Andhra HC (Pre-Telangana)
Commissioner Of Income-Tax vs G. Seshagiri Rao on 9 September, 1992
Equivalent citations: [1995]213ITR304(AP)
Author: Syed Shah Mohd. Quadri
Bench: P. Venkatarama Reddi, S.S. Mohammed Quadri
JUDGMENT Syed Shah Mohd. Quadri, J.
1. At the instance of the Commissioner of Income-tax, Andhra Pradesh, the following questions of law are referred to this court for its opinion :
"(1) Whether, on the facts and in the circumstances of the case, the Appellate Tribunal is justified in law in annulling the Commissioner of Income-tax's order under section 263 ?
(2) Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was correct in law in holding that there was no transfer of interest by the assessee to the other partners in the firm within the meaning of section 2(47) of the Income-tax Act, 1961 ?"
2. There was a partnership under the name and style of Messrs. White Field Industrial Corporation, Bangalore (for short, "White Field"). It purchased certain land in Seghalli, Bidarahalli, Hebli, Hoskote Taluk, Bangalore district, from Messrs. Krishna Mining Company, Goginenipuram. Gudur, Nellore district, under a registered sale deed dated May 15, 1972. Out of the four partners of the White Field, one Sri Peda Sekhar died on July 9, 1977. The remaining partners continued under a fresh deed of partnership executed on July 15, 1977. Three more partners including the assessee, were included in the partnership under the deed of partnership dated April 1, 1977. The land which was purchased by White Field was converted for industrial purposes and was revalued at Rs. 12 lakhs. The assessee's share in the said partnership in a sum of Rs. 2 lakhs was credited to his account. On February 20, 1980, the old partners of White Field retired and the assessee received the said sum of Rs. 2 lakhs on retirement. For the assessment year 1980-81, in the assessment proceedings, the assessee claimed that the said amount of Rs. 2 lakhs received by him did not constitute "transfer" within the meaning of section 2(47) of the Income-tax Act. Accepting this contention, the Income-tax Officer completed the assessment on December 10, 1980. In exercise of the power under section 263 of the Income-tax Act, the Commissioner revised the order of assessment on the ground that the Assessing Officer did not go into the question whether any capital gains liable to tax had arisen in the case of the assessee on his receiving Rs. 2 lakhs at the time of his retirement. Against this order of the Commissioner of Income-tax dated December 1, 1982, the assessee filed appeal before the Income-tax Appellate Tribunal. The Tribunal took the view that as the land in question was purchased by the firm even before the assessee became the partner of the firm, the question of transferring the interest of the assessee in favour of the other partners in the firm did not arise. It accordingly allowed the appeal following the judgment of this court in CIT v. L. Raghu Kumar . At the instance of the Commissioner of Income-tax, the above two questions are referred to this court for its opinion.
3. Sri S. R. Ashok, learned standing counsel for the Department, submits that on retirement, the assessee received the benefit of conversion of property into industrial purpose and as the conversion is at a higher valuation, the benefit was passed on to the assessee on retirement, so there was a transfer within the meaning of section 2(47) of the Act.
4. From the narration of the facts given above, it is clear that even before the assessee became the partner of White Field, the land was purchased by White Field. After the assessee was inducted into the partnership, the capital assets of the firm were credited to each of the partners. The amount which was allotted to the account of the assessee was Rs. 2 lakhs. He withdrew the said amount which was standing to the credit of his capital account.
5. In Raghu Kumar's case , the assessee was the karta of a Hindu undivided family. He was a partner of two firms. He retired from the said two firms with effect from January 1, 1971. On the date of retirement, his capital account was credited with a sum of Rs. 46,500, which was in excess of the amount due to him towards his capital and profits. The Income-tax Officer treated the addition l amount of Rs. 46,500 as capital gains in the hands of the assessee. The assessee carried the matter in appeal but the appeal was dismissed upholding the order of the Income-tax Officer. The assessee then went up in further appeal to the Appellate Tribunal. Before the Tribunal, he contended that there was no transfer of any capital asset within the meaning of section 2(47) of the Act. It was held by this court that when the share of a partner in the partnership was worked out by taking accounts in the manner prescribed by the relevant provisions of the partnership law, there was no element of transfer of interest in the partnership assets by the retiring partner to the continuing partners. It was further held that for the purpose of section 45 of the Income-tax Act, no distinction-could be drawn between an amount received by the partner on dissolution of the firm and that received on his retirement, since both of them stood on the same footing and the amount received by a partner from the partnership in excess of the capital and profits standing to his credit at the time of retirement could not be construed as "capital gain" under section 45 of the Act as there was no transfer within the meaning of section 2(47) of the Act, and such excess was not exigible to tax as capital gains. This judgment was followed by the Tribunal in arriving at the conclusion to which it reached. From the above judgment it follows a fortiori that when the amount standing to the capital amount of the retiring partner is drawn by him at the time of his retirement, it cannot be said that there was any transfer of a capital asset in favour of the existing partners by him for the purpose of section 45 of the Income-tax Act. In this view of the matter, the second question is answered in the affirmative, i.e., in favour of the assessee and against the Revenue. The first question which is only a consequential question is also answered in the affirmative, i.e., in favour of the assessee and against the Revenue.
6. The referred case is accordingly disposed of. No costs.