COMMISSIONER OF INCOME TAX Vs. RAJENDRA BABUBHAI MODI

JUDGEMENT

(1.) IN this reference at the instance of the Revenue, the Tribunal has referred for our opinion the following question :

(2.) THE factual matrix leading to this reference projects the following picture. The assessee is an individual. The assessment year is 1971 72 corresponding to Samvat year 2026, which was spread over from 10th Nov., 1969 to 30th Oct., 1970. Originally, there were four partners in the firm of Bharat Salt and Industrial Works for the accounting years 1964 65 to 1970 71. They comprised the assessee, Dhirajlal Madhavji, Harkishan Ratilal and Gunvantlal Madhavji. Harkishan Ratilal retired from the firm at the end of the year of account relevant to the asst. year 1970 71. Thus, at the beginning of the year of account relevant for the present case, i.e., asst. year 1971 72, there remained three partners in the said firm, viz., the assessee, Dhirajlal Madhavji and Gunvantlal Madhavji. The year of account relevant to the next assessment year, viz., 1972 73 was Samvat year 2027 which commenced on 31st Oct., 1970 and ended on 19th Oct., 1971. The share ratio of the three partners at the commencement of the said accounting year was as follows.

(3.) THE ITO who had to frame assessment regarding the assessee's returned income for the relevant year, issued a show cause notice to the assessee to show cause why the receipt of Rs. 2,05,000 should not be brought to tax as a revenue receipt. The ITO, in that connection, relied Assessee 36 per cent Dhirajlal Madhavji 40 per cent Gunvantlal Madhavji 24 per cent upon a decision of the Supreme Court in the case of CIT vs. Gangadhar Baijnath (1972) 86 ITR 19 (SC). The assessee resisted this attempt on the part of the ITO by contending that the said decision had no application to the facts of the present case and that compensation which the assessee had received was a capital receipt and was not taxable as a revenue receipt. That he was paid this amount on account of reduction of his share in the reconstituted firm from 36 per cent. to 5 per cent. which also included reduction of share in the goodwill and leasehold rights. The ITO, however, repelled these contentions and treated this amount as a revenue receipt in the hands of the assessee and framed the assessment accordingly.