataka High Court was examining the question of compensation received on acquisition of the banking business of the assessee consequent to nationalization of banks. Because, the price that was received was a lump sum price without any break up relating to individual assets, it was ruled that allocation of price between various assets could not be done and hence no capital gain is attracted. The obiter was that if the prices for the individual assets are available or stated in the take over, it is proper to relate the price received against the cost of each assets and if there is any gain it would attract capital gain.
79. In CIT vs. Bangalore Turf Club Benevolent Fund (1984) 45 ITR 323 (Kar) in the Karnataka High Court the issue was whether the amount of fines, etc., levied by Bangalore Turf Club and transferred to the assessee is its income. The High Court ruled that it is not its income. This is based on the fact that when the recipient of the income is one person and that income is transferred to another person, the income is not assessable in the hands of the transferee. In the instant case, the real recipients of the sale proceeds of the share of rights and interest are the individuals, the appellants in the instant case and by virtue of the jurisdictional High Court ruling, it is not open to them to contend that the income is assessable in the hands of another entity AOP. AOP as observed above has come into being because HCK had permitted the carrying on of the business in the fashion as it used to be earlier till the petition before it is disposed of. AOP never became owner of the assets of the firm MGBW as there was never any transfer in its favour and it was the firm that was being considered for dissolution and not the AOP, i.e., dissolution of AOP was never an issue at any time by any of the parties and in fact there could never be one for the sole reason that AOP was used because HCK allowed the business to be carried on in the interest of one and a half lakh employees.
80. On the argument that when the price is a slump price and price could not be attributed to the individual assets, no capital gain is attracted for which reliance was placed on the two decisions of the Supreme Court in Artex Mfg. Co.'s case (supra) and Electric Control Gear Mfg. Co.'s case (supra). In both the above cases the issues was concerning the sale of the business of a firm to a company. In the instant case the facts are partner or partners allowing the remaining partner or partners carry on the business as a going concern on they being paid off their rights and interests on the assets and business of the firm and by virtue of this transaction the firm is succeeded by a new one formed by the partner or partners who purchase the interest of the other partner or partners. Therefore, the above two decisions did not have any application to the issues in the present appeal.
81. Interest in a firm is an asset and is includible for wealth-tax purpose is an accepted proposition. The WT Act has provided the rule for valuation of the interest of a partner in a firm and this is based on the assets of the firm and its value. In the instant case we are concerned with the value of the interest of a partner that he had transferred and this has necessarily to be related to the value of the assets of the firm. The lump sum price of Rs. 92 crores as accepted by HCK is the total value of the assets of the firm and from this total value the shares of the individual partners are to be distributed, which was so done. The bidders who had placed this price have obviously taken into account the present value of the assets and other items and had placed their bid. The partners who had received money value for their interests in the firm's assets, must be held to have accepted the valuation of the individual assets, though, they did not express it in so many words because, just like the buyer had made the calculation for placing his bid, they too had made by placing their bid but it was lower.
82. If the proposition of the appellants that it is a slump price and no allocation between the assets is possible, it could be taken to mean that the value that is received in excess of the balance in their respective capital accounts could be attributed to capital gain. However, the AO himself had not proceeded on this basis, and it was not so claimed by the Department, the capital gains could not be considered as relatable to excess over the capital account balance.
83. The other alternative that is likelihood is with reference to the base price of Rs. 30 crores. This was the price fixed as minimum by HCK for purpose of dissolution. The partners could consider the corresponding amount credited to their capital accounts as the price on revaluation of assets for settlement of accounts and withdrawal of capital accounts if done may not result in any capital gain. But, since, this was not so done, this possible contention may not arise in the instant case.
84. This leaves the only alternative of relating the gains on the assets is with reference to the valuation of each asset in order to determine the capital gain on the transfer of the interest in the firm. HCK while dealing with the minimum price had touched upon the fact that poor people mostly smoke beedis and they normally prefer a brand that gives them the most satisfaction. Further they also observed that the switch over to another brand in case their preferred brand is not available might cause irreparable damage to the firm's business. Apart from the tangible assets there are intangible assets like trade marks, trade name, goodwill that do have a value. It is the case of the Department that trademarks, trade name, etc. are part of the goodwill. This has been the view of the Tribunal in Ramanatha Shenoy's case too. With respect to this decision of the Tribunal, we find ourselves unable to agree with this view.
85. Trademarks are registered for a price and this is capital asset. The decision of the apex Court in Finlay Mills Ltd.'s case (supra) was dealing with a situation of recurring renewal fees of trade marks that was paid every year after the initial registration and held that renewal fees is revenue expenditure. Sec. 55(1)(b) of the Act touches upon 'cost of improvement in regard to any other asset' and defined it as 'expenditure of a capital nature in making additions or alterations to such assets ............ but does not include any expenditure which is deductible in computing the income chargeable under the head 'profits and gains of business or profession'. It is thus clear that renewal fees paid year after year are not part of cost of improvement. Sec. 55(2)(b)(i) defines the term 'cost of acquisition' to mean 'in relation to any other assets where the capital asset became the property of the assessee before the 1st April, 1981, means cost of acquisition of the assets by the assessee or the fair market value of the asset as on the 1st April, 1981, at the option of the assessee'. This is quiet clear that the cost of an acquired asset that was acquired before 1st April, 1981, the assessee could opt for its cost or the market value as on 1st April, 1981, Trade marks are the basis of the business such as the one before us and its initial cost, which was a capital asset that was so acquired by paying a price the option, is available to the assessee to adopt the cost or its market value as on 1st April, 1981. The plea advanced by the assessee that its cost being zero, it has no value and no allocation could be done, is frivolous and hence, rejected.
86. Goodwill is in reality a composite name of many items such as trade marks, trade name and these have independent identities of their own. People buy many goods by their brand name and may be by the name of the company that makes the brand. Therefore, the brand name has definitely a value and it adds up the value of the goodwill separately. Copyrights are assets and no person other than the person owning it could make copies of the same. These are again registered just like patents, trade marks. These have their initial cost and subsequent renewal charges. These being assets that have a value and being transferable, they have to be related to their respective market value as on the date of sale and the option of the assessee to substitute its value on 1st April, 1981.
87. One possible method that appeals to us is the value adopted by the buyers for the simple reason that they remain the best judges as to the value of the assets that they have been able to acquire. Land, buildings, etc., the tangible assets have been considered with reference to the valuation reports and more or less the values are nearabout the same. Goodwill is one item that comes with the package and the other items are trade marks, trade names and copyrights. Adopting the price that has been depicted by the buyers in their balance sheet could be reasonable guide in regard to the market value of the assets at which the transfer took place. By giving a suitable reduction to the value as taken by equating with inflation rates, the value as on 1st April, 1981 could be arrived at. This could be applied even to the goodwill because, it was built up over the years but, in view of the specific definition of items whose initial cost was zero, it shall be taken at nil, the entire amount adopted for goodwill by the buyers not including therein trade marks, trade name and copyrights would be capital gain. We would direct the AO to rework the capital gains as indicated above.
88. The other issue relates to the nature of profit for 234 days received by the appellants. The Tribunal in Ramanatha Shenoy's case independently considered this and concluded that it was revenue income. The argument was that in view of the decision of the apex Court in Tribhuvandas G. Patel vs. CIT (1999) 236 ITR 515 (SC) the income was assessable in the hands of AOP and s. 86 should be applied. On this aspect of assessing of the income or capital gains in the hands of AOP, we had dealt with it earlier and our conclusion was that it was rightly assessed in the hands of the individual only. Our observations, reasons as indicated while dealing with capital gains would equally apply to this aspect as well. We also find ourselves (in agreement) with the other reasoning given by the Tribunal in the case of Ramanatha Shenoy (supra). We therefore have no hesitation in rejecting the plea of the appellants on this issue.
89. It was further argued that AO had arrogated himself by not following the decision of the Tribunal on the same set of facts and that too in the one other partner's case, by placing reliance on the decision of the Tribunal in P. N. Devgirikar vs. ITO (1997) 61 ITD 376 (Pune). Reliance was also placed on certain decisions of High Courts for the same contention. The perspective of the AO at the time of framing of the order has to be appreciated. The decision of the Tribunal in the case of Ramanatha Shenoy is in reference before the Karnataka High Court. As and when the High Court gives its views, AO could carry out modifications to the order made by him in that case as it allowed under s. 155 of the Act. Sec. 155 of the Act permits the AO to carry out the modifications of his order only on receipt of an order from the High Court in that case but, could not do so on the basis on an order made in another case.
90. The other aspect of this matter is that Department that has sought reference in the case of Ramanatha Shenoy on the aspect of capital gain is attracted or not, could not have applied the decision of the Tribunal in other partner's cases because, it would be similar to self-goal or self-defeating of its cause. In our view, the following of the decision of the Tribunal that is final authority on facts is to be insisted upon only where the decision of the Tribunal has been accepted as final with no question of law being referred to the opinion of the High Court. We accordingly reject this plea of the appellants.
91. Finally we shall deal with the aspect of taxability of the profit for 234 days as revenue income. The assessee does not accept the decision of the Tribunal in that case and the reference is pending. HCK was concerned with two aspects of the issues agitated by the parties before it. One, the price for buying off of the shares of partner or partners because, the partners had sought for winding up and dissolution. Second, because it directed that the business be carried on in the same manner as it was earlier, the profit earned by the business, each of the partner had acquired his or her right. The profit for 234 days was a notional profit calculated on two years average profits and from this average profits 40 per cent towards tax was to be deducted and the net amount was to be paid. This amount so received by the appellants for part of the year and at a time the actual profit has not been determined and required calculation on some basis and the average profit method was adopted. The notional tax is again a process of calculation only and does not mean that the buyers had withheld tax. This amount therefore, had not suffered any tax and the authorities below had rightly treated it as revenue income. We uphold the same.
92. The additional ground of awarding of cost because appellants felt that Department ought to have followed the decision of the Tribunal and by not following the same it has caused them considerable damage and in the incurring of cost on counsel's fees. To our mind, in the light of the foregoing, the parties should bear their own costs.
93. In the result, the appeals are dismissed.
R. V. Easwar, J.M.
94. We have carefully perused the order proposed by the learned Vice President. While we agree with the conclusion that the appeals should be dismissed, we wish to give our reasons for doing so.
95. So far as the principal contention raised on behalf of the appellants viz., that the individual partners, the appellants herein, are not taxable in respect of the capital gains that arose on the sale of their interests in the partnership firm and that it is only the AOP which is so liable, is concerned, we wish to refer to certain arguments in support of the contention.
96. The main arguments which were raised in support of the contention were these. It was first contended that after the dissolution of the partnership firm, the business was continued by the erstwhile partners and returns were filed in respect of the business in the status of AOP, that in such returns the AOP had claimed depreciation in respect of the assets which hitherto belonged to the erstwhile firm, that the profits were assessed and the depreciation was allowed in the hands of an AOP and therefore, it is too late in the day for the IT authorities to say that it is not the AOP which is the owner of the business but that it is the individual partners who are the ownership and who are liable for capital gains tax on the business being taken over by a group of three erstwhile partners. It was further contended that an AOP can acquire, hold and sell property and the view of the IT authorities to the contrary is wrong. Our attention was drawn to the provisions of s. 26, s. 27(iii), s. 49(1)(iii)(b) and s. 47(ii) of the IT Act in this behalf. It was then contended that in the balance sheet of the AOP, the assets of the erstwhile firm were shown as assets thereby reiterating the claim that those assets belonged to the AOP as such and not to the individual partners. Reliance in this connection was placed on the order of the Pune Bench of the Tribunal in P. N. Devgirikar's vs. ITO (1997) 61 ITD 376 (Pn). It was also contended that the partners of the erstwhile firm had come together to sell the business undertaking as such and since the Hon'ble High Court of Karnataka has said that the business must be sold as a going concern, it must be taken that the partners of the erstwhile firm had come together at least for the purpose of effecting the sale and such coming together was sufficient to constitute them as an AOP, which was liable for the capital gains tax. It was finally contended that after the dissolution, the partnership firm shed the garb of a firm and assumed the garb of an AOP, the existence of which was proved by the judgment of the Hon'ble High Court, the returns filed with the IT Department and the assessments made in the status of an AOP.
97. We are unable to give effect to the aforesaid arguments. In order to constitute an AOP, there must be an intention on the part of the members thereof to associate or combine together to produce income, profits and gains. In our opinion, such an intention cannot be spelt out in the present case. What would happen on the dissolution of the partnership firm has been provided by cl. (16) of the partnership deed and it is only to give effect to the terms of this clause that the erstwhile partners were obliged to transfer their interests in the firm to the group of partners who took over the firms as per the said clause. In transferring their interests to the successful bidders for a price, what the erstwhile partners were doing was nothing but to follow the terms of cl. (16) of the partnership deed. In our opinion, the mere fact that a clause in the partnership deed had provided for a particular course of action to be followed by the erstwhile partners on the happening of a contingency in the overriding interests of the continuance of the business as such, does not, without anything more, lead to the inference that the erstwhile partners combined or associated to sell the business undertaking as such. The inter se relationship between the partners came to an end on dissolution of the firm in December, 1987. When once the partnership was dissolved, the partners continued to hold their respective interests in the net assets of the erstwhile partnership firm not as partners or as co-owners or joint owners. Their relationship had come to an end and thereafter they held their respective shares in the net assets of the erstwhile firm in severalty and therefore even if it is assumed for the sake of argument that they came together for effecting the transfer of their respective interests, they cannot be considered as forming of an AOP. Each erstwhile partner transferred his share or interest in the net partnership assets to the group of successful bidders. Such transfer was not by any AOP. In our opinion, there is no coming together of the erstwhile partners. What really happened, if things are seen in proper perspective, is that each partner conveyed his share or interest in the erstwhile partnership firm to the successful bidders for a price. Therefore there was no AOP which could be taxed on the capital gains arising out of the transfer. In the case of CGT vs. R. Valsala Amma (1971) 82 ITR 828 (SC), the assessee and her sister received a cinema theatre with machinery and another building called 'Police Quarters' under the Will of their mother. Each of them had a half-share in the properties. They gifted their properties to their brother by means of a single document of gift. On these facts, it was held by the Supreme Court that in law, since each one of them had a half-share in the properties, they were holding them as tenants in common and therefore each one must be held to have made a gift of her share in the properties though the gift was made through a single document. It was further held that the fact that they did not divide the property was not material. It was therefore held that the assessee and her sister could not be taxed as an AOP or BOI. The ratio of this judgment, in our understanding, is that where the shares of the owners of the property is ascertained or defined, the mere fact that they conveyed the property by joining together and even executed a single document of conveyance does not constitute them into an AOP or BOI. It was not disputed before us on behalf of the appellants that the shares of the erstwhile partners were defined on dissolution of the firm. When the shares are defined or ascertained and there is a dissolution which puts and end to the association or relationship between the partners, it would be contradictory to say that the very same persons come together for the purpose of transferring the business undertaking as such to the successful bidders.
98. In C. M. Aleemullakhan vs. Commr. of Agrl. IT (1984) 148 ITR 696 (Kar), the Hon'ble Karnataka High Court has held that where the shares of the legal heirs of the Mohammedan, who died, are defined and they took the estate as tenants in common, their status as tenants in common with separate rights and interests in the properties held by them is not affected by the continued joint possession and joint management of the property either through one of themselves or through a manager. This decision also supports our view.
99. The assessments made on the erstwhile partners in the status of an AOP in respect of the profits of the business after the dissolution of the firm, in our opinion, is not of much significance in deciding the fate of these appeals. We are inclined to view the returns filed by the assessee in the status of an AOP claiming depreciation on the assets of the erstwhile firm and the acceptance thereof by the IT authorities as a sort of expediency for assessing the profits of the running business. It must be remembered that as per cl. (16) of the partnership deed, the business was to continue notwithstanding the dissolution of the firm so as to enable an individual partner or a group of partners to bid for the takeover of the business. This clause, as we have opined, was conceived to preserve the continuity of the business and the need to do so has also been recognised by the Hon'ble High Court. Therefore, the partners of the erstwhile firm perforce had to continue the business, notwithstanding the dissolution. A peculiar situation therefore arose. The provisions of s. 189 of the IT Act would not cover such a situation and the profits earned by the business after the dissolution could not be brought to income-tax in the hands of the firm. However, the profits which were substantial cannot also be permitted to escape taxation. Therefore, it was that a method was devised, which also had the tacit approval of the IT authorities, by which the profits could be assessed was that of an AOP. The conduct of the assessee in filing the returns in the status of an AOP and that of the IT authorities in accepting the returns should, in our opinion, be confined only to the purpose of taxing the profits of the business and cannot be read as a conscious or deliberate act on the part of the erstwhile partners to associate or join together with the common object of producing income or with the common object of conveying the business as such as a running concern to the successful bidders. Similarly, in our opinion, nothing more can be read into the conduct of the Department in accepting the returns filed in the status of an AOP. By accepting the returns in the status of an AOP, the IT authorities cannot be stated to have also accepted the position that it would be the same AOP which would be liable, if at all, to capital gains on the sale of the business at a future date as a going concern to the successful bidders. That was a matter which could not have been in the contemplation of anyone concerned, either the partners of the erstwhile firm or the IT authorities. That was a matter which would be decided on its own merits when an occasion arose in the future. By filing the returns in the status of an AOP, the partners of the erstwhile firm cannot, in our opinion, foreclose or pre-empt the rights of the IT authorities to take their own stand in respect of a matter which would arise in the future. For the same reason, the IT authorities were also not disabled from examining the question as to who would be liable to tax to capital gains if the question arises in the future. There was no overt act, apart from the filing of the returns in the status of an AOP on the part of the erstwhile partners to show that they have decided to associate with each other, without being partners, and merge their separate interests in the net partnership assets which had crystallised on dissolution. There is no evidence of any "reunion" of the erstwhile partners of their own volition either to conduct the business or to transfer the business to the successful bidders.
100. The matter can be viewed from another angle. Initially there were 13 erstwhile partners who continued the business upto 3rd July, 1993 on which date Vinod Rao, one of them assigned his interest in the erstwhile firm to the other partners. Thus, the number was reduced to 12. It was these 12 persons who filed returns in the status of an AOP in respect of the business which was continued after the dissolution of the firm. Out of these 12, 3 partners successfully bid for purchasing the business under the terms of cl. (16) of the partnership deed. Thereafter, the other 9 persons, who are the appellants herein, transferred their respective interests in the firm to the three successful bidders. Thus, even assuming that there was an AOP in the strict legal sense of the term which could be stated to have transferred the business of the erstwhile firm as a going concern to the three successful bidders, that was only an AOP consisting of 9 members, which was wholly different from the AOP consisting of 12 members, which existed earlier. In this view of the matter, the fact that returns of income were filed in the status of an AOP consisting of 12 members and accepted by the IT authorities has no relevance or significance so far as the claim that it was an AOP consisting of 9 persons members which transferred the business as a going concern to the successful bidders is concerned. It is another matter that, as we have held, there is no evidence to show the existence of an AOP consisting of 9 members, as claimed by the appellants, which could be stated to have transferred, in concert, the business of the erstwhile firm to the successful bidders.
101. The provisions of ss. 26, 27(iii), 47(ii) and 49(1)(iii)(b) which were referred to on behalf of the appellants no doubt support the proposition that in law an AOP as such can acquire, hold and sell property. However, the question is whether there was an AOP at all. In our opinion, there was no AOP. Therefore, these statutory provisions do not assist the case of the appellants. If anything, s. 26 would appear to go against the contention of the appellants inasmuch as it says that if a property is owned by two or more persons having definite or ascertained shares, the income from the property would not be assessed in the status of an AOP, but would be assessed in the hands of the co-owners, in accordance with their respective shares. The section therefore seems to suggest that if the shares of the co-owners of an immovable property being buildings or buildings and land appurtenant thereto are definite or ascertained, there could be no assessment on an AOP.
102. The accounting treatment given by the erstwhile partners in the returns filed in respect of the profits of the business in the status of an AOP is not conclusive in the matter of deciding the question that has arisen before us. Admittedly, the assets used by the erstwhile firm were being used in the business even after the dissolution of the firm. The depreciation on those assets was therefore a proper charge in the computation of the profits of the business subsequent to the dissolution just as it was prior thereto. The same position was being continued to be exhibited in the accounts with a minor change viz., that whereas earlier it was the firm which was shown as the owner of the assets. It is only a mere change in the nomenclature of the owner of the assets without any real transformation or transmission of the assets from the firm to the alleged AOP. As already noticed, the predominant consideration was that the profits of the business should not go untaxed and in the anxiety to ensure this, there was no focussed or in-depth examination of the legal implications or correctness of the claim of the depreciation in the returns filed by the AOP. It appears to us that the IT authorities mechanically computed the profits of the business by allowing depreciation in respect of all the assets. No conscious decision appears to have been taken or no thought appears to have been bestowed upon the question whether the twin conditions of s. 32 viz., ownership and user in the business, were satisfied. We are therefore unable to hold that the AOP became the owner of the assets of the erstwhile partnership firm by a stroke of the pen by showing the assets in the balance sheet of an AOP. On the dissolution of the firm, the legal position, as explained by the Supreme Court in Addanki Narayanappa vs. Bhaskara Krishnappa AIR 1966 SC 1300 is that the partner becomes entitled to a share in the assets of the firm which remains after satisfying the liabilities set out in cl. (a) and sub-cls. (i), (ii) and (iii) of cl. (b) of s. 48 of the Indian Partnership Act. When the partners have become entitled to receive such share upon dissolution, unless there is some overt or conscious act on their part, apart from the mere entry in the balance sheet of an alleged AOP, it is not possible to spell out a merger of such shares of the erstwhile partners into a common pool so that it could be stated that there was an AOP which could be stated to have sold the business to the successful bidders and thus become liable to tax on the capital gains. We are therefore not prepared to regard the accounting treatment as conclusive of the matter.
103. In support of the argument that the individual partners of the erstwhile firm were not liable to capital gains tax, attention was drawn to the finding recorded by the Tribunal in the case in ITA No. 591 to the effect that there was no distribution of any assets amongst the partners in December, 1987, a finding, which has been accepted by the Hon'ble High Court. It was further pointed out that nothing had happened between December, 1987 and November, 1994 to show that the assets were allotted to the partners. It was therefore contended that the individual partners cannot be held liable for capital gains in the asst. yr. 1995-96. Reference was also made to s. 36 of the Partnership Act and it was contended that under this provision, a partner has only a right of general lien and since there no cost of acquisition in respect of such right, there can be no capital gains. It was alternatively contended that the fair market value of the asset in 1987 should be taken as cost of acquisition.
104. The aforesaid contention cannot be accepted because the subject-matter of taxation is not any individual asset, in specie in the hands of the partners, but it is their respective shares or interests in the net partnership asset which was transferred by them for a price to the three successful bidders which is the subject-matter of taxation. In other words, the capital asset, the sale of which has given rise to liability to capital gains, is the individual shares or interests of each of the appellants in the net partnership assets as prescribed by s. 48 of the Partnership Act and as explained by the Supreme Court in the case of Addanki Narayanappa (supra). Under s. 2(14) of the IT Act, "capital asset" has been defined to mean property of any kind held by an assessee. This is a very wide definition and a share of a partner in the net partnership assets has been held to be a capital asset under s. 2(4A) of the IT Act, 1922, by the Madras High Court in V. Rangaswami Naidu vs. CIT (1957) 31 ITR 711 (Mad). Sec. 2(4A) of the 1922 Act is the forerunner of s. 2(14) of the new Act. The share or interest in the net partnership assets has also been held to be "property" for the purpose of the WT Act, by the Allahabad High Court in Juggilal Kamlapat Bankers vs. WTO (1979) 116 ITR 646 (All). The argument advanced on behalf of the appellants arises out of a misconception, if we may say so, with respect regarding the nature of the capital asset, the transfer of which has given rise to capital gains. What we have before us is not a case of a dissolution of the partnership firm followed by a distribution of the assets to the erstwhile partners. If this were to be the case, then there will be no liability to capital gains to tax in the hands of the erstwhile partners on the principle laid down by the Supreme Court in CIT vs. Bankey Lal Vaida (1971) 79 ITR 594 (SC) and Malabar Fisheries Co. vs. CIT (1979) 120 ITR 49 (SC) (supra), as rightly contended on behalf of the appellants. But we have before us a somewhat peculiar case where there was a dissolution of the firm in December, 1987, followed by the continuance of the business of the firm by virtue of cl. (16) of the partnership deed solely for the purpose of enabling a partner or group of partners to successfully bid and purchase the interests of the other partners. Clause (16) expressly mentions that the continuing business shall vest in the successful bidder or bidders in a sale to be held amongst the partners at which sale nobody other than the partners shall be entitled to bid. The clause further says that the partners who have sold their interests to the successful bidders shall execute and complete in favour of the "purchasing partner or partners" all such deeds, etc. as are necessary for the completion of the transaction. What the partners could sell to the successful bidders is only their respective interest in the dissolved firm. Indeed, there could not have been a distribution of the assets amongst the partners, as cl. (16) impliedly prohibits such distribution. Under the said clause, the business of the erstwhile firm had to the sold to the successful bidders, which would not be possible if the assets were to be distributed to the partners on dissolution. The position therefore is that the assets of the dissolved firm were not and could to be distributed to the partners. The partners sold their respective shares or interests in the dissolved firm to the successful bidders for the price and this transaction has been described in cl. (16) as a sale and a purchase. No doubt, the sale had to be made only to a partner or group of a partners and no outsider was entitled to participate in the bid. If for the sake of argument, it is assumed that an outsider was also eligible to take part in the bid and all the erstwhile partners had conveyed their respective interests in the dissolved firm to such outsider who had offered a price for the sale, it could have hardly been suggested that there was no sale by the partners of the respective interests to such outsider. We fail to appreciate why the position should be different merely because no outsider was entitled to take part in the bid and it was only a partner or a group of partners who could take part in the bid. The factual situation is not similar at all to the facts obtaining in Bankey Lal Vaidya's case (supra) or Malabar Fisheries Co.'s case (supra). The partners, the appellants herein, did not receive anything from the firm as such by way of settlement of their rights, but they transferred their respective interests, for a price, to the successful bidders, who were also partners. Therefore, in our opinion, it cannot be said that what the partners received from the successful bidders was something which was in satisfaction of their rights in the partnership which were worked out and realised. It cannot therefore be stated that there was no transfer at all, as was contended on behalf of the appellants. In our view, there was a transfer by way of sale by the appellants of their respective shares in the net partnership assets to the successful bidders for a price and therefore they are liable for capital gains tax in respect of the same. In none of the authorities, apart from those referred to above, cited before us on behalf of the appellants, did we find facts similar to the facts obtaining in the cases before us.
105. We cannot also accept the alternative contention that the fair market value of the capital asset in 1987 should be adopted as the cost of acquisition of such asset because the partners did not become entitled, for the first time, to share in the net assets of the partnership firm. That right was acquired by them the moment they became partners in the firm but the occasion for working out that right arose only in 1987, but that is quite different from saying that they acquired the right to share in the net partnership assets in the year 1987.
106. It was further contended on behalf of the appellants that the sale was of a going concern for the slump price and therefore there was no liability to capital gains tax. In this connection, one of the arguments advanced was that the sale was of the undertaking as a whole, which is different from the components thereof and nowhere in the calculations has any break-up been given apportioning the price of various assets. It was also argued that there was no cost of acquisition or cost of improvement in respect of the going concern as such and even the date of coming into existence of the concern as a whole is not ascertainable. Since there is no cost of acquisition or cost of improvement, there is no liability to capital gains tax. On the strength of the judgment of the Bombay High Court in the case of Evans Fraser & Co. Ltd. vs. CIT (1982) 137 ITR 493 (Bom) and the judgment of the Supreme Court in the case of R. C. Cooper vs. Union of India AIR 1970 (SC) 564, it was contended that the cost of acquisition of the business undertaking as a whole is not equivalent to the aggregate cost of all its components.
107. We find it difficult to accept the argument that it is a slump sale. The concept of a slump sale does not fit in to the present case because though the sale of the business as a going concern is the ultimate result, what each of the appellants has sold is his share in the net assets of the dissolved firm. The computation of the capital gains can be made only on that basis. Therefore, neither the contention that it is slump sale nor that no capital gains are attracted on the sale of a going concern is acceptable.
108. It was contended that even if it be held that the individual partners (the appellants herein) transferred their rights for a price, no capital gains would arise, since the cost of acquisition of such rights is incapable of being computed, and as held by the Supreme Court in the case of CIT vs. B. C. Srinivasa Shetty (1981) 128 ITR 294 (SC), where the cost of acquisition cannot be computed, the gains cannot be charged to tax. It was pointed out that the positions of s. 49(1)(iii)(b) do not apply because the dissolution of the firm took place after 1st April, 1987 and therefore the cost of acquisition to the firm cannot be taken as cost of acquisition of the individual member as partner. It was submitted that in such a case, the fair market value on the date the member or partner obtained the asset, i.e., in December, 1987, should be estimated reasonably and taken as the cost. The impediment in accepting the contention is that the mere difficulty in ascertaining the cost of acquisition cannot be a ground for holding that the charge itself fails; the asset itself should be something of which it is impossible to envisage a cost and it is only then that the principle "no cost, no capital gains" is attracted. The capital asset that is the subject-matter of tax in the cases before us is not of that character. In fact, by suggesting that the fair market value as on 4th December, 1987, reasonably estimated, could be taken as cost of acquisition, the appellants have recognised that it is possible to envisage a cost for the capital asset and that the asset is not one of which it is not possible at all to envisage a cost. The contention therefore fails.
109. Grounds have been taken, and some arguments were also advanced, on the question whether the AO was justified in treating the capital gains, insofar as they related to goodwill and land, as long-term capital gains and the capital gains, insofar as they related to depreciable assets, as short-term capital gains. It was submitted that the entire capital gains, if taxable, should be treated as long-term. The AO has, in our opinion, rightly classified the various components of the right, as per the date of acquisition and the provisions of s. 50, as long-term or short-term. When the actual figures are available in respect of each of the assets and the provisions of s. 50 are applicable to some of them, we do not find any merit in the claim that no part of the capital gains can be assessed as short-term. We therefore reject the same.
110. It was said on behalf of the appellants in the course of the arguments that there was no sale at all because the sale directed by the Hon'ble Karnataka High Court was subject to the final orders to be passed in company application No. 433 of 1994. It was pointed out that the Company Application has since been dismissed in the year 1998 and a Special Leave Petition against a same is pending before the Supreme Court in S.L.P. No. 16809 to 16814 of 1998 and under these circumstances, at best, there was only a conditional sale. This claim cannot be accepted because as on the date of the assessment, as per the orders of the Hon'ble Karnataka High Court dated 22nd December, 1994, there is a sale of the individual shares of each of the partners in the dissolved partnership firm in favour of the three successful bidders. This order has not been shown to have been upset by any further orders. Further, in pursuance of the aforesaid order of the Hon'ble High Court and on the necessary undertaking as ordered by the High Court, having been furnished, the successful bidders were put in possession of the assets of the dissolved firm as a going concern on 7th January, 1995 and had also deposited the purchase price together with the accrued interest, which was also disbursed to the appellants under orders of the Hon'ble High Court. These facts have been recorded by the Hon'ble High Court in their order dated 1st September, 1995 in Company Application Nos. 160 & 174 of 1995. It is therefore too late in the day for the appellants to contend that the sale is only a conditional sale. We reject the contention.
111. We further agree with the observations of the learned Vice-President made in paragraph 22.29 of his order to the effect that the judgment of the Supreme Court in the case of CIT vs. Artex Mfg. Co. (1997) 227 ITR 260 (SC) case and CIT vs. Electric Control Gear Mfg. Co. (1997) 227 ITR 278 (SC) are not applicable to the issues which arise in the present appeals.
112. So far as the taxability of the profits for the period of 234 days is concerned, we agree with the learned Vice-President in his observations made at para 22.40 of his order to the effect that the same was rightly taxed as revenue profit.
113. As regards the additional ground raised on behalf of the appellants to the effect that they should be awarded costs, again we agree with the decision of the learned Vice-President rendered in para 22.41 of his order. That apart, there is no question of awarding any costs to the appellants since they have failed in their appeals.
114. The grounds relating to the chargeability of interest under s. 234B is decided against the appellants, respectfully following the judgment of the jurisdictional High Court in Dr. S. Reddappa vs. Union of India (1998) 232 ITR 62 (Kar), though we place it on record that the appellants did not give up the ground.