1. The only issue in this appeal is whether the assessee, an individual, is liable to be taxed on capital gains arising on the amount received on retirement from a partnership firm.
2. The assessee along with two other persons had purchased a piece of land in Vijayawada sometime in 1969. A theatre was constructed thereon.
The assessee and the two others formed themselves into a partnership and ran the business of cinema exhibitors in the theatre. A partnership deed was made out on 30-12-1972 only which recorded that the business had commenced on 7-4-1970. Each of the partners had one-third interest in the partnership firm.
3. The cost of the land which was jointly purchased by the three individuals did not find a place in the books of the firm. However, the cost of construction of the theatre was shown to be an asset of the firm in the books. Thus, the balance sheet of the firm reflected only the cost of the buildings and not the cost of the land.
4. On 10-7-1975, there was a change in the constitution of the firm.
Two others, Kilaru Vani and Anne Tulasamma, had joined the partnership.
The shares of the partners were reallocated. The assessee had one-fourth share in the profits and thus it was reduced from one-third share which he had earlier. We may note here certain peculiarities of the expressions used in the partnership deed since some arguments were based on the wordings. The preamble states : "Whereas the parties hereto 1, 2 and 3 who are the owners of the theatre have sold a portion of ownership in the theatre to Kilaru Vani wife of Madhusudana Rao and Anne Tulasamma wife of late Venkataratnam for Rs. 1,00,000 a share of 13 paise to each in the ownership of the theatre." 5. On 5-11-1980, the assessee entered into an agreement with the other four partners. As per this agreement, the assessee would cease to be a partner and he would relinquish his interest in the partnership assets, especially the site, the plant, electrical installations, etc., and the amounts due to the firm. The continuing partners should pay to the assessee a sum of Rs. 3,75,000. These amounts were paid either by demand draft or by adjustment of the amounts due by the assessee to the firm and thereafter a document was executed on 30-1-1981. As per this document, the assessee ceased to have any further interest in the partnership firm.
6. On these facts, the ITO came to a finding that there was a transfer of a capital asset by the assessee giving rise to capital gains. He held that these facts would show that there was a transfer within the meaning of Section 2(47), read with Section 45 of the Income-tax Act, 1961 ('the Act'). He further pointed out that the interest of a partner in a firm is property. That property was transferred by the assessee when his interest in the partnership stood terminated on his receipt of the stipulated amount. The ITO went further and gave a finding that it was not a case of retirement from the partnership but a case where the assessee disposed of his share in the partnership by means of a registered relinquishment deed of 30-1-1981. He relied on the decision of the Bombay High Court in the case of CIT v. Tribhuvandas G. Patel [1978] 115 ITR 95. In computing the capital gains, he took the full value of consideration at Rs. 3,75,000 and reduced therefrom the share of the assessee in the cost of the land. Thus, he arrived at capital gains of Rs. 3,50,248.
7. The assessee appealed. The Commissioner agreed with the ITO. He pointed out that the site was not transferred to the firm and the assessee had only relinquished his share in the other assets of the firm. The site remained outside the firm's accounts up to 31-1-1981.
Citing the decision of the Bombay High Court noted by the ITO, he drew a distinction between a case where a retiring partner got his share of the assets after the deduction of liabilities and prior charges after taking of accounts on the footing of a notional sale and a case where a lump sum payment is made in consideration of the partner retiring without any accounting being done. Where a lump sum payment is made without adjustment of accounts, the transaction amounts to a transfer.
He then pointed out that there was no determination or taking of accounts at the time of retirement. There was no determination of the share of the retiring partner in the assets and liabilities of the firm. In fact, the books of account of the firm did not figure anywhere in this transaction. He once again pointed out that the site was never in the partnership accounts and it was brought in for the first time in the release deed. He then pointed out that the payment of Rs. 3,75,000 was effected by the continuing partner directly to the assessee. The firm was not involved in this transaction. In the course of his order, he distinguished the decision of the Andhra Pradesh High Court in the case of CIT v. L. Raghu Kumar [1983] 141 ITR 674, on which the assessee had heavily relied.
8. The assessee is on further appeal. Shri Satyanarayana, the learned counsel for the assessee, submitted that this was not a case of sale or transfer. It was a case of retirement, and as per the decision of the Andhra Pradesh High Court in L. Raghu Kumar's case (supra), there is no distinction between retirement and dissolution. The law applicable is the same for both. He then submitted that on the retirement from a partnership, the retiring partner receives what his share is in respect of the assets and liabilities of the firm. He is receiving only what was due to him under the partnership deed. Therefore, there is no transfer at all in such cases. A number of authorities are available on this point and the most recent pronouncement of the Supreme Court on this case is Malabar Fisheries Co. v. CIT [1979] 120 ITR 49. He then submitted that the Bombay High Court's decision referred to by the ITO and the Commissioner had been specifically dissented from by the Andhra Pradesh High Court in the case of L. Raghu Kumar (supra).
9. Coming to some of the factual findings of the Commissioner, he submitted that it is not a fact that the land on which the building is constructed does not belong to the partnership firm. According to him, there was some difficulty initially for the partners in drawing up the proper books of account since some of the old documents were misplaced.
He then brought to our notice a narration in the first partnership deed of 1972 where it has been stated that certain documents were misplaced and could not be traced. It was because of this that the value of the land could not be shown in the partnership deed. Nevertheless, according to him, the partners had treated the land as belonging to the firm only. He, however, admitted that it was brought into the books only after the retirement.
10. Shri Padmanabhan, for the department, submitted that it was not a case of retirement at all. It was a case of a partner transferring his interest in the partnership concern to the continuing partners. In support of this submission, he pointed out that no balance sheet was drawn up on the date of alleged retirement, no valuation of the assets was done, no profit ascertained and in fact nothing associated with retirement of a partner has been done. Under these circumstances, it could only be a case of a transfer as contemplated by the Bombay High Court in the case cited by the Commissioner. He then submitted that it is not correct to say that the Bombay High Court's decision has been dissented from by the Andhra Pradesh High Court. He pointed out that at page 680, the Andhra Pradesh High Court has held that the decision of the Bombay High Court turned on the facts of the case. What was dissented from was the distinction sought to be made between retirement of a partner and dissolution of a partnership. Shri Padmanabhan then submitted that as far as the land was concerned, it was not a property of the firm and the question of retirement or relinquishment did not at all arise. That was a case of one of the co-owners transferring his rights to the other co-owners and, therefore, it was a plain case of transfer. He then submitted that the firm had not made any payment to the assessee and all the payments had been made by the individual continuing partners. Thus, the transaction had nothing to do with the firm and, therefore, the case law regarding retirement and dissolution will not be applicable.
11. We have considered the submissions. The first issue we would decide is whether the land on which the cinema theatre was constructed belonged to the individuals as co-owners or it belonged to the firm. No doubt, the partnership books did not show this asset. But that by itself is not conclusive of this issue. The persons involved are partners and the firm. We have to see whether their conduct is consistent with the theory of co-ownership of the land. Shri Satyanarayana had submitted that the land was not shown in the books because the original documents were misplaced. This is supported by the narration in the partership deed of December 1972. The three persons who are signatories to that partnership deed had stated that they shall be the owners of the theatre. Now, normally it would be difficult to bifurcate the land from the building. If the parties have declared that they are the owners of the theatre, it means that they are the owners of not only the superstructure but also the land on which it is situated. The declaration in the partnership deed of 1972 was necessary because of the loss of the documents. That is why they made an averment that they are the owners of the theatre. Otherwise, it will not normally find a place in the partnership deed.
12. Apart from this, a normal conduct in respect of the ownership of land being different from the ownership of the superstructure would be the charging of ground rent. We do not find any such charge in the books of the partnership firm. It might be unnecessary so long as the three co-owners continued to be the partners. However, from 1975, there were five partners. If the department's theory is correct, at least from 1975 onwards, there should be charging of ground rent. The partnership deed between the five partners also throws some light on this point. We have given an extract of the preamble in an earlier paragraph. That preamble states that the first three partners were the owners of the theatre and they had sold a portion of the ownership to the incoming partners. If by theatre they meant the land/building, then the two incoming partners have also become co-owners of the asset.
Otherwise, it would amount to the ownership of the theatre alone being transferred to the incoming partners without any right on the land on which the theatre stands. In the books of account of the firm on 31-1-1981 the land has also been brought in. It would appear to us that this is only in conformity with what was the intention of the partners all along. That is, the land and the building go together for this purpose. Shri Satyanarayana had submitted that the partnership deeds were made out in Telugu in the villages and the scribe may not have been very familiar with the legal terms. Therefore, a loose expression used here and there should not be taken serious notice of. We accept this submission. There are a number of authorities which have held that in interpreting documents in Indian languages, precision and clarity associated with documents drawn up by well established solicitors should not be expected. When all these points are considered together, we come to the conclusion that the land was not separately treated and it was all along an asset of the partnership.
13. The next question to be considered is whether the document of January 1981 denotes retirement of the partner or whether it amounts to a transfer of the partnership interest. We have to start with the proposition that there is no difference between the retirement of a partner and the dissolution of a partnership firm in this respect. This had been laid down by the Andhra Pradesh High Court in the case of L.
Raghu Kumar (supra), and has been approved by the Supreme Court in the recent case of Sunil Siddharthbhai v. CIT [1985] 156 ITR 509.
14. In the case of Tribhuvandas G. Patel (supra) relied on by the department, the Bombay High Court has laid down that retirement of a partner can take two forms : one is the qualification of his share by taking into account on the footing of a notional sale of the assets and liabilities of the firm and the other is where the 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. So, if an account is taken of the assets and liabilities and an amount is paid, that would be a case of retirement and no transfer will be involved. Shri Padmanabhan had pointed out that in this case there was no question of any valuation of the assets. This does not appear to be borne out by facts. The firm was closing accounts on 31st of July every year. We have before us the balance sheets for the years ended 31-7-1979 to 31-7-1980. In these two balance sheets, we do not find the value of the site on the assets side of the balance sheet. The total value of all the assets amounts to about Rs. 6.33 lakhs as on 31-7-1980. If the same pattern had been followed, the books of account would have been closed next on 31-7-1981. Instead of that, the firm had closed the books on 31-1-1981.
That is one day after effecting the retirement. On this balance sheet, the value of the land has been included. Its value is shown as Rs. 2 lakhs. There is no change in the value of the buildings. The other assets are balances in nominal account and, therefore, there is no question of revaluing them. On the liabilities side also, there was nothing which required revaluation. Thus, the inclusion of one asset which was not shown earlier in the books of account drawn up the next day after the retirement must be taken to mean that the partners have made some sort of adjustment of their mutual rights on the assets and liabilities of the firm. It would, therefore, appear that even applying the ratio of the Bombay High Court decision, this was a case of quantification of the rights of the assessee by taking accounts. We may at this juncture dispose of a point made by Shri Padmanabhan, i.e., the agreement that the partner should retire was made out in November and the consideration was effected by instalments starting from 5-11-1980 when Rs. 1 lakh was paid. Therefore, according to him, the payments were decided without reference to the valuation of the assets. We are unable to accept this submission. As we have pointed out, there was only one asset which had to be brought into the books. That was the land. It is quite possible that the partners between themselves must have agreed on the valuation of the land. Since no other asset required revaluation, it could not be said that the payment was without any reference to the value of the assets, 15. The expressions used in the relinquishment deed were also made a basis for the contention that it was only a transfer. As we have stated earlier, the documents are in Telugu. There are expressions therein which show that the assessee was effecting a transfer. But, there are also expressions in the preamble which mean that the assessee was retiring from the firm. As we have pointed out earlier, the documents written in Indian languages should not be construed as if the expressions used are precise. One has to interpret the documents by taking into account all the surrounding circumstances and the conduct of the parties. We are, therefore, satisfied that this is not a case of the assessee transferred his right but a mere case of retirement.
16. This is further strengthened when we consider who made the payments. It was the department's case that the payments were effected only by the continuing partners directly. We have called for the extracts from the books of account. We find that the payments have been effected through the books of the firm only. It is true that the firm did not have sufficient cash to pay off the amount required. The partners, therefore, had to arrange the funds. The funds arranged by them were brought into the books of the partnership firm. The individual partners were given credit for the amount they had brought in. But, the amount brought in was treated as the firm's amounts. When the payments were effected, the account of the assessee was debited.
Since the assessee had only a debit balance and had to be paid a much larger amount owing to the inclusion of certain assets, the extra payments effected have to be debited to the continuing partners in order to balance the books. This had been effected. The continuing partners had been debited proportionately with the amounts payable to the assessee. Therefore, in our opinion, it is not a fact that the partners individually had made the payments and the payments have been made only by the firm. If that is so, there could not be any question of transferring of the interest in a partnership firm, because a transfer of the interest in the firm to that firm itself would be an absurdity.
17. In the result, we are of opinion that there is no case for inclusion of capital gains. The assessee's appeal is allowed.
1. I have perused the order proposed by the learned Accountant Member.
I express my inability to agree either with his finding of facts, reasoning or his conclusions.
2. In my opinion, the primary point which crops up for consideration is to find out what is the business of the firm with which we are concerned in this case. Is it only mere exhibition of feature films or does it include owning of the theatre site on which the theatre building stood as well as exhibition of films From a critical reading of the documents on record I came to the conclusion that the firm does business only in exhibition of films. It neither owns the theatre building nor the site on which the theatre building stood. It appeared to me from the facts of the case that neither of the above assets forms part of the assets of the firm.
3. According to the assessee there is no transfer involved under the deed dated 30-1-1981 executed by the assessee in favour of the four remaining partners of the firm inasmuch as what he receives as consideration under the said deed represents only his share in the partnership assets. Now this argument would be available to the assessee only when the assets in question form part of the assets of the firm but not otherwise.
4. The first of the available partnership deeds is dated 30-12-1972.
Shri K. Gopala Rao, the assessee herein, and his brothers Shri K.Visweswara Rao and Shri K. Madhusudhana Rao were only three parties to that deed. In the preamble it is stated that previously there used to be a partnership deed dated 7-4-1970 and the parties to the deed had constructed a cinema theatre at Vijayawada. However, the said deed is either mislaid or lost beyond hope of recovery. Therefore, the said fact is the provocation for entering into the deed dated 30-12-1972. In the preamble itself it was made clear that under the present deed dated 30-12-1972 the parties agreed to run the business of exhibition of films subject to the terms and conditions stated subsequently in the deed. Clause 1 of the deed is that the parties to the deed shall be the owners of the theatre. Clause 4 says that the firm shall be deemed to have come into existence on 12-9-1969, on which date the land was purchased. However, for the purpose of ascertaining profit and loss for making division between the partners the date of commencement of exhibition of films shall be taken as the date of commencement of the business. Clause 5 reiterates that the firm shall carry on business of exhibition of films, etc. Clause 6 reiterates that the parties to the deed, viz., Shri K. Gopala Rao, Shri K. Visweswara Rao and Shri K.Madhusudhana Rao have constructed the theatre, installed the necessary projector and equipment and made it a full-fledged theatre with all the necessary modern equipment. Clause 7 of the deed states that the capital for the purchase of the site, construction of the building, installation of machinery, etc., was contributed by the partners.
Clause 12 of the deed states that the accounts maintained by the firm relating to business of exhibition of films shall be closed to profit and loss at the end of the year or any other date conveniently suited to the partners. The profit and loss thus ascertained at the end of the year after meeting all the outgoings and expenses shall be divided among the partners and adjusted to their accounts in the proportion of the shares shown hereunder. Each of the partners was shown to be having one-third share. Clauses 1 to 7 clearly indicate that both the site as well as the theatre building do not belong to the firm, do not constitute the assets of the firm but they constitute the property of the very three partners which are parties to the deed.
5. In my opinion, it is a matter of agreement between the parties as to which of their joint properties should be brought into a partnership firm. Simply because the three persons constituted a firm for exhibiting feature films it does not mean either the theatre building commonly owned by them or the site on which the said building stood should also be brought as the assets of the firm.
6. Now let us come to the second written partnership deed produced before us. It is dated 10-7-1975. There are five parties to it. Apart from the three brothers Smt. K. Vani, wife of the third brother Shri K.Madhusudhana Rao and one Smt. Anne Tulasamma were admitted as partners.
In the preamble it is stated that the first three parties, viz., the three brothers were the owners of the theatre and they have sold a portion of ownership in the theatre to Smt. K. Vani and Smt. Anne Tulasamma for Rs. 1 lakh and they have created a share of 13 paise each to them in the ownership of the theatre. This recital would conclusively prove that the ownership never vested in the firm but always remained as co-ownership property of the three brothers and under the deed dated 10-7-1975 they have admitted two more persons as owners of the theatre after accepting Rs. 1 lakh from them. Dealing with the business of the firm it is stated in the preamble of the deed dated 10-7-1975 that the parties agreed to run the business of exhibition of films, subject to the terms and conditions set out below.
In clause 4 of the said deed it is reiterated that the business of the firm is only exhibition of films. In clause 5 which deals with capital it is not mentioned that the theatre building or the site on which it stood are brought into the firm. Even after a comprehensive reading of the deed dated 10-7-1975 it would appear to me that the ownership of the theatre is kept separate from the business carried on by the firm, viz., exhibition of feature films. Previously, the theatre used to be owned by three persons whereas it is now owned by five persons. Even after the deed dated 10-7-1975 but before 31-1-1981 in none of the balance sheets the site on which the theatre building stood was shown as belonging to the firm. For the first time the site on which the theatre building stood was brought into assets of the firm only under the balance sheet dated 30-1-1981.
7. Therefore, in my considered opinion the sale of the site is an outright sale which gives rise to capital gains and it does not amount to mere relinquishment. Relinquishment would always be in favour of persons already interested. Smt. K. Vani and Smt. Anne Tulasamma were not having any interest in the site prior to 30-1-1981 and for the first time they acquired interest by the registered deed dated 30-1-1981. Under no circumstances it is possible to say that the site is relinquished in favour of the vendees.
8. In this case, admittedly, the accounts of the firm were not closed.
No profit and loss of the firm were ascertained on 30-1-1981. No assets of the firm were revalued on that date. The liabilities of the firm on that date were also not found out. The adjustment of the liabilities from the assets did not take place and the share of the interest of the assessee in the firm as on 31-1-1981 was also not found out. It is also not shown whether Rs. 3,75,000 paid under the deed dated 30-1-1981, represents nothing but the share of the assessee in the assets of the net firm as on 30-1-1981. The balance sheet as on 30-1-1981 was not drawn. The balance sheet drawn on 31-1-1981 which is filed in the paper book cannot be of any help to us in this appeal.
9. Relinquishment may be of two types. Under the first category the person who relinquishes may receive no more than his share in the net assets of the firm on a notional dissolution when the assets and liabilities are adjusted. This category of relinquishment only is considered by the Andhra Pradesh High Court in L. Raghu Kumar's case (supra). It is very clear from the head note of the said decision in L.
Raghu Kumar's case (supra) : ... When, therefore, a partner retires from a partnership and the amount of his share in the net partnership assets after the deduction of liabilities and prior charges is determined on taking accounts on the footing of a notional sale of the partnership assets and given to him, what he receives is his share in the partnership and not any consideration for a transfer of his interest in the partnership to the continuing partners. His share in the partnership is worked out by taking accounts in the manner prescribed by the relevant provisions of the partnership law and it is this, namely, his share in the partnership, which he receives in terms of money.
There is in this transaction no element of transfer of interest in the partnership assets by the retiring partner to the continuing partners . . . . (p. 674) But, this is not the only mode of relinquishment known to law. There is a second category of relinquishment and the said category of relinquishment is clearly recognised by the Bombay High Court in Tribhuvandas G. Patel's case (supra). The Bombay High Court, postulating the two types of relinquishment by an outgoing partner, had stated the following : ... 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 be no element of 'transfer' involved in the transaction . . . . (p. 115) The following observation of the Bombay High Court is very relevant for our purposes : ... 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 Income-tax Act. . . .(p.
116) In the course of the judgment of the Andhra Pradesh High Court in L.
Raghu Kumar's case (supra) at page 680 it is stated that the Bombay High Court decision in Tribhuvandas G. Patel's case (supra) turned upon the facts of the said case. The Andhra Pradesh High Court did not strike a different note as regards the two modes of retirement contemplated by the Bombay High Court and, therefore, as regards the modes of retirement are concerned, the Bombay High Court decision still holds good.
10. Now in this connection the recitals of the relinquishment deed assume importance. In the recitals it is never stated that on ascertainment of the net partnership assets the share of the assessee was arrived at Rs. 3,75,000. It was never stated in the said deed that any balance sheet of the assets and liabilities of the firm as on 30-1-1981 was drawn and the share of the assessee in the net assets of the partnership was ascertained at Rs. 3,75,000. On the other hand, a reading of the recitals of the registered deed dated 30-1-1981 would clearly show that the amount of Rs. 3,75,000 was a lump sum amount received by the assessee for which the assessee agreed to relinquish his interest both in the assets of the firm as well as in the joint properties held by him. Therefore, following the decision in Tribhuvandas G. Patel's case (supra) I have to hold that there is transfer of the partnership interest of the assessee and also his joint interest in the co-ownership property in favour of other partners under the deed dated 30-1-1981.
11. Though the site was purchased on 12-9-1969 by the assessee and his two brothers for Rs. 1 lakh after obtaining the registered relinquishment deed dated 30-1-1981 the value of the site was for the first time was entered into the firm's assets at Rs. 2 lakhs in the balance sheet drawn on 31-1-1981. Thus, even according to the vendees the value of the site on 31-1-1981 which is just one day after the relinquishment or sale was Rs. 2 lakhs and the value of other assets purchased under the relinquishment deed was Rs. 1,75,000. Taking these guidelines the ITO should compute the capital gains.
We, the Members of the Hyderabad Bench 'B' having differed on the above issue while deciding the case of K. Gopala Rao v. ITO [IT Appeal No. 31 (Hyd.) of 1985] mentioned above, refer the following questions to the President, Tribunal under Section 255(4) : 1. Whether, on the facts and in the circumstances of the case, the firm became the owner of the land and the building, which is used for exhibition of films 2. Whether, on the facts and in the circumstances of the case, the assessee is liable for capital gains in respect of the receipt of Rs. 3.75 lakhs when he retired from the partnership firm 1. This matter has come before me by way of a Third Member to express my opinion on the following points of difference of opinion that arose between the learned Members of the Hyderabad Bench 'B' who heard this appeal : 1. Whether, on the facts and in the circumstances of the case, the firm became the owner of the land and the building, which is used for exhibition of films 2. Whether, on the facts and in the circumstances of the case, the assessee is liable for capital gains in respect of the receipt of Rs. 3.75 lakhs when he retired from the partnership firm The relevant facts that gave rise to this difference of opinion are : The assessee is a HUF deriving income from property which is not very considerable but the assessee has a share in the firm called 'Venkateswara theatre' from where it received substantial income. The assessee along with two other persons purchased a piece of land in Vijaywada sometime in 1969. A theatre to exhibit cinematographic films was constructed thereon. To run that business of exhibition of films the assessee and those two persons formed into a partnership on 30-12-1972. This partnership recorded that the business of exhibition of films had commenced on 7-4-1970 which means that though the business was started on 7-4-1970 in partnership, the deed of partnership was executed after a lapse of time. Another point that needs to be noted here is that the cost of the land, which was purchased by the assessee with two other persons jointly did not find a place in the books of the firm. However, the cost of construction of theatre was accounted for in the books of the firm and was shown as an asset of the partnership.
This fact has a bearing on the issue that arose before me. Sometime on 10-7-1975 two other partners joined the partnership, as a consequence of which there was reallocation of profit-sharing ratio. Thereafter, sometime on 5-11-1980 the assessee entered into an agreement with the other partners by which the assessee retired from the partnership in consideration of payment of a sum of Rs. 3.75 lakhs. The agreement provided that the assessee, i.e., the retiring partner, would relinquish his interest in the partnership assets more particularly the site and plant and the electrical installations and the amounts due to the firm. The sum of Rs. 3.75 lakhs was paid to the assessee partly by adjustment of the amounts due by the assessee to the firm and partly by a demand draft. A document was executed on 30-1-1980 whereunder the assessee acknowledged the receipt of the sum of Rs. 3.75 lakhs in full and whereby he ceased to have any interest in the partnership firm.
2. The question then arose before the ITO as to whether there was any capital gains involved in the sum of Rs. 3.75 lakhs received by the assessee from the said firm of Venkateswara Theatre. The assessee contended that there was no capital gains involved in this transaction of the receipt of Rs. 3.75 lakhs in lieu of his share and in any case it was exempt from the levy of capital gains tax. The main contention relied on was that the transaction fell outside the purview of the terms 'capital gains and transfer', that the interest of the assessee is neither immovable property nor a capital asset notwithstanding the fact that the firm owned immovable property, that the release deed dated 30-6-1981 executed by the assessee evidenced only his retirement when according to law there was only a readjustment of accounts, which in law did not involve a transfer, nor the release deed operated as a deed of conveyance. The ITO rejected these contentions. He held that the facts of the case clearly showed that there was a transfer within the meaning of Section 2(47), read with Section 45, that the interest of the partner in a firm was property and that property was transferred by the assessee for a consideration, that in any case this was not a case of retirement from the partnership but a case where the assessee disposed of his share in the partnership by relinquishing it and such a relinquishment did amount to a transfer within the meaning of Section 2(47). He relied on the decision of the Bombay High Court in the case of Tribhuvandas G. Patel (supra) in support of his view. Holding thus, he computed the capital gains at Rs. 3,50,248 and brought that sum to tax. The ITO also relied on the entries in the account books to show that the other partners made efforts to find money to pay to the assessee his dues. This also involved an intention by the other partners to purchase the share of the assessee in the land debars the partnership.
3. The appeal before the Commissioner (Appeals) was in vain. The Commissioner (Appeals) was of the opinion that the site on which the theatre was built was never the firm's property in the sense that it was never transferred to the firm and that when the assessee had relinquished his share in that asset, that transaction amounted to a transfer. Before the Commissioner (Appeals) reliance was placed on behalf of the assessee on the decision of the Andhra Pradesh High Court in L. Raghu Kumar's case (supra) where the Andhra Pradesh High Court laid down the rule that the interest of a partner in a firm is neither an immovable property nor a capital asset and that on retirement of the partner, there is only a readjustment of accounts which does not involve transfer and that in a case where a partner receives certain money in consideration of his retirement, no capital gains tax was leviable. The Commissioner (Appeals) distinguished this Andhra Pradesh High Court decision from the decision of the Bombay High Court in Tribhuvandas G. Patel's case (supra), relied upon by the ITO to hold in favour of the revenue. The distinction that is sought to be made was that according to him the Bombay High Court drew a distinction between a case where a retiring partner gets his share of assets after deduction of his liabilities and prior charges after taking up accounts on the footing of notional sale of partnership assets and a case where a lump sum payment was made in consideration of the partner retiring without any accounting being done. While the former transaction would not amount to a transfer, the latter transaction would amount to a transfer, i.e., to say where a lump sum payment was made without adjustment of accounts, i.e., without reference to accounts, that transaction would amount to a transfer and not otherwise. He also drew support for his view from the decision of the Madras High Court in the case of CIT v. Bharani Pictures [1981] 129 ITR 244. Since according to the Commissioner (Appeals), there was no determination or checking of accounts at the time of retirement, the case fell under the latter category of cases decided by the Bombay High Court and, therefore, the transaction amounted to a transfer. He also supported the finding of the ITO that since the other partners had to borrow moneys to pay the assessee his dues and since the firm accounts were not involved in any manner in these borrowings, the transaction amounted to a sale by the assessee of his shares to the other partners. Thus, he held that the decision of the Andhra Pradesh High Court did not apply to the facts of the case. This is how the Commissioner (Appeals) justified the action of the ITO.4. Aggrieved by the order of the Commissioner (Appeals), the assessee preferred further appeal before the Tribunal. After hearing the arguments addressed to the Bench at length, my brother the learned Accountant Member held in favour of the assessee on all counts, namely, that the land on which the theatre was built belonged to the partnership and it formed part of the partnership property, that there was no difference between the retirement of a partner or a dissolution of a partnership, that the deed dated 30-1-1981 denoted retirement of the partner and the facts of this case fell squarely within the ruling of the Andhra Pradesh High Court in the case of L. Raghu Kumar (supra).
He also noted that the decision of the Andhra Pradesh High Court was approved by the Supreme Court in the case of Sunil Siddharthbhai (supra). He also found by going through the accounts and comparing the balance sheets of the firm drawn as on 31-7-1979, 31-7-1980 and 31-1-1981 (the relevant dates in question before me), he came to the conclusion that while in the earlier balance sheets the land value was not brought into the books, in the last balance sheet the value of the land having been brought into the accounts demonstrated that the partners drew up the accounts in the manner in which the Bombay High Court held in the case of Tribhuvandas G. Patel (supra) and even according to that decision, there was only a retirement of partner not involving any transfer. He also held that it was wrong to say that the payments were made directly by the continuing partners to the retiring partner and the account books of the firm show that the payments were affected through the account books of the firm although the firm had to borrow money, it was arranged naturally by the continuing partners.
Since the moneys arranged by the continuing partners was brought into the firm books, it could not be held that the continuing partners directly dealt with the assessee in discharging the amounts due to the assessee.
5. However, the learned Judicial Member took a different view. He was of the firm opinion that the land did not form part of the firm's property as it was never brought into the accounts. By relying upon the deed executed between the erstwhile partners dated 30-12-1972, he held that the land on which the theatre was built never formed part of the partnership assets. He went a step further to say that even the theatre building did not belong to the firm and that both the land and the theatre built thereon did not constitute the property of the assessee and the original two partners and the assessee owned these assets perhaps jointly. The second deed executed on 10-7-1975 also according to the learned Judicial Member did not show that the land or the building became the partnership assets and that the intention of the partners was clear to keep these assets away from the business carried on by the firm, namely, exhibition of films. However, he held that while previously the theatre was owned by three persons by the execution of the latter deed dated 10-7-1975 it came to be owned by five persons. Since the value of the land was brought into the accounts only in the balance sheet prepared on 30-1-1981, it should be held that the sale of the land was an outright sale which gave rise to capital gains. He also disagreed with the learned Accountant Member's view that it could be said on the facts of this case that the accounts of the firm were closed in order to arrive at the sum payable to the assessee on his retirement. According to him relinquishment of share by a partner can take place under two circumstances, one of which was the relinquishment and the partner receiving not more than the share in the net assets of the firm in which case there would be no transfer and it was this case that the Andhra Pradesh High Court was considering in L.
Raghu Kumar's case (supra). The second category of relinquishment whereunder a lump sum payment was made to a retiring partner was not considered by the Andhra Pradesh High Court and it was considered by the Bombay High Court in Tribhuvandas G. Patel's case (supra) and it was that case that applied to the facts of this case and, therefore, the Commissioner (Appeals) was right in his conclusion that there was a capital gains involved in the transaction of this sale. Thus, according to the learned Judicial Member the case fell squarely within the ruling of the Bombay High Court and not within the rule laid down by the Andhra Pradesh High Court. Following that decision, he supported the view of the department but he gave certain directions to the ITO to recompute the capital gains. It was how the two Members differed in their conclusions and the points of difference of opinion as formulated by them was referred to the President, who in his turn, appointed me as a Third Member to express my opinion thereon.
6. I have heard the learned counsel Shri Satyanarayana for the assessee and Shri Padmanabhan senior departmental representative at great length. While the learned advocate supported the order passed by the learned Accountant Member, the learned departmental representative supported the order passed by the learned Judicial Member. After recounting the facts in their choronological and historical order, the learned counsel for the assessee submitted that a casual reading of the deeds executed by the partners in this case on different dates, to provide for different occasions, show that they were treating the land as belonging to the partnership. He pointed out relying upon Section 14 of the Indian Partnership Act, 1932 that the site on which the theatre was built was always treated as the property of the firm and it is unthinkable that the partners regarded only the superstructure as the assets of the partnership and not the land on which the superstructure was built. Placing reliance on the decision of the Andhra Pradesh High Court in L. Raghu Kumar's case (supra), the Gujarat High Court decision in CIT v. Mohanbhai Pamabhai [1973] 91 ITR 393 and the Supreme Court decision in Malabar Fisheries Co.'s case (supra) the learned advocate for the assessee submitted that the transaction did not attract capital gains tax at all because when the assessee received the agreed sum, it was only in adjustment of his rights in the partnership properties, which did not amount to a transfer within the meaning of Section 2(47).
By relying on certain observations of the Andhra Pradesh High Court in L. Raghu Kumar's case (supra), he pointed out that the Andhra Pradesh High Court was expressing dissent from the decision of the Bombay High Court in Tribhuvandas G. Patel's case (supra). When the Andhra Pradesh High Court decision expressed dissent from the decision of the Bombay High Court, the Tribunal situated in Hyderabad should follow the rule laid down by the Jurisdictional High Court and not dissent from it and follow the Bombay High Court decision. According to him there was no difference between a retirement of a partner by settling accounts and receiving certain moneys as per accounts or receiving lump sum in consideration of the retirement from a relinquishment. In either case the settlement of accounts and adjustment of rights, was neither a transaction nor amounted to a transfer. It was this point that was highlighted by the Andhra Pradesh High Court in L. Raghu Kumar's case (supra) by expressing dissent from the Bombay High Court. The learned Judicial Member, therefore, according to him, erred in distinguishing the Andhra Pradesh High Court decision by stating that the Andhra Pradesh High Court was concerned only with one category of retirement of partners, namely, receiving certain amounts on settlement of accounts and not with the other type. He submitted that the Andhra Pradesh High Court considering both the categories of retirement of partners and having found no distinction between the two, held that there was no transfer involved in either of those circumstances. He commended for acceptance the view expressed by the learned Accountant Member. He also pointed out that it was not a case where amounts were agreed upon without reference to accounts. The method and manner in which the amount had been arrived at might not have been mentioned in the partnership deed but no amount was possible to arrive at unless accounts were settled. It is this aspect he submitted that was specifically noticed by the learned Accountant Member, who whereupon held that there was settlement of accounts also.
7. The learned departmental representative, on the other hand, in a brilliant exposition of law on the subject, made an attempt to point out that there was neither conflict nor dissent between the Andhra Pradesh High Court and the Bombay High Court decisions, as according to him they were dealing with two different and distinct situations. The Andhra Pradesh High Court decision does not give the facts as to how the sum mentioned as consideration in that case was arrived at but from the facts of that case it should be inferred that it was a lump sum consideration. To this situation Section 48 of the Indian Partnership Act was attracted. He pointed out that the Bombay High Court did not dissent from the Gujarat High Court in order to say that the Andhra Pradesh High Court preferred to follow the Gujarat High Court decision rather than that of the Bombay High Court. He pointed out how there could be no difference between the Gujarat High Court decision and the Bombay High Court decision by reading out to me the observations of the Gujarat High Court decision at page 403. By referring me to the decision of the Bombay High Court relied upon by the Commissioner (Appeals) and the ITO and drawing my attention to the decision of the Andhra Pradesh High Court particularly the observations made on L.
Raghu Kumar's case (supra), the learned departmental representative pointed out that the arguments advanced by the standing counsel before the Andhra Pradesh High Court was not correct and in any case the High Court fell into an error in coming to that conclusion as distinguished from the decision of the Bombay High Court. He suggested that even according to the Andhra Pradesh High Court, it could be said that when accounting was done and amount was paid to a retiring partner, no transfer was involved while when lump sum was paid, there was a transfer. By referring to deed of relinquishment, he pointed out that it was a clear case where the assessee sold his share in partnership assets in consideration of the sum of Rs. 3.75 lakhs to which attracted the levy capital gains tax. He also disputed the observations made by the learned Accountant Member particularly in paragraph 13 of his order. As according to him there was a difference between retirement of a partner and the dissolution of a partnership firm. He also disputed the finding of the learned Accountant Member that there was settlement of accounts in this case. He commended for acceptance the order of the learned Judicial Member for the reasons shown by him and for the above reasons.
8. It was on a consideration of these facts and arguments, I have to decide as to which view is tenable and right. The learned departmental representative, according to me, did not seriously dispute the fact that the land on which the theatre was built did not form part of the firm's assets even though the learned Judicial Member had recorded a categorical finding that the land in question did not form part of the partnership assets. Even otherwise it is very difficult to agree with the learned Judicial Member's view that the land did not form part of the firm's assets merely because its value was not brought to the books. Instances can be multiplied where assets belonging to the partnership forming part of firm's property are not brought into the accounts of the partnership and yet form part of the firm's property. I do not wish to burden this order with such instance but a perusal of Section 14 would clearly prove this point. Section 14 is in the following terms : Subject to contract between the partners, the property of the firm includes all property and rights and interest in property originally brought into the stock of the firm, or acquired, by purchase or otherwise, by or for the firm, or for the purposes and in the course of the business of the firm, and includes also the goodwill of the business.
Unless the contrary intention appears, property and rights and interest in property acquired with money belonging to the firm are deemed to have been acquired for the firm.
This shows very clearly that the property can be acquired by purchase or otherwise by or for the firm, which means that a property can be acquired for the firm by any partner thereof or by any other person acting on behalf of the firm. All that is necessary is to see whether there is any contract to the contrary between the partners. If there is a contract to the contrary between the partners, then the presumption available under Section 14 will not be applicable. The learned Judicial Member infers from the averments made in the partnership deed executed from time to time that there was a contract between the partners to treat the land on which the theatre was built as not belonging to the firm. This, in my opinion, is incorrect because the partnership deed that was executed on 10-7-1975 provided in the preamble as under : Whereas the parties hereto 1, 2 and 3 who are the owners of the theatre have sold a portion of ownership in the theatre to Kilaru Vani wife of Madhusudhana Rao and Anne Tulasamma wife of Late Venkataratnam for Rs. 1,00,000 a share of 13 paise to each in the ownership of the theatre.
In clause 1 of the deed while mentioning the name of the firm, it is very clearly mentioned that the parties hereto shall be the owners of the theatre. Clause 1 reads as under : 1. Name of the firm : The firm shall run the business under the name and style of Venkateswara Theatre, Vijaywada-10. The parties hereto shall be the owners of the theatre.
Now going earlier to the deed dated 30-12-1972 which was executed between the assessee and two other partners, which was the original deed of partnership, the following are the preamble and relevant clauses, which throw ample light on the question whether the parties to the deed treated the land as belonging to the firm or not : 3. Kilaru Madhusudhana Rao son of Kotaiah resident of Penamaluru, now residing at General Hospital Ashoton-Under-Lyas, Lancashire, England ; Whereas the parties hereto formed into a firm duly constituted under a deed of partnership dated 7th day of April, 1970 and have constructed a cinema theatre at Vijaywada ; Whereas the said deed is either mislaid or lost and it could not be traced out and the partners have therefore considered it necessary to draw up a deed of partnership afresh ; Now this deed of partnership witnesseth that the parties hereto hereby agree to run the business of exhibition of films subject to the following terms and conditions that is to say : Clause 6 of the partnership deed provided that the parties to this deed constructed the theatre, installed the necessary projectors and equipments and made it a full-fledged theatre with all the necessary modern equipments. Clause 7 of the partnership deed shows, in my opinion, in no mistakable terms that the site on which the theatre was constructed was purchased by the partners with their capital and it formed part of the theatre, which is an asset of the partnership. The intention of the partners there is clearly to treat the site as an asset of the partnership and not to treat it as an asset belonging to the partners jointly, de hors the partnership. Merely on the ground that the value of the site was not brought into the accounts, it cannot be said that the site was not the asset of the partnership. When the theatre was treated as the asset of the partnership, unless the contrary intention appears, the land on which the theatre was built must also be held to belong to the partnership. Here as against a contrary intention, clause 7 of the first partnership deed dated 30-12-1972 clearly postulated that the site was purchased with the capital provided by the partners, which means the provisions of Section 14 were attracted and this site became the assets of the partnership. I am, therefore, of the opinion that the learned Accountant Member is right in his view that the site on which the theatre was built belonged to the partnership. Since the partnership deeds both of 30-12-1972 and of 10-7-1975 clearly provided that the partners were the owners of the theatre, it is in my opinion not possible to construe that the theatre did not belong to the partnership. I am, therefore, unable to walk along with the view expressed by the learned Judicial Member that even the theatre did not belong to the partnership.
9. Now as regards the other question whether the sum of Rs. 3.75 lakhs received by the assessee was liable for capital gains tax or not The controversy eventually boiled down to whether the Andhra Pradesh High Court decision in L, Raghu Kumar's case (supra) governs the issue or the Bombay High Court decision in Tribuvandas G. Patel's case (supra).
10. In the case before the Andhra Pradesh High Court the assessee was a karta of a HUF. He was a partner in two firms. The assessee retired from those two firms with effect from 1-1-1971. On the date of retirement his capital accounts were credited with a sum of Rs. 46,500 more than the amount due to him towards his capital and profits.
[Emphasis supplied]. The firms from which the assessee retired were carrying on business with the remaining partners. The question arose whether the sum of Rs. 46,500 received by the assessee was to be treated as capital gains or not. The ITO assessed this amount as capital gains. The main contention that was urged in this case was that Section 1(47) governed the transaction, according to which this transaction could not be regarded as a transfer so as to attract the liability for capital gains under Section 45. This contention was rejected by the ITO on the ground that this was not a case of dissolution of firms. The first appeal before the AAC was unsuccessful.
In the second appeal before the Tribunal, the assessee contended that there was no transfer of any capital asset within the meaning of Section 2(47). This contention was based on the view that a partner has no right to the partnership assets as such and his right was only to receive a share in the profits, and assets when he retired from the firm. In support of this contention reliance was placed upon a decision of the Gujarat High Court in Mohanbhai Pamabhai's case (supra). The Tribunal allowed the assessee's appeal. The revenue by way of reference moved the High Court raising the following question : Whether, on the facts and in the circumstances of the case, the excess amount of Rs. 46,500 received by the assessee on retirement from the two partnership firms is assessable to capital gains The Andhra Pradesh High Court after making reference to the decisions of the Supreme Court in Addanki Narayanappa v. Bhaskara Krishnappa AIR 1966 SC 1300 and the decision of the Gujarat High Court in Mohanbhai Pamabhai's case (supra) and another decision of the Gujarat High Court in CIT v. Dilip Engg. Works [1981] 129 ITR 688 held that on the retirement of a partner no transfer was involved when he receives at the time of retirement his share in the partnership assets whether in cash or any other assets. The Andhra Pradesh High Court also referred to the decisions of the Allahabad High Court in Addl. CIT v. Smt.
Mahinderpal Bhasin [1979] 117 ITR 26 and CIT v. Madan Lal Bhargava [1980] 122 ITR 545.
11. When the attention of the Andhra Pradesh High Court was drawn to the decision of the Bombay High Court in Tribhuvandas G. Paters case (supra) and another case of the same High Court in CIT v. H.R. Aslot [1978] 115 ITR 255, the Andhra Pradesh High Court held that it was not able to agree with the view of the Bombay High Court. Let us now consider what were the views expressed by the Bombay High Court as explained by the Andhra Pradesh High Court. In Tribhuvandas G. Paters case (supra) a lump sum amount was paid to the retiring partner and the question arose whether it amounted to a transfer under Section 2(47).
The Bombay High Court drew a distinction between a case where a retiring partner gets his share in the partnership after deducting of his liabilities and his share of profit on taking account on the footing on a notional sale of partnership assets and where a lump sum amount is paid in consideration of the partner retiring without any accounting being done. In a case where the partner is paid a particular amount of money as his share in the partnership assets after accounting, the Bombay High Court held that it would not amount to a transfer. But where a lump sum amount was paid in consideration for the retirement, it would be a transfer as defined in Section 2(47). At this juncture, the attention of the Andhra Pradesh High Court was drawn to the decision of the Gujarat High Court in Mohanbhai Pamabhai's case (supra) where the Gujarat High Court held that there was no distinction between a case of retirement of a partner and a dissolution of the partnership firm and that there could never be a transfer of partnership assets in the case of a retirement of a partner as there was no relinquishment of rights therein. After noticing this difference between the views of the Gujarat High Court arid the Bombay High Court, the Andhra Pradesh High Court held that it would with great respect disagree with the view of the Bombay High Court. The expression of disagreement with the Bombay High Court's view would in my opinion mean that the Andhra Pradesh High Court was laying down the principle that there would be no distinction between a case of retirement of a partner and the dissolution of a partnership firm and that there could never be a transfer of assets in the case of a retirement of a partner and that whatever be the mode adopted to receive the amount due by the retiring partner, that was only in view of adjustment of his rights in the partnership involving no transfer of assets. The learned counsel for the revenue explained at great length that this was not the rule laid down by the Andhra Pradesh High Court. He seemed to suggest that the Andhra Pradesh High Court was concerned with the case where a lump sum amount was not paid in consideration of the retirement of the partner without taking accounts of the assets and liabilities of the firm. Here I find myself unable to agree because as I mentioned earlier the facts of this case as noticed by the High Court clearly showed that the assessee on the date of retirement received Rs. 46,500 more than the amount due to him towards his capital and profits. It is no doubt true that it is not known as to how the excess amount of Rs. 46,500 was worked out but this is sufficient to show that a partner received certain amount in excess of the amount due to him towards his capital and profits. That excess amount must have been arrived at only on the valuation of the assets as reduced by the liabilities. That valuation of assets might have been an asset to asset basis or by way of a lump sum also keeping in view broadly what the assets would fetch in the market if sold on the date of retirement as reduced by the liabilities.
If the book figure is taken for the assets and liabilities, the amount owing to the retiring partner would only be the amount as was shown by his capital account. It is only when a revaluation of assets was undertaken for the purpose of retirement, any excess would result or deficiency in certain cases. Therefore, accounting of the assets has to be taken either as meticulously or broadly as the circumstances of each particular case warrant. But it is not possible to say that without accounting being taken of, the market value of the assets and the liabilities to be discharged, no amount would be paid. In the case before the Andhra Pradesh High Court the excess of Rs. 46,500 must have been arrived at only after taking accounts of the assets and liabilities of the firm with reference to their realiseable value or the amounts payable as the case may be and could not be a blind figure.
It is certainly an amount in excess of the amount due to the partner as per accounts. Therefore, the Andhra Pradesh High Court must have felt that there could be no difference between the payment of a lump sum consideration to a partner on his retirement in view of his giving up his rights in partnership or payment of a sum due to a partner on taking up accounts in a meticulous way. It is perhaps bearing this principle in view that the Andhra Pradesh High Court held that they were unable to agree with the view expressed by the Bombay High Court in Tribhuvandas G. Patel's case (supra) and preferred to follow the view expressed by the Gujarat High Court in Mohanbhai Pamabhai's case (supra) wherein the Gujarat High Court pointed out that there was no distinction between a case of retirement of a partner and dissolution of the partnership firm and in either case there was no transfer of capital assets. The Andhra Pradesh High Court had clearly brought out this aspect on page 680 and I do not think it is necessary for me to reproduce those observations. In the penultimate paragraph of the judgment the Andhra Pradesh High Court pointed out that it would agree with the view expressed by the Gujarat High Court in Mohanbhai Pamabhai's case (supra), which was based on the observations of the Supreme Court in Addanki Narayanappa's case (supra). This elaborate discussion of the Andhra Pradesh High Court decision have to be undertaken by me because the matter was argued before me on the footing that the Andhra Pradesh High Court decision was inapplicable to the facts of this case. As explained above the Andhra Pradesh High Court was categorical in its view that when a partner retires from a partnership, there was no transfer of interest in the partnership assets to the continuing partners and, therefore, there was no question of levy of capital gains treating the transaction as a transfer. This decision was based upon the decision of the Supreme Court in Addanki Narayanappa's case (supra).
12. In Tribhuvandas G. Patel's case (supra) the assessee was a partner in a firm called KEW. This firm was dissolved with effect from 31-12-1960 as a consequence of settlement of accounts subsequent to filing of a suit for the dissolution of accounts. The assessee eventually as a consequence of retirement received among others a sum of Rs. 4,77,941 as his share in the assets of the firm. The question arose whether this sum could be considered as capital gains. The Bombay High Court held that having regard to the extended meaning given to the term 'transfer' by Section 1(47), the transaction did amount 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 the partnership and its assets in favour of the continuing partners and that the transaction could not be regarded as amounting to any distribution of capital assets upon dissolution of a firm. The Bombay High Court after examining the provisions of the Act, the decisions of the Supreme Court and the Gujarat High Court and the views expressed by Lindley on Partnership, Thirteenth edn. at p. 474, held that 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 to take the amount due to him from the firm and give a receipt for the money and acknowledge that he has no claim on his co-partners. The former type of transactions, the High Court pointed out, would be regarded as sale or release or assignment by a deed attracting stamp duty while the latter would not.
Then the High Court pointed out that whether a partner had retired from the partnership or the firm as such had dissolved would depend upon the mode of retirement employed and considering the deed of partnership executed in that case, which evidenced the retirement, the Bombay High Court held that that was a case of retirement of a partner which was hit by the extended meaning of the word 'transfer' in Section 2(47) as the assessee therein had assigned, released and relinquished his interest and share in partnership in favour of the continuing partners and that the transaction would not be regarded as amounting to any distribution of capital assets. It is this decision that was not followed by the Andhra Pradesh High Court. I have already pointed out how in the Andhra Pradesh High Court decision, the assessee received much more than the amount due to him towards his capital and profits.
Since the Andhra Pradesh High Court did not specifically agree with the view expressed by the Bombay High Court and since I find that the facts in this case are akin to the facts obtaining in the case before the Andhra Pradesh High Court, I am of the view that by this transaction it could not be said that the assessee did not transfer any rights in the assets of the partnership in favour of the continuing partners when he received the said sum of Rs. 3.75 lakhs, I am also inclined to agree with the view expressed by the learned Accountant Member that even the sum of Rs. 3.75 lakhs should have been ascertained with reference to some calculations though those calculations were not given in the deed of dissolution because I am of the firm opinion that for any payment made to a retiring partner, some calculation of the value of the assets will have to be undertaken. Sometimes even a higher payment may be agreed upon in order to get rid off an inconvenient partner. Even so there would not be any transfer of assets by the retiring partner in favour of the continuing partners because even such a case would be the adjustment of rights between the partners.
13. Upon a consideration of the above, I am of the opinion that the case is governed by the rule laid down by the Andhra Pradesh High Court, which is binding on me and following, therefore, respectfully the view expressed by the Andhra Pradesh High Court, I express my assent with the view expressed by the learned Accountant Member.
14. The matter will now go back before the regular Bench for decision according to the majority opinion.