1. In this appeal, the grievance of the assessee relates to disallowance of Rs. 40,000 as value of the share of goodwill in a firm, Rs. 55,950 as value of the assessee's share in the said firm and Rs. 26,561 as interest by the ITO and confirmed by the Commissioner (Appeals).
2. The assessee-appellant, his son Dilip Jadavji Kathrani and seven others were partners in the firm Asian Chemical Works under the deed of partnership dated 12-11-1971. It was a partnership at will. Some disputes arose between the assessee and his son on the one hand and the other partners on the other hand and on 10-8-1974, a notice of dissolution of the partnership with effect from 16-8-1974 was issued to the other seven partners on behalf of the assessee and his son. On the failure of the said partners to dissolve the partnership, the assessee and his son instituted on 30-9-1974 a suit being No. 924 of 1974 in the ordinary original jurisdiction of the Bombay High Court for a declaration that the partnership stood dissolved with effect from 16-8-1974 and other consequential reliefs. In the meantime, one of the partners, Mavji Ambaram Kathrani died on 23-9-1974. By a consent order dated 17-1-1975, the disputes and differences between the parties were referred to the mediation of two solicitors, Shri R.A. Gagrat and Shri M.L. Bhakta, who gave their decisions on 30-9-1976. In pursuance "of this decision of the mediators, the indenture dated 31-3-1977 was executed by the assessee, his son and the other seven partners of the dissolved firm. Under the terms of this deed, the assessee received from the other partners of the partnership firm Asian Chemical Works the sum of Rs. 1,22,511 on the following heads : (i) Share of goodwill of the firm 40,000(ii) Share in appreciation in the value or raw materials 9,032(iii) Share in the appreciation in the value of land and buildings 40,669(iv) Share in the appreciation in the value of machinery and furniture 4,680(v) Share in the appreciation in the value of motor vehicles 1,569 55,950(vi) Interest payable on various Before the ITO it was the contention of the assessee that the above amounts were received by him on dissolution of the partnership firm Asian Chemical Works under the indenture, dated 31-3-1977, which was a deed of dissolution of the said partnership and were, therefore, not chargeable to income-tax under Section 47(ii) of the Income-tax Act, 1961 ('the Act'). The ITO was of the opinion "there has been no division of the partnership assets and the Court (sic) had only directed that the assessee should be paid only the value of appreciation in respect of raw materials, land and building, machinery and furniture and motor vehicles belonging to the firm ...." This view of the ITO was upheld by the IAC in the directions given under Section 144B(4) of the Act. Accordingly, he disallowed the assessee's claim in respect of these amounts.
3. An appeal was preferred against this decision. The Commissioner (Appeals) held that "there was only a retirement of the appellant and Shri Dilip Jadavji Kathrani from the partnership firm of Asian Chemical Works". He was of the opinion that there was a gain to the extent of Rs. 95,950 as a result of transfer of capital asset. He, however, directed the ITO to bring this amount to tax as long-term capital gain.
He did not discuss the claim with regard to the interest of Rs. 26,561 but, in a supplementary order, dated 19-7-1982, held that "it would partake the character of interest only and, hence, was rightly brought to tax by the ITO under the head 'Income from other sources' ".
4. In this appeal, the assessee challenges these decisions of the Commissioner (Appeals). It has been contended on behalf of the assessee that there was dissolution of the firm under the indenture dated 31-3-1977 in pursuance of the decision of the mediators dated 30-9-1976 and, that the amounts paid under three heads were in effect really one payment as value of the assessee's share on dissolution of the firm and as such these were not liable to income-tax under Section 47(ii) read with Section 45 of the Act. This contention, raised on behalf of the assessee-appellant, has been seriously opposed on behalf of the department. The departmental representative, however, agreed with the learned lawyer for the assessee that all these payments under different heads except interest were really one payment as value of the assessee's share in the partnership firm, though according to him, on retirement of the assessee and his son. As such, it is no longer necessary to consider whether these payments under different heads really constitute one payment or not as it has been agreed upon by both the sides.
5. It was, however, strenuously contended by the departmental representative that under the indenture dated 31-3-1977 there was retirement of the assessee and his son Dilip Kathrani from the partnership firm and there was no dissolution of the firm as contended by the assessee. In support of this contention, he referred to para 10 of the partnership deed, dated 12-11-1971 and argued that the notice dated 10-8-1974 was a notice for retirement in accordance with the provision of this para in the partnership deed. In support of his contention he also relied upon the cases in CIT v. Tribhuvandas G.Patel [1978] 115 ITR 95 (Bom.) and CIT v. H.R. Aslot [1978] 115 ITR 255 (Bom). He contended that according to the notice dated 10-8-1974, the retirement was to take effect from 16-8-1974 but was postponed to 23-9-1974 for the convenience of the parties. All these contentions have been opposed by the learned lawyer for the assessee.
6. Para 10 of the partnership deed dated 12-11-1971 required a partner to give one month's previous notice in case he wanted to retire from the partnership. The learned lawyer for the assessee correctly pointed out that by notice dated 10-8-1974, the assessee and his son gave a week's notice and not a notice of one month as required by para 10 of the partnership deed. He also correctly pointed out that the notice was categorical that the assessee and his son wanted the dissolution of the partnership and not their retirement therefrom. The copy of the plaint of Suit No. 924 of 1974 filed in the original side of the Bombay High Court is also quite clear in showing that it was a suit for dissolution and not retirement. The prayers therein are also quite specifically for the dissolution of the partnership. Reference to the mediators was made in the said suit and in (heir decision they clearly stated that the date of dissolution of the firm should be taken as 23-9-1974. In pursuance of and in accordance with this decision, the indenture dated 31-3-1977 was executed between the assessee, his son and the erstwhile partners of the firm. The departmental representative drew our attention to page 5 of this indenture dated 31-3-1977, wherein it was stated "and Mr. Jadavji and Mr. Dilip both hereby release and relinquish unto the parties of the 3rd part to the 9th part all their share right title and other interest whatsoever in the said partnership business and . . . ." and contended that this goes to show that there was retirement of the assessee and his son from the partnership firm.
We are unable to accept this view because in para 14 of the decision of the mediators, it was clearly stated that "the partnership accounts had been made up, adjusted and settled between the parties hereto up to the date hereof". The operative part of this indenture dated 31-3-1977 states (at page 5) "now, this indenture witnessth : that in pursuance of the aforesaid decision of the mediators the said partnership existing between the parties hereto stands dissolved as and from 23-9-1974". So the Commissioner (Appeals) should have come to the conclusion that there was dissolution of the firm because he himself stated in para 5 of his order that "dissolution in such a firm can be said to take place only when accounts are taken". Moreover, it has to be remembered that Mavji Ambaram Kathrani, one of the partners, died on 23-9-1974. The partnership deed dated 12-11-1971 clearly shows that it was a partnership at will and that there was no provision excluding dissolution of the firm in case of death of a partner. As such, under the provision of the Partnership Act, there was, in law, dissolution of the partnership firm with effect from 23-9-1974 on the death of Mavji Ambaram Kathrani. In view of the law as contained in the Partnership Act, the partners of the firm could not treat it to be a case of retirement instead of dissolution even if they intended to do so. The cases relied upon by the departmental representative deal with retirement of a partner and as such, have no application.
7. For the reasons stated above and on a careful consideration of the facts and circumstances of the case, we are of the opinion that there was a dissolution of the partnership firm with effect from 23-9-1974 as claimed by the assessee.
8. In view of our above finding that there was a dissolution of the firm, the finding of the Commissioner (Appeals) that there was transfer of capital gains on the retirement of the assessee can no longer stand.
It seems he was under the impression that in order to bring the case under Section 47(z7), there has to be physical distribution of the capital assets and that is why he held that the amount received by the appellant would be taxable as capital gain. In the case reported in CIT v. Bankey Lal Vaidya [1971] 79 ITR 594 the Supreme Court categorically stated that : In the course of dissolution, the assets of a firm may be valued and the assets divided between the partners according to their respective shares by allotting the individual assets or paying the money value equivalent thereof. This is a recognised method of making up the accounts of a dissolved firm. In that case the receipt of money by a partner is nothing but a receipt of his share in the distributed assets of the firm.
So, there cannot be any doubt that what the assessee received under the three heads was really value of his share in the partnership firm on distribution of capital assets on the dissolution of the firm within the meaning of Section 47(ii) and as such was not taxable. So, we are of the opinion that the contention of the department that it was a case of retirement of the assessee from the firm and that the amount received by him is taxable has to be overruled.
9. The learned lawyer for the assessee had made alternative submissions before us in case we held it to be a case of retirement and not of dissolution. But as we have come to the finding that it was a case of dissolution of the firm, we do not propose to discuss the alternative arguments submitted by the learned lawyer for the assessee.
10. As a result, the appeal succeeds. The ITO is directed to exclude the amounts in dispute from the taxable income of the assessee in making the assessment.