Income Tax Appellate Tribunal - Pune
Shevantibhai C. Mehta vs Income Tax Officer on 28 August, 2003
Equivalent citations: (2004)83TTJ(PUNE)542
ORDER
P.M. Jagtap, A.M.
1. This appeal by the assessee is directed against the order of learned CIT(A)-I, Pune dt. 5th Sept., 2000, and the only issue arising out of the same relating to the taxability of amount received by the assessee on retirement from the firm of M/s Mehta & Kakade Associates as long-term capital gains, is raised in the following grounds raised therein :
1. The learned CIT(A) erred in confirming addition of Rs. 34,43,700 added in the assessment as long-term capital gain, without appreciating facts and circumstances of the case as also the correct legal position. The addition being unjustified both in law and on facts, may kindly be deleted.
2. The learned CIT(A) erred in relying on the decision of Bombay High Court in N.A. Mody's case, which according to the assessee, in fact was in favour of the assessee on the facts of the assessee's case.
3. The learned CIT(A) erred in not considering the decision of Supreme Court and High Courts cited in support of appellant's claim.
2. In this case, the assessee filed his return of income for the year under consideration on 30th Aug., 1995, declaring a total income at Rs. 26,813. Along with the said return, a letter was filed by the assessee stating therein that he has retired from the firm of M/s Mehta & Kakade Associates by a deed of retirement dt. 1st Oct., 1994, and that he has received an amount of Rs. 34,43,700 on his retirement from the said firm. Since no capital gain was offered by the assessee in respect of the said amount in his return of income, a notice under Section 148 was issued by the AO on 18th Sept., 1997, which was duly served on the assessee on 22nd Sept., 1997. During the course of reassessment proceedings under Section 147 r/w Section 143(3), it was contended on behalf of the assessee that his retirement from the firm did not result in the transfer of any asset and, therefore, the amount of Rs. 34,43,700 received by him on retirement was not liable to capital gains tax. It was also contended that in view of the provisions of Section 45(4), such liability to capital gains tax, if any, arises in the case of a firm and not in the case of a partner. In support of these contentions, reliance was placed by the assessee on the following decisions :
(i) CIT v. Mohanbhai Pamabhai (1973) 91 ITR 393 (Guj)
(ii) Kartikeya V. Sarabhai v. CIT (1985) 156 ITR 509 (SC)
(iii) N.A. Mody v. CIT (1986) 162 ITR 420 (Bom).
(iv) CIT v. P.H. Patel (1988) 171 ITR 128 (AP)
(v) CIT v. B.V. Shah; (1992) 196 ITR 379 (Guj)
(vi) CIT v. A.N. Nimkar.
3. The AO did not find merits in the contentions raised on behalf of the assessee and proceeded to hold that the amount of Rs. 34,43,700 received by the assessee on retirement from the firm of M/s Mehta & Kakade Associates was liable to capital gains tax for the following reasons given in para Nos. 5 to 9 of his impugned order:
"On bare reading of the provision of Section 45(4) it prima facie appears that said section is not applicable, if on retirement no capital asset of the firm is distributed to the retiring partners and only money value of retiring partner's share in the assets of the firm is given to him. The Sub-section (4) to Section 45 fastens liability for capital gain tax on the firm and not on any partner when the firm does not stand dissolved and capital assets are continued to be retained by it as before on retirement of a partner. It, therefore, cannot be said that the capital gain has arisen to the firm on distribution of capital assets of the firm. The definition of 'transfer' in relation to capital gain enlarged its scope by Taxation Laws Amendment Act, 1984, w.e.f., 1st April, 1985. The definition of 'Transfer' under Section 2(47) encompasses the capital gain arising on account of sum received by a partner on retirement.
6. The principles laid down by the Supreme Court in the case of Addl. CIT v. Mohanbhai Pamabhai (1987) 165 ITR 166 (SC) and followed by the other High Courts in the decision relied upon by the assessee, the learned Judges were inclined to restrict the principles decided therein as applicable in strictness only to cases of general dissolution of partnership. They were inclined to hold that Supreme Court's decision cannot be applied to a case, where on retirement, a partner agrees to take a lumpsum from the other partners without valuation of the assets of the partners and without arriving at his share of the net assets. To adopt the reasoning of the Supreme Court for the purpose of capital gain taxation and make no distinction between dissolution on one hand and retirement of a partner on the other hand was not correct according to learned Judges of Bombay High Court. In the case of CIT v. Tribhuvandas G. Patel (1978) 115 ITR 95 (Bom), the Bombay High Court held that, if partner agrees to pay a lumpsum consideration of the retiring partner assigning or relinquishing his share and right in partnership and its assets in favour of continuing partners, the transaction would amount to transfer within the meaning of Section 2(47) of the IT Act. This view has been substantiated in the following decisions :
(i) CIT v. H.R. Aslot (1978) 115 ITR 255 (Bom)
(ii) N.A. Mody v. CIT (1986) 162 ITR 420 (Bom)
7. The learned Judges of Bombay High Court pointed out that the Indian Partnership Act, 1932, did not have a specific provision for taking on account and settlement of accounts on the retirement of a partner. The learned Judges accordingly held that the question whether there was any transfer on the retirement of a partner would depend on the manner in which the retirement takes place. It was in this context that the learned Judges had held that where the partner took lumpsum consideration on retirement, then the mode of retirement would involve an element of transfer since it involved a relinquishment by the retiring partner of his interest in favour of the remaining partners.
8. Section 45(4) would rope in 'distribution of assets at the time of dissolution of a firm or otherwise'. The term distribution implies that there is more than one asset or more than one partner amongst whom the mutual adjustments take place supposing there is only one immovable asset of the firm which exists at the time of dissolution of firm, there being no other asset at all, the same may be allowed to only one partner who pays cash to the other partners for mutual adjustment. It may then be contended that despite dissolution of firm there was no 'distribution' and hence no capital gain tax would be attracted. It is to curb such an attempt that Section 45(4) aims to bring in even such an arrangement by implying that it is 'distribution or other wise'. In other words the word 'otherwise' qualifies distribution and not dissolution. Therefore, dissolution is the only event roped in by Section 45(4) and no retirement of a partner. Thus all the decisions of Bombay High Court referred to above would apply in full force.
9. It is specified in the retirement deed dt. 1st Oct., 1994, that the retiring partners have agreed to accept the amounts representing the value of their respective shares in the assets of the firm including the appreciation in the value of immovable property at 498, Parvati, Pune including their rights to share in the profits of the firm, their interest, title, claim of whatsoever nature present or future. In the light of the above discussion, the consideration received of Rs. 34,43,700 is added as long-term capital gains of assessee."
4. Aggrieved by the order of the AO, the assessee preferred an appeal before the learned CIT(A) and it was submitted on behalf of the assessee during the course of appellate proceedings before him that the partnership firm of M/s Mehta & Kakade Associates was originally constituted by a deed of partnership dt. 23rd June, 1994, with four partners out of which two partners, i.e., Shri Shevantibhai C. Mehta, assessee in the present case and Mrs. Anitaben Mehta retired w.e.f. 1st Oct., 1994, and the remaining two partners continued to carry on the business of the firm with all its assets and liabilities. The retiring partners were settled at Rs. 34,43,700 each by way of value of their interest in the firm. No assets were taken over by the retiring partners and the amount of Rs. 34,43,700 was paid to them in instalments on account of market value of their interest in the firm as mutually agreed in the deed dt. 1st Oct., 1994. It was, therefore, contended that this was a case of retirement of some of the partners of the firm and there was neither dissolution nor the distribution of assets on such dissolution attracting the provisions of Section 45(4). It was also contended that in the facts and circumstances of the case there is no transfer involved as contemplated by Hon'ble Bombay High Court in the case of N.A. Mody (supra) and the addition made by the AO on account of long-term capital gain is liable to be deleted. The submission made on behalf of the assessee did not find favour with the learned CIT(A) and he proceeded to uphold the action of the AO on this count for the following reasons given in para No. 4 of his impugned order :
"I have considered the rival submissions. I find that the contention of the appellant is not factually correct as stated during his reply. From the terms and conditions of the deed of retirement of 1st Oct., 1994, is very clear that the appellant while retiring from the firm has relinquished all his rights in the assets of he firm. This is specifically stated in Clause 7 of the said deed. Therefore, the ratio of the Bombay High Court judgment in the case of N.A. Mody v. CIT (1986) 162 ITR 420 (Bom) is clearly applicable to the facts of the appellant's case. This being the High Court having territorial jurisdiction, the AO is bound to follow the same. Therefore, the assessment order is confirmed."
Aggrieved by the order of the learned CIT(A), the assessee is in appeal before us.
5. The learned counsel for the assessee submitted before us that the learned CIT(A) while upholding the action of the AO in treating the amount of Rs. 34,43,700 received by the assessee on his retirement from the firm of M/s Mehta & Kakade Associates as liable to tax as a long-term capital gain, has relied entirely on the decision of Hon'ble Bombay High Court in the case of N.A. Mody v. CIT (supra) wherein it was held that when a partner retires from the firm and receives what is due to him by assigning his interest by a deed, there arises a capital gain. He contended that the decision of Hon'ble Bombay High Court in N.A. Mody's case (supra) has been impliedly overruled by the various decisions of the Supreme Court and, therefore, the reliance on the same by the learned CIT(A) while deciding the issue raised in the present case was clearly misplaced. Explaining further, he submitted that no distinction was made between dissolution of a firm and retirement of the partner by the Hon'ble Supreme Court in the case of Narayanappa v. Bhaskar Krishnappa AIR 1966 SC 1300 and it was also held by the Hon'ble apex Court in the said case that a deed of retirement did not operate as a relinquishment of interest in immovable property but that it was merely by way of adjustment of the rights of partners and no compulsory registration was involved under Section 17(1)(c). Further relying on the decision of Hon'ble Gujarat High Court in the case of CIT v. Mohanbhai Pamabhai (supra) in which reference was made to the decision of Hon'ble Supreme Court in the case of Narayanappa v. Bhaskara Krishnappa (supra), he pointed out that the Hon'ble Gujarat High Court has held that the observations of the Hon'ble Supreme Court in the said case are applicable both for retirement and dissolution. He also invited our attention on the relevant portion of Hon'ble Gujarat High Court decision on page Nos. 402 and 403 of the report wherein it was held that the decision of Hon'ble apex Court in the case of Narayanappa v. Bhaskara Krishnappa (supra) was relevant even for considering the relinquishment of the rights by the partner. He pointed out that a reference was made by the Hon'ble Gujarat High Court in the said decision to the case of Velo Industries for the proposition that when a partner retires from the firm, what is given to him by way of shares in partnership, whether it be cash or property in the partnership received by him, is his share in the net partnership assets after deducting liabilities and prior charges and there is no transfer of any interest in property from him to the continuing partners nor is it for price. He, therefore, strongly relied on the decision of Hon'ble Gujarat High Court in the case of Mohanbhai Pamabhai (supra) wherein their Lordships relying on the aforesaid decisions of Hon'ble Supreme Court ultimately held that when the assessee retired from the firm, there was no transfer of interest by any of the assessee in the goodwill of the firm and no part of the amount received by the assessee was assessable as capital gain.
6. Further reliance was placed by the learned counsel for the assessee on the decision of Hon'ble Supreme Court in the case of Sunil Sidharthbhai v. CIT (1985) 156 ITR 509 (SC) for the proposition that what a partner gets upon dissolution or upon retirement is realization of a pre-existing right of interest. He contended that although this decision was rendered by the Hon'ble apex Court while explaining the position regarding introduction of assets by the partner in the firm, the position of retirement of the partner also was considered by the Hon'ble apex Court. Referring to the relevant observations of the Hon'ble Supreme Court on page No. 519 of the report, he pointed out that distinction was made by their Lordships between retirement and dissolution on one hand and partner bringing his personal assets into partnership firm on the other and it was thereafter held by the Hon'ble apex Court that on retirement and dissolution there is no transfer but realisation of a pre-existing right, which position does not apply when a personal asset is brought into partnership by a partner. He contended that the decision of Hon'ble Supreme Court in Sunil Sidharthbhai's case (supra) is thus equally relevant in the context of retirement of the partner from the firm. Reliance was also placed by the learned counsel for the assessee on the decision of Hon'ble Supreme Court in the case of Addl. CIT v. Mohanbhai Pamabhai (supra) to point out that the decision of Hon'ble Gujarat High Court strongly relied upon by the assessee in support of his case, has been affirmed by the Hon'ble Supreme Court keeping in view their decision in the case of Sunil Sidharthbhai (supra) and thus the legal position of this issue has become final.
7. As regards the decision of Hon'ble Bombay High Court in the case of N.A. Mody v. CIT (supra) on which heavy reliance was placed by the learned CIT(A), he pointed out that the Hon'ble Bombay High Court in the said decision has followed its earlier decisions in the case of CIT v. Tribhuvandas G. Patel (supra) and CIT v. H.R. Aslot (supra). He submitted that the said two decisions of the Hon'ble Bombay High Court came to be considered by the Hon'ble Andhra Pradesh High Court in the case of CIT v. L. Raghukumar (1983) 141 ITR 674 (AP) wherein their Lordships of Andhra Pradesh High Court clearly expressed their dissent from the view expressed by the Hon'ble Bombay High Court in the said two decisions. Referring to the relevant observations of the Hon'ble Andhra Pradesh High Court at p. 680 of the report, he pointed out that while dissenting from the two decisions of the Hon'ble Bombay High Court, the Hon'ble Andhra Pradesh High Court preferred to follow the decision of Hon'ble Gujarat High Court in the case of Mohanbhai Pamabhai (supra) and came to the conclusion that the ratio laid down by the Hon'ble Supreme Court in the case of Narayanappa v. Bhaskara Krishnappa (supra), although rendered in the context of registration of the relevant document, was equally applicable in the context of whether there was any relinquishment or extinguishment of interest of the partner on retirement. He submitted that the decision of Hon'ble Andhra Pradesh High Court in the case of CIT v. R.L. Raghukumar (supra) has been affirmed by the Hon'ble Supreme Court vide its decision CIT v. R. Lingmallu Raghukumar (2001) 247 ITR 801 (SC) keeping in view their decision in the case of Mohanbhai Pamabhai (supra). He contended that the two decisions of Hon'ble Bombay High Court in the case of Tribhuvandas G. Patel1 (supra) and H.R. Aslot (supra) thus have been impliedly overruled by the Supreme Court and since the decision of Hon'ble Bombay High Court in N.A. Mody's case was rendered relying on the said two decisions, the same also stands impliedly overruled by the Hon'ble Supreme Court.
8. To summarise his arguments, the learned counsel for the assessee submitted that the following principles emerge from the various decisions cited by him and contended that if the same are applied to the facts of the present case, there was no transfer within the meaning of Section 2(47) on the retirement of partners giving rise to capital gain.
(i) The consequences of retirement of a partner and dissolution of the firm are the same.
(ii) The case where lump sum consideration is received and a case where an account is taken of the assets and liabilities had both been considered by Bombay High Court and as pointed out above, the Andhra Pradesh High Court dissented from both and the decision of Andhra Pradesh High court now stands affirmed. It also may be stated that the Hon'ble Supreme Court in Tribhuvandas G. Patel v. CIT (1999) 236 ITR 515 (SC) has partly overruled the decision of the Bombay High Court in the case of Tribhuvandas G. Patel (supra) and preferred to follow their decision in Addl. CIT v. Mohanbhai Pamabhai (1987) 165 ITR 166 (SC). Because of this decision, it has now to be stated that retirement of a partner and dissolution of the firm stand on the same footing. This means that whether lumpsum is received or the amount is received in actual accounting, result is same.
(iii) When a partner retires from the firm, it is a case of realization of his right and not a case of extinguishment or relinquishment of his right. This is because the right of the partner itself is equivalent to getting a surplus on realization of the properties on notional basis deducting liabilities therefrom and getting a share in the surplus. Thus getting share of surplus may be on notional basis is nothing but realization of the right and not a relinquishment or extinguishment of the right. This has been sufficiently explained by the Gujarat High Court in Mohanbhai Pamabhai (supra) which decision has been affirmed by the Supreme Court.
9. The learned counsel for the assessee also relied on the Third Member decision of Pune Bench of Tribunal in the case of Aruna A. Bhat v. Asstt. CIT (2002) 75 TTJ (Pune)(TM) 675 : (2002) 81 ITD 218 (Pune)(TM) and submitted that in the identical facts and circumstances, the legal position as sought to be put forth by the assessee on a similar issue was accepted by the Division Bench in para No. 9 of the learned Accountant Member's order. He contended that the issue raised in the present appeal is squarely covered in favour of the assessee by the various decisions of Hon'ble apex Court and following the said decisions, this Bench has already taken a view which is in favour of the assessee.
10. The learned Departmental Representative, on the other hand, submitted that heavy reliance has been placed by the learned counsel for the assessee on the decision of Hon'ble Gujarat High Court in the case of Mohanbhai Pamabhai (supra) in support of assessee's case stating further that the same has been affirmed by the Hon'ble Supreme Court in (1987) 165 ITR 166 (SC) (supra). He submitted that the facts involved in the case of Mohanbhai Pamabhai (supra) before the Hon'ble Gujarat High Court were entirely different from the facts of the present case inasmuch as the interest of the assessee in the net value of assets of the firm was worked out in the said case by drawing accounts on the date of retirement and the retiring partners were settled on the basis of such valuation actually done. He contended that in the present case before the Tribunal, the assessee, however, has received a lumpsum amount on his retirement from the firm of M/s Mehta & Kakade Associates on account of release/surrender of his rights in the said firm which was evidenced by a retirement deed. He also contended that out of questions referred to the Hon'ble Gujarat High Court in the case of Mohanbhai Pamabhai (supra), question No. 3 related to an issue which was similar to the issue under consideration in the present appeal, but since the same was not considered and answered by their Lordships finally, the decision rendered by the Hon'ble Gujarat High Court in the said case has no application in the present case.
11. As regards the affirmation of the said decision of Hon'ble Gujarat High Court by the Hon'ble Supreme Court in (1987) 165 ITR 166 (SC) (supra), the learned Departmental Representative pointed out that the Hon'ble apex Court has simply relied on its decision rendered in the case of Sunil Sidharthbhai v. CIT (supra) while affirming the decision of Hon'ble Gujarat High Court without any further discussion. He contended that in the case of Sunil Sidharthbhai v. CIT (supra), the issue before the Hon'ble apex Court was relating to the introduction of capital asset by the partner in the firm and the retirement of a partner as well as receipt of lumpsum consideration by him on such retirement was not in issue before the Hon'ble Supreme Court. He contended that the decision of Hon'ble Gujarat High Court in the case of Mohanbhai Pamabhai (supra) and its affirmation by the Hon'ble Supreme Court in the case of Sunil Sidharthbhai (supra) are, therefore, of no help to the assessee in the present case.
12. The learned Departmental Representative further submitted that even in the case of L. Raghukumar (supra) before the Hon'ble Andhra Pradesh High Court, the facts involved were different and further their Lordships in their judgment rendered in the said case had distinguished the decision of Hon'ble Bombay High Court in the case of CIT v. Tribhuvandas G. Patel (supra) and CIT v. H.R. Aslot (supra) on facts. According to him, it therefore cannot be said that the affirmation of the decision of Hon'ble Andhra Pradesh High Court by the Hon'ble Supreme Court in the case of L. Raghu Kumar (supra) has in effect overruled even impliedly the decisions of Hon'ble Bombay High Court in the case of Tribhuvandas G. Patel (supra) and H.R. Aslot (supra) on which heavy reliance was placed by the Hon'ble Bombay High Court in its subsequent judgment rendered in the case of N.A. Mody (supra). He contended that in the case of N.A. Mody (supra) before the Hon'ble Bombay High Court, the retiring partner was paid a lumpsum consideration and as per the deed of retirement executed in the said case, the rights in the assets of the firm were specifically assigned by the erstwhile partners to the continuing partners. He contended that the mode of retirement as well as the method of settling the account of retiring partners was particularly different in the case of N.A. Mody (supra) and giving emphasis on this mode and method which was found to be a decisive point, the Hon'ble Bombay High Court held that there was a transfer by the retiring partners of their interest in the firm in favour of continuing partners within the meaning of transfer under Section 2(47) which includes 'relinquishment of the assets' or 'the extinguishment of any right therein'. He contended that the Hon'ble Bombay High Court in the case of N.A. Mody (supra) has discussed its earlier decision in the case of Tribhuvandas G. Patel (supra) and H.R. Aslot (supra) as well as the decision of Hon'ble Gujarat High Court in the case of Mohanbhai Pamabhai (supra) and having regard to the particular mode of retirement adopted in the case before it which was different than the mode of retirement adopted in the case of Mohanbhai Pamabhai, (supra) took a different view from that of Hon'ble Gujarat High Court. He contended that the decision of Hon'ble Gujarat High Court in the case of Mohanbhai Pamabhai (supra) as well as that of Hon'ble apex Court in the case of Sunil Sidharthbhai (supra) have been discussed and distinguished by the Hon'ble Bombay High Court in the case of N.A. Mody giving specific reasons and, therefore, reliance of the learned counsel for the assessee on the said decision again is clearly misplaced. He contended that even the decision of Hon'ble Supreme Court in the case of Tribhuvandas G. Patel v. CIT (supra) was based on its earlier decisions (1985) 156 ITR 509 (SC) (supra) and (1987) 165 ITR 166 (SC) (supra) and since both these decisions have already been considered and distinguished by the Hon'ble Bombay High Court in the case of N.A. Mody, (supra) the same are of no help to the assessee in stating that the reliance by the Revenue on the decision of N.A. Mody (supra) was misplaced.
13. As regards the decision of Hon'ble Supreme Court in the case of Vania Silk Mills (P) Ltd. v. CIT (1981) 191 ITR 647 (SC) he submitted that the said decision was rendered in a different context and in the facts and circumstances of that case, a restricted meaning was given by the Hon'ble apex Court to the expression 'extinguishment of interest' used in Section 2(47). He contended that the larger Bench of Hon'ble Supreme Court in the case of CIT v. Mrs. Grace Collis (2001) 248 ITR 323 (SC) has disapproved the said decision of Division Bench in the case of Vania Silk Mills (P) Ltd. (supra) while holding that the meaning of the expression 'extinguishment of any right therein' used in Section 2(47) is wide and the same is not confined to transfer of any particular share. He contended that the surrender of rights in the interest of a firm by the retiring partners in favour of the continuing partners thus has to be considered in the light of this extended or wide meaning assigned by the larger Bench of the Supreme Court to the expression 'extinguishment of any right therein' in the case of Mrs. Grace Collis (supra) and in that sense the same would constitute 'transfer' within the meaning of Section 2(47) attracting the levy of capital gain tax. He contended that a similar issue arose for consideration before the Hon'ble Delhi High Court recently in the case of Bishan Lal Kanodia v. CIT (2002) 257 ITR 449 (Del) wherein the Hon'ble Delhi High Court concurred with the view expressed by the Hon'ble Bombay High Court in the case of N.A. Mody (supra) holding that the mode of retirement is a relevant consideration for deciding the issue about the taxability of amount received by retiring partner on retirement. As regards the decision of this Bench in the case of Aruna A. Bhat v. Asstt. CIT (supra), the learned Departmental Representative submitted that the decisions of Hon'ble Bombay High Court now relied upon in the present case by the Revenue were neither cited nor considered by the Tribunal while rendering the said decision and since the said decisions of Hon'ble jurisdictional High Court are directly applicable to the facts of the present case, the Tribunal is bound to follow the same.
14. Further referring to the decision of learned CIT(A) in the case of Mrs. Anitaben S. Mehta, the other partner who retired simultaneously with the assessee from the firm M/s Mehta & Kakade Associates on the same terms and conditions, rendered vide his order dt. 19th Feb., 2001, the learned Departmental Representative pointed out that the order of the AO holding the amount received by the retiring partner on retirement as liable to capital gain tax was supported by the learned CIT(A) on the basis of ratio laid down by the Hon'ble Supreme Court in the case of McDowell & Co. Ltd. v. CTO (1985) 154 ITR 148 (SC). He contended that since the facts and circumstances involved in the present case are identical to the case of Mrs. Anitaben S. Mehta, he also supports the order of the AO as well as the CIT(A) in the present case on this basis relying on the arguments raised on behalf of the Department in the case of Anitaben S. Mehta (ITA No. 415/PN/2001) while defending the aforesaid order of the learned CIT(A) dt. 19th Feb., 2001.
15. In the rejoinder, the learned counsel for the assessee submitted that no case was made out either by the AO or by the learned CIT(A) to support the Revenue's stand on the issue under consideration in the present case by applying the decision of Hon'ble Supreme Court in the case of McDowell & Co. (supra) and, therefore, the learned Departmental Representative was not correct in seeking to support the Revenue's case on this point at this stage before the Tribunal. He submitted that, in any case, he has already raised his arguments elaborately on the application of McDowell's case (supra) to the facts of the present case in the case of Mrs. Anitaben S. Mehta (ITA No. 415/PN/2001) and urged that the same may be considered if this alternative stand sought to be taken by the Revenue is entertained by the Tribunal at this stage.
16. We have considered the arguments of both the sides in the light of material available on record as well as the decisions cited at bar. It is observed that the order of the AO in treating the amount of Rs. 34,43,700 received by the assessee on his retirement from the firm of M/s Mehta & Kakade Associates to be liable to tax as long-term capital gain has been upheld by the learned CIT(A) mainly relying on the decision of Hon'ble Bombay High Court in the case of N.A. Mody v. CIT (supra) in which it was held that a lump sum consideration received on assignment of his share in a firm by partner on his retirement is liable for capital gain tax as there is transfer within the meaning of Section 2(47). For this proposition, the Hon'ble Bombay High Court had relied on its two decisions rendered earlier in the case of CIT v. Tribhuvandas G. Patel (supra) and CIT v. H.R. Aslot (supra). In this regard, the learned counsel for the assessee has contended that in the case of CIT v. L. Raghukumar (supra), the Hon'ble Andhra Pradesh High Court has expressed their dissent from the view taken by the Hon'ble Bombay High Court in the case of Tribhuvandas G. Patel (supra) and H.R. Aslot (supra) and since the decision of Hon'ble Supreme Court in its judgment (2001) 247 1TR 801 (SC) (supra), the decisions of Hon'ble Bombay High Court in the case of Tribhuvandas G. Patel (supra) and H.R. Aslot (supra) as well as its subsequent decision in the case of N.A. Mody (supra) following the same which has been heavily relied upon by the learned CIT(A), stand impliedly overruled by the Hon'ble Supreme Court. We find it difficult to agree with this contention of the learned counsel for the assessee. It is observed that the Hon'ble Andhra Pradesh High Court in the case of L. Raghukumar (supra) actually had distinguished the decisions of Hon'ble Bombay High Court in the case of Tribhuvandas G. Patel (supra) and H.R. Aslot (supra) on facts and there was no expression of any dissent from the main proposition propounded by the Hon'ble Bombay High Court which is evident from the relevant observations made by the Hon'ble Andhra Pradesh High Court in para No. 14 of its order which are reproduced below :
"Mr. Suryanarayana Murthy drew our attention to two decisions of the Bombay High Court in CIT v. Tribuvandas G. Patel (1978) 115 ITR 95 (Bom) and CIT v. H.R. Aslot (1978) 115 ITR 255 (Bom) taking a contrary view. In the first case, a lump sum amount was paid to the retiring partner and the question arose whether it amounted to a transfer under Section 2, Clause (47). The Bombay High Court drew a distinction between a case where a retiring partner gets his share of partnership after deducting the liabilities and his share of partnership on taking accounts on the footing of a notional sale of partnership assets and where a lump sum amount is paid in considerations of the partner retiring without any accounting being done. It was held that in a case where the partner is paid a particular amount of money as his share in the partnerships assets after accounting, it would not amount to a transfer, but where a lump sum amount is paid in consideration for his retirement in the partnership and assignment of his interest to the other partners it would be a transfer defined in Section 2, Clause (47). Referring to the terms of the retirement deed, it was held that there was a transfer as defined by Section 2, Clause (47) and hence liable to tax under Section 45 of the Act. The other decision of the Bombay High Court also turned on the interpretation of the retirement deed following the view taken in CIT v. Tribhuvandas G. Patel (supra). Thus in these two cases, the decision turned upon the facts of the said cases."
17. It is also observed that the dissent incidentally was expressed by the Hon'ble Andhra Pradesh High Court in its decision rendered in the case of L. Raghukumar (supra) from the view of the Hon'ble Bombay High Court taken in the case of Tribhuvandas G. Patel (supra) and H.R. Aslot (supra) to the effect that the position of a retiring partner, for capital gains tax purposes, could not be equated with that of a partner upon general dissolution since a clear distinction existed between the two concepts in as much as consequences flowing from each were entirely different. In the case of Tribhuvandas G. Patel, it was also held by the Hon'ble Bombay High Court that in the case of retirement of a partners, it is only that partner who goes out of the firm and remaining partners continue to carry on the business of a partnership firm whereas in the case of dissolution, the firm as such no more exists and the dissolution is between all the partners of the firm. It is with this view that the Hon'ble Andhra Pradesh High Court did not agree with the Hon'ble Bombay High Court and concurred with the view of Hon'ble Gujarat High Court in the case of CIT v. Mohanbhai Pamabhai (supra) that the position of a retiring partner could be equated with that of a general dissolution of partnership firm considering that the same was based on the decision of Hon'ble Supreme Court in the case of Narayanappa v. Bhaskara Krishnappa (supra). In the said case, a question arose before the Hon'ble apex Court whether a document recording the terms and conditions of dissolution which included a stipulation that one of the partners had given his shares in the machines, etc. and in the business and made over the same to the other partners was compulsorily regrsterable under Section 17(1)(c) of the Registration Act and the Hon'ble Supreme Court after analysing the relevant provisions of the Partnership Act observed as under :
"From a perusal of these provisions it would be abundantly clear that whatever may be the character of the property which is brought in by the partners when the partnership is formed or which may be acquired in the course of the business of the partnership, it becomes the property of the firm and what a partner is entitled to is his share of profits, if any, according to the partnership from the realization of his property, and upon dissolution of the partnership to a share in the money representing the value of the property. No doubt, since a firm has no legal existence, the partnership property will vest in all the partners and in that sense every partner has an interest in the property of the partnership. During the subsistence of the partnership, however, no partner can deal with any portion of the property as his own. Nor can he assign his interest in a specific item of the partnership property to anyone. His right is to obtain such profits, if any, as fall to his share from time to time and upon the dissolution of the firm to share in the assets of the firm which remain after satisfying the liabilities set out in Clause (a) and Sub-clause (i), (ii) and (iii) of Clause (b) of Section 48."
On the basis of the aforesaid observations, the Hon'ble Supreme Court held in the later portion of its judgment as under:
"......... his right during the subsistence of the partnership is to get his share of profits from time to time as may be agreed upon among the partners and after the dissolution of the partnership or with his retirement from partnership of the value of his share in the net partnership assets as on the date of dissolution or retirement after a deduction of liabilities and prior charges."
18. From the above, it is evident that both the situations, i.e., retirement of a partner and dissolution of a partnership firm were treated on equal footing by the Hon'ble Supreme Court in an entirely different context as further clarified by the Hon'ble Delhi High Court in the case of Bishan Lal Kanodia v. CIT (supra) in para No. 8 of its order, relevant portion of which is reproduced below :
"The equating of the two done by the Supreme Court in Addanki Narayana v. Bhaskara Krishnappa AIR 1966 SC 1300, was not for capital gains tax purposes but for considering the question whether the instrument executed on such occasion between the partners inter se required registration and could be admitted in evidence for want of registration. For capital gains tax purposes, the question assumes significance in view of the fact that under Section 47(ii) any distribution of assets upon dissolution of a firm has been expressly excepted from the purview of Section 45 while the case of a retirement of a partner from a firm is not so exempted and hence the question arises whether the retirement of a partner stands on the same footing as that upon a dissolution of the firm."
The Hon'ble Delhi High Court then proceeded to hold that a clear distinction exists between the two concepts, i.e., retirement of a partner and a dissolution of a firm by discussing the relevant provisions of the Partnership Act as under :
"In our view, a clear distinction exists between the two concepts, inasmuch as the consequences flowing from each are entirely different. In the case of retirement of a partner from the firm it is only that partner who goes out of the firm and the remaining partners continue to carry on the business of the partnership as a firm, while in the latter case the firm as such no more exists and the dissolution is between all the partners of the firm. In the Indian Partnership Act, the two concepts are separately dealt with. Sections 31 to 38 which occur in Chapter V deal with, the incoming and outgoing partners and some of the consequences of retirement of a partner are dealt with in Sub-sections (2) & (3) of Section 32 while some others are dealt with in Sections 36 and 37. Under Section 37, the outgoing partner or the estate of the deceased partner, in the absence of a contract to the contrary, would be entitled at the opinion of himself or his representatives to such share of the profits made since he ceased to be a partner as may be attributable to the property of the firm or to interest at 6 per cent per annum on the amount of his share in the property of the firm. The subject of dissolution of a firm and the consequences are dealt with in Chapter VI--Sections 39 to 55. Section 48 deals with the mode of settlement of accounts between partners upon dissolution and the rules of settlement of accounts between the partners mentioned therein are subject to agreement by partners, in other words, in the absence of any agreement made in that behalf, the rules mentioned in the section would apply. It would be interesting to mention that the Partnership Act nowhere contemplates or deals with the concept of any partial dissolution or a dissolution qua an individual partner, the concept indicated in Section 39 appearing in Chapter VI is a total dissolution between all the partners of the firm."
19. It is thus clear that the observations of the Hon'ble Supreme Court in the case of Narayanappa v. Bhaskara Krishnappa making no distinction between the retirement of a partner and the dissolution of a firm were recorded in an entirely different context and as held by the Hon'ble Delhi High Court, the same are not applicable for considering the question relating to capital gains tax. No doubt, a different view than that of Hon'ble Bombay High Court in the case of Tribhuvandas G. Patel (supra) and Delhi High Court in the case of Bishan Lal Kanodia (supra) was taken by the Hon'ble Andhra Pradesh High Court in the case of L. Raghukumar (supra) while holding that the decision of Hon'ble Supreme Court in Narayanappa v. Bhaskara Krishnappa which lays down the proposition of law unequivocally applies to the case of retirement of a partner in the context of taxability of the amount received on retirement as a long-term capital gain and there is no distinction between the retirement of a partner and dissolution of a firm even in this context and although the said decision of Hon'ble Andhra Pradesh High Court has been affirmed by the Hon'ble apex Court in (2001) 247 ITR 801 (SC) (supra), their Lordships have simply relied on the decision of Hon'ble Gujarat High Court in the case of CIT v. Mohanbhai Pamabhai (supra) which was affirmed by them in (1987) 165 ITR 166 (SC) (supra). In the case of Mohanbhai Pamabhai (supra), it was held by the Hon'ble Gujarat High Court that where a partner retires from a partnership and the amount of his share in the net partnership asset after deduction of liabilities and prior charges is determined on taking accounts in the manner prescribed by the relevant provisions of the partnership law, there is no element of transfer of interest in the partnership assets by the retiring partner to the continuing partner and specifically referring to this proposition propounded by the Hon'ble Gujarat High Court which was subsequently confirmed by them, their Lordships of Hon'ble Supreme Court affirmed the decision of Hon'ble Andhra Pradesh High Court in the case of L. Raghukumar (supra). It is a first and foremost principle for reviewing the binding nature of precedents that the precedent is an authority for what it actually decides and not what may remotely or even logically follow from it. In the case of CIT v. Sun Engineering Works (P) Ltd. (supra) the Hon'ble Supreme Court has held that it is neither desirable nor permissible to pick out a word or sentence from the judgment of the Court divorced from the context of the question under consideration and to treat it to be the law declared by the Court. It, therefore, cannot be said that the observations of the Hon'ble Andhra Pradesh High Court making no distinction between the retirement of a partner and dissolution of a partnership firm for the purpose of Capital gains tax have been affirmed by the Hon'ble Supreme Court and thus the contention of the learned counsel for the assessee that by the said decision of Hon'ble Supreme Court, the decision of Hon'ble Bombay High Court in the case of N.A. Mody (supra) as well as the other two decisions in the case of Tribhuvandas G. Patel and H.R. Aslot stand impliedly overruled, in our opinion, can not be accepted. In any case, equating the retirement of a partner with dissolution of a firm by the various Courts was done in the context of applicability of the provisions contained in Clause (ii) of Section 47 then existed in the statute and since the same dealing with the taxability of distribution of assets between the partners on dissolution as long-term capital gain in the case of a firm have since been omitted w.e.f. 1st April, 1988, and simultaneously Sub-section (4) in Section 45 has been inserted making the profits and gains arising from the transfer of a capital asset by way of distribution of capital assets on dissolution of a firm or otherwise chargeable to tax as the income of the firm, such equating appears to be irrelevant for deciding the present case involving asst. yr. 1995-96.
20. Reverting to the decision of Hon'ble Gujarat High Court in the case of Mohanbhai Pamabhai (supra) on which heavy reliance has been placed by the learned counsel for the assessee in support of assessee's case, it is observed that the said decision was also cited on behalf of the assessee before the Hon'ble Bombay High Court in the case of N.A. Mody v. CIT (supra) and their Lordships considered and dealt with the same elaborately in para Nos. 13 to 15 of its order as follows :
"13. Great emphasis was placed by Mr. Dwarkadas on the decision of Gujarat High Court in CIT v. Mohanbhai Pamabhai (supra). This was a case in which the assessee had retired from a firm leaving continuing partners. The terms and conditions of retirement were contained in the minutes. It was argued on behalf of the Revenue that when the assessee retired, the interest of each of the assessees in the partnership was extinguished and there was, accordingly, a transfer of interest within meaning of Section 2(47) of the IT Act, 1961. Relying upon the observations of the Supreme Court in the context of dissolution of the partnership, which the Gujarat High Court found to be equally applicable when a partner retired from a partnership, it was held that when a partner retired from a partnership and the amount of his share in the net partnership assets, after deduction of liabilities and prior charges, was determined on taking accounts on the footing of a notional sale of the partnership assets and was given to him, what he received was his share in the partnership and not any consideration for the transfer of his interest in the partnership to the continuing partners. His share in the partnership was worked out by taking accounts in the manner prescribed by the relevant provisions and it was this and this only, namely, his share in the partnership which he received in terms of money. Even in the artificially extended sense in which the word 'transfer' was defined in Section 2(47), there was no transfer of interest in the partnership assets involved when a partner retired from the partnership, It was not possible to contend that when a partner retired, there was a relinquishment or extinguishment of his interest in the partnership assets.
14. This decision of the Gujarat High Court was considered by a Division Bench of this Court in CUT v. Tribhuvandas G. Patel (supra). The facts of that case need to be briefly set out. The assessee had been a partner in a firm prior to his retirement therefrom. He has served notice of his intention to dissolve the firm. This was opposed. He then filed a suit for dissolution and accounts. The suit was settled out of Court under a deed. Thereunder, the assessee retired from the firm and the remaining partners continued its business. It was contended that the retirement of the assessee as a partner, the quantification of his share therein and the payment thereof to him did not result in the transfer of a capital asset inasmuch as; upon retirement, there was merely an adjustment of his rights. Reliance was placed upon the decision of the Gujarat High Court in Mohanbhai Pamabhai's case (supra). This Court observed that this was the only decision directly on the point at issue; but the question was whether, for capital gains tax purposes, the position of a retiring partner could be equated with that of a partner upon general dissolution. A clear distinction existed between the two concepts in as much as the consequences flowing from each were entirely different. In the case of retirement of a partner, it was only that the partner who went out of the firm and the remaining partners continued to carry on the business of the partnership as a firm : in the latter case, the firm as such no more existed and the dissolution was between all the partners of the firm. A retiring partner while going out and receiving what was due to him in respect of his share might assign his interest by a deed or he might, instead of assigning his interest, take the amount due to him from the firm and give a receipt for the money and acknowledge that he had no claims on his copartners. The former type of transaction would be regarded as a sale or release or assignment of his interest by a deed while the latter type of transaction would not. In other words, it was clear that the retirement of a partner could take either of two forms and the question whether the transaction would amount to an assignment or release of his interest in favour of the continuing partners or not would depend upon what particular mode of retirement was employed. If, instead of quantifying his share by taking accounts on the footing of notional sale, parties agreed to pay a lump sum in consideration of the retiring partner assigning or relinquishing his share or right in the partnership and its assets in favour of the continuing partners, the transaction would amount to a transfer within the meaning of Section 2(47) of the IT Act, 1961. In the document, the assessee stated that he did hereby assign and release unto the continuing partners and each of them all his right, title interest and undivided half share in the partnership firm.....' Having regard to the particular mode employed to effect and bring about the retirement of the assessee from the partnership, the transaction had to be regarded as amounting to a 'transfer' within the meaning of Section 2(47) inasmuch as the assessee could be said to have assigned, released and relinquished his interest and share in partnership and its assets in favour of the continuing partners. The transaction could not be regarded as amounting to the distribution of capital assets upon the dissolutions of a firm.
15. The decision of the Gujarat High Court in Mohanbhai Pamabhai's case (supra) and of this Court in Tribhuvandas Patel's case (supra) were cited before this Court in the case of CIT v. Patel Bros. (1984) 145 ITR 614 (Bom). The question was whether the assessee-firm was entitled to have the extra payment made by it to the estate of a deceased partner towards his share in the appreciation in the value of shares added to the original cost of the shares for the purpose of computation of capital gains arising on the sale of those shares. It was noted that the real question on which the decision would turn was : what was the effect of the death of the deceased partner or what was the effect of the retirement of a partner. The Court said that in the case of retiring partner or an outgoing partner or in the case of death of a partner, all that the outgoing or retiring partner or the estate of the deceased partner would be entitled to was his proportion of the partnership assets after they had been realized and converted into money and the debts and liabilities of the partnership had been paid and discharged. The view taken by this Court in Tribhuvandas Patel's (supra) case was that when there was no document or assignment by which the retiring partner proposed to assign or release to the surviving or continuing partners, there was no question, of a transfer of a capital asset. In the particular case, no document had been executed and, therefore, the Court was not called upon to consider any document executed between the parties. Had there been a document, its terms would have been required to be considered. The effect of the decision in Tribhuvandas Patel's case (supra) was that it was the mode in which the retirement had been brought about which determined the question whether there was a transfer or not. If there was to be an acquisition of interest, there had to be a mode by which the interest must pass, If there was no process by which a transfer of interest could be said to have taken place in respect of the interest of the deceased partner, but what the estate of the deceased partner got was only the money value of his interest, it had to be held that in the case of retirement or the death of a partner where moneys were paid to the retiring partner or to the estate of the deceased partner in lieu of his share in the partnership, there was no acquisition of any interest by the surviving or continuing partners."
21. From a perusal of the aforesaid observations of the Hon'ble Bombay High Court, it is quite evident that the factual position involved in the case of Mohanbhai Pamabhai was found to be distinguishable by their Lordships from the facts in the case of N.A. Mody inasmuch as the mode of retirement adopted in the case of Mohanbhai Pamabhai was different in the sense that the amount of retiring partner's share in the net partnership assets after deduction of liabilities and prior charges was determined on taking accounts and as further observed in para No. 19 of the order, although there was a document in the form of minutes under which the partner retired, the same contained no assignment of his interest to the continuing partner. The Hon'ble Bombay High Court thus laid great emphasis on the particular mode employed to effect and bring about the retirement of the assessee from the partnership and having regard to the fact that lumpsum consideration was received by the retiring partner in the case of N.A. Mody (supra) as consideration for assignment of his share in a firm to the retiring partners, came to the conclusion that there was a transfer within the meaning of Section 2(47) giving rise to capital gain.
22. Before us, the learned counsel for the assessee "has contended that the decision of Hon'ble Gujarat High Court in Mohanbhai Pamabhai's case (supra) has been affirmed by the Hon'ble Supreme Court in (1987) 165 ITR 166 (SC) (supra) relying on their earlier decision in the case of Sunil Sidharthbhai v. CIT (supra) in which it was held that what a partner gets upon dissolution or upon retirement is realizations of pre-existing right or interest. He has also contended that it was explicitly held by the Hon'ble Supreme Court on page No. 519 of the report that on retirement and dissolution, there is no transfer but realization of a pre-existing right and, therefore, the said decision was equally relevant in the context of retirement of a partner from the firm although a question relating to introduction of assets by the partner in the firm was raised for consideration before the Hon'ble Supreme Court in the said case. In this regard, it is observed that the issue relating to the transfer of assets within the meaning of Section 45 on partner bringing his individual assets into partnership as capital contribution was under consideration before the Hon'ble Supreme Court in the case of Sunil Sidharthbhai (supra) and since it was impossible to conceive of evaluating the consideration acquired by the partner when he brings his personal asset into the partnership firm when neither the date of dissolution or retirement could be envisaged nor could there be any ascertainment of liabilities and prior charges which might not have even arisen yet, the Hon'ble Supreme Court held that the consideration which a partner acquires on making over his personal asset to the partnership firm as his contribution to its capital cannot fall within the terms of Section 48 and since that provision was fundamental to the computation machinery incorporated in the scheme relating to the determination of the charge provided in Section 45, such a case must be regarded as falling outside the scope of taxation altogether. It is pertinent to note here that the said decision of Hon'ble Supreme Court in the case of Sunil Sidharthbhai (supra) was also cited on behalf of the assessee in the case of N.A. Mody (supra) and the same was dealt with by their Lordships in para No. 12 of their judgment as under :
"Mr. Dwarkadas submitted that the same position in law obtained upon the retirement of a partner, in other words, that there was only a mutual adjustment of rights between the partners and no transfer of assets. He argued that the Supreme Court had equated the position in law as on dissolution with that as on retirement. He placed reliance, in this behalf, upon an unreported judgment of the Supreme Court dt. 27th Sept., 1985, in Civil Appeal No. 1841 of 1981--Siddharthbhai v. CIT reported at (1985) 156 ITR 509 (SC). The question before, the Supreme Court was whether a transfer took place within the meaning of Section 2(47) of the IT Act, 1961, of an asset contributed by a partner as capital to the firm in which he was a partner. It was submitted that there was an analogy between the position obtaining when a personal asset was brought by a partner into a partnership as his contribution to its capital and that which arose when on dissolution or retirement, a share in the partnership asset passed to the erstwhile-partner. The Supreme Court noted that it had been held by itself and the Punjab and Haryana, Kerala and Gujarat High Courts that when a partner retired or the partnership was dissolved, what the partner received was his share in the partnership. The position was different the Supreme Court said, when a partner brought his personal assets into the partnership as his contribution to its capital. An exclusive interest in an asset before it entered the partnership was reduced on such entry into a shared interest. The Supreme Court did say that what the partner got upon dissolution or retirement was the realization of a pre-existing interest, but it said so in considering the aforementioned argument. The judgment cannot be read as a finding that the position in law as on dissolution and as on retirement was the same."
A perusal of the aforesaid observations of the Bombay High Court reveals that the relevant observations to the effect that what the partner got upon dissolution or retirement was the realization of the pre-existing asset were made by the Hon'ble Supreme Court while dealing with a specific argument raised in the context of a question raised in the said case as to whether a transfer took place within the meaning of Section 2(47) on an asset contributed by a partner as capital to the firm in which he was a partner and, therefore, as held by the Hon'ble Bombay High Court, the said judgment cannot be read as a finding that the position in law as on dissolution and as on retirement was the same.
23. Before us, reliance has been placed by the learned counsel for the assessee on the decision of Hon'ble Supreme Court in the case of Vania Silk Mills (P) Ltd. v. CIT (supra) wherein the following observations were recorded by their Lordships in para No. 8 of their judgment:
"8. So also when a partner retires from the partnership what he receives is his share in the partnership which is worked out and realized. It does not represent consideration received by him as a result of the extinguishment of his interest in the partnership assets. He has no share in any particular asset of the firm. Therefore, there is no transfer of interest in any particular asset of the firm on account of the receipt of his share by a retired partner. As held in CIT v. Mohanbhai Pamabhai (1973) 91 ITR 393 (Guj) no part of the amount received by the assessee as a retired partner is assessable to capital gains tax under Section 45."
In this regard, it is observed that the question before the Hon'ble Supreme Court in the said case was whether there was an extinguishment of right in the asset on loss of the same on account of fire within the meaning of Section 2(47) and the insurance claim received by the assessee from the insurance company as compensation was liable to capital gain tax on such extinguishment of right which was not brought about by any transfer and in this context it was held by the Hon'ble Supreme Court that in the case of damage or destruction or loss of asset, there is no transfer of it in favour of a third party and thus there was no extinguishment of any rights therein within the meaning of Section 2(47) since such extinguishment envisaged in Section 2(47) is confined to extinguishment of right on account of transfer and cannot be extended to mean any extinguishment of right independent of or otherwise than on account of transfer. It is thus clear that the issue involved in the case of Vania Silk Mills (P) Ltd. (supra) was entirely different and the aforesaid observations recorded by the Hon'ble Supreme Court were not in the context of issue which was directly involved in the said case for consideration of Hon'ble apex Court. In any case, the larger Bench of Hon'ble Supreme Court in their subsequent judgment rendered in the case of CIT v. Grace Collis and Ors. (2001) 248 ITR 323 (SC) had an occasion to consider the decision rendered by their Division Bench in the case of Vania Silk Milk (P) Ltd. (supra) and disapproved the aforesaid proposition laid down therein for the following reasons given in para No. 13 of their order :
"13. We have given careful thought to the definition of 'transfer' in Section 2(47) and to the decision of this Court in Vania's case (supra). In our view, the decision clearly contemplates the extinguishment of rights in a capital asset distinct and independent of such extinguishment consequent upon the transfer thereof. We do not approve, respectfully, of the limitation of the expression 'extinguishment of any rights therein to such extinguishment on account of transfers or to the view that the expression 'extinguishment of any rights therein' cannot be extended to mean that extinguishment of rights independent of or otherwise than on account of transfer. To so read the expression does include the extinguishment of rights in a capital asset independent of and otherwise than on account of transfer."
24. Keeping in view the reasons given hereinabove and after taking into consideration the text and context of all the decisions relied upon by both the sides in the present case, we find it difficult to accept the contention of the learned counsel for the assessee that the consequences of retirement of a partner and dissolution of the firm stand on equal footing for the purpose of chargeability of capital gains tax and as already observed, equating these two positions even otherwise would not be of any help in the present case after omission of Clause (ii) of Section 47 and insertion of Section 45(4). We also, do not find merits in his contention that when a partner retires from the firm, it is a case of realization of his pre-existing rights and not the case of extinguishments or relinquishment of his rights within the meaning of Section 2(47), since as already discussed, observations to this effect were made by the Courts in the different context and as held by the Hon'ble Bombay High Court, the same cannot be applied or read as a proposition of law in the context of taxability of amount received on retirement as long-term capital gain. We also do not agree with his contention that the mode of retirement which was held to be of great significance while considering a similar issue by the Hon'ble Bombay High Court in the case of N.A. Mody (supra) is not relevant as held by Hon'ble Andhra Pradesh High Court in the case of L. Raghukumar (supra) and as stated to be impliedly affirmed by the Hon'ble Supreme Court, As a matter of fact, it appears from the decisions relied upon by the learned counsel for the assessee that neither the Hon'ble Supreme Court nor the other High Courts have disapproved the proposition laid down by the Hon'ble Bombay High Court having regard to the particular mode of retirement. On the contrary, the Hon'ble Delhi High Court in its recent judgment in the case of Bishan Lal Kanodia v. CIT (supra) has concurred with the said proposition propounded by the Hon'ble Bombay High Court in the case of N.A. Mody (supra) after considering the relevant provisions of Partnership Act in para Nos. 8 and 9 of its order as follows :
"Further, under Section 32, which occurs in Chapter V, retirement of a partner may take any form as may be agreed upon between the partners and can occur in three situations contemplated by Clauses (a), (b) and (c) of Sub-section (1) of Section 32. It may be that upon retirement of a partner his share in the net partnership assets after deduction of liabilities and prior charges may be determined on taking accounts on the footing of notional sale of partnership assets and be paid to him but the determination and payment of his share may not invariably be done in that manner and it is quite conceivable that, without taking accounts on the footing of notional sale, by mutual agreement, a retiring partner may receive an agreed lump sum for going out as and by way of consideration for transferring or releasing or assigning or relinquishing his interest in the partnership assets to the continuing partners and if the retirement takes this form and the deed in that behalf is executed, it will be difficult to say that there would been no element of 'transfer' involved in the transaction.
9. A couple of things emerge clearly from the aforesaid passages. In the first place, a retiring partner while going out and while receiving what is due to him in respect of his share, may assign his interest by a deed or he may instead of assigning his interest, take the amount due to him from the firm and give a receipt for the money and acknowledge that he had no more claim on his copartners. The former type of transactions will be regarded as sale or release or assignment of his interest by a deed attracting stamp duty while the latter type of transaction would not. In other words, it is clear, the retirement of a partner can take either of two forms, and apart from the question of stamp duty, with which we are not concerned, the question whether the transaction would amount to an assignment or release of his interest in favour of the continuing partners or not would depend upon what particular mode of retirement is employed and as indicated earlier, if instead of quantifying his share by taking accounts on the footing of notional sale, parties agree to pay a lump sum in consideration of the retiring partner assigning or relinquishing his share or right in the partnership and its assets in favour of the continuing partners, the transaction would amount to a transfer within the meaning of Section 2(47) of the Act."
25. Having regard to the elaborate reasons given by the Hon'ble Delhi High Court in its aforesaid judgment to further support the view taken by the Hon'ble Bombay High Court in the case of N.A. Mody (supra) as well as considering the specific basis on which the Hon'ble Bombay High Court proceeded to draw an analogy in the case of N.A. Mody (supra) we find that the legal position which emerges from the analysis of the said decision can be summarized as under :
(1) Retirement of a partner could take either of two forms and the question whether the transaction would amount to an assignment or release of his interest in favour of the continuing partners or not would depend upon what particular mode of retirement was employed. If, instead of quantifying his share by taking accounts on footing of notional sale, parties agree to pay a lump sum in consideration of the retiring partner assigning or relinquishing his share or right in the partnership and its assets in favour of the continuing partners, the transaction would amount to a transfer within the meaning of Section 2(47).
(2) A retiring partner while going out and receiving what is due to him in respect of his share might assign his interest by a deed or he might, instead of assigning his interest, take the amount due to him from the firm and give a receipt for the money and acknowledge that he has no claims on his copartners. The former type of transaction would be regarded as a sale of release or assignment of his interest by a deed while the latter type of transaction would not.
26. In the present case, it is observed that both the situations contemplated by the Hon'ble Bombay High Court in the case of N.A. Mody (supra) to make the amount received by the retiring partner liable to capital gain tax were obtained in as much as the retiring partners had assigned their interest in the partnership firm specifically by a deed of retirement executed in writing to the continuing partners and consideration for the same was agreed to be paid to them in lumpsum. This being so, we are of the opinion that the decision of Hon'ble Bombay High Court was clearly applicable to the facts of the present case and there was no infirmity in the impugned order of the learned CIT(A) upholding the action of the AO in subjecting the amount received by the assessee on retirement from a firm to tax as long-term capital gain relying on the said decision of Hon'ble jurisdictional High Court.
27. Before us, the learned counsel for the assessee has also cited the decision of this Bench in the case of Mrs. Aruna A. Bhat v. Asstt. CIT (supra) wherein the two members constituting Division Bench decided a similar issue in favour of the assesses in para No. 9 of the order as follows :
"9. We have considered the rival submissions and perused the facts on record. It is noted that the AO has not challenged the genuineness of the partnership deed or the recitals in various deeds. This fact is clear from the observations of the CIT(A) in para 13.1 of his order when he states, ' The AO is also of the view that partnership is not 'sham' or an 'arrangement'.' The AO has accepted the fact that the amount was received on retirement. He, however, took a legal stand that the retirement amounts to transfer and relying heavily on the judgment of the Bombay High Court in Tribhuvandas G. Patel (supra) held that the amount is liable to capital gains tax. The Hon'ble Supreme Court in Mohanbhai Pamabhai (supra) has confirmed the decision of the Gujarat High Court in Mohanbhai Pamabhai's case (supra) that when a partner retired from the firm and received his share of an amount calculated on the value of the net partnership assets including goodwill of the firm, there was no transfer of interest of the partner in the goodwill, and no part of the amount received by him would be assessable as capital gains under Section 45 of the IT Act, 1961. The Hon'ble apex Court again in the case of Tribhuvandas G. Patel v. CIT (1999) 236 ITR 515 (SC), Mowing the earlier judgment in Mohanbhai Pamabhai (supra) partly reversed the decision of the Bombay High Court in Tribhuvandas G. Patel ease (supra) relied upon by the AO. Thus, the AO's order has no legal legs to stand."
From a perusal of the aforesaid observations of the Tribunal, it is evident that the decision of Hon'ble Bombay High Court in the case of N.A. Mody (supra) was not cited before the Tribunal and it, therefore, had no occasion to consider the applicability of the same to the facts of the said case. In the present case, however, heavy reliance has been placed by the Revenue on the said decision and having come to the conclusion that the said decision of Hon'ble jurisdictional High Court is squarely applicable to the facts of the case, we are bound to follow the same. Moreover, it is also observed a Special Bench of the Tribunal was constituted at Bangalore to decide a similar issue and in it's decision rendered in the case Mrs. Arathi Shenoy and Ors. v. Jt. CIT (2000) 69 TTJ (Bang)(SB) 779 : (2000) 75 ITD 100 (Bang)(SB), it was held by the Tribunal that interest in a firm is an asset as any other asset as recognized by the Act that defined a capital asset to include extinguishment of interest and the partners having surrendered/extinguished their rights in such asset on retirement from the firm, there was a transfer within the meaning of Section 2(47) giving (rise) to capital gain exigible to tax. Explaining further, the Tribunal observed that in situation where 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 interest have been valued at the market price and when this price exceeds the cost, Section 45 comes into operation to treat the difference between the market price and the cost being gains on account of transfer of capital asset leading to levy of tax on such capital gains. It was, therefore, held by the Tribunal in the said case that the outgoing partners of the firm having surrendered their rights and interest in the firm in consideration of the amount paid to them by the other partners who took over the business in an auction in accordance with the terms of the partnership deed, there was a transfer of capital asset and the resultant capital gain was liable to tax as long-term capital gain in the hands of each partner.
28. Before us, the learned Departmental Representative has made an attempt to support the orders of the authorities below on the issue under consideration by stating that the ratio laid down by the Hon'ble Supreme Court in the case of McDowell & Co. Ltd. v. CIT (supra) is squarely applicable to the facts of the case. In this regard, he has relied on the decision of learned CIT(A) dt. 19th Feb., 2001, in the case of Smt. Anitaben S. Mehta, the other partner who retired simultaneously with the assessee from the firm of Mehta & Kakade Associates on the identical terms and conditions. It is, however, observed that neither the AO nor the learned CIT(A) have considered the applicability of the said decision of Hon'ble Supreme Court in the case of McDowell & Co. Ltd. (supra) to the facts of the present case in their orders. In any case, the order of the learned CIT(A) dt. 19th Feb., 2001, in the case of Smt Anitaben S. Mehta relied upon by the learned Departmental Representative has been set aside by us on this issue by our order of even date passed in ITA No: 415/PN/2001.
29. Before we part with our order, we may place on record our appreciation for the efforts made by the learned representatives of both the sides especially Mr. G.S. Singh, the learned CIT-Departmental Representative in raising elaborate arguments which have helped us in analysing the legal position emanating from various judicial pronouncements on the issue under consideration and in applying the same to the facts of the present case.
30. In the result, the appeal of the assessee stands dismissed.