COMMISSIONER OF INCOME TAX Vs. CHUNILAL M PANDYA

JUDGEMENT

(1.) THE assessee is an individual and the assessment year involved is 1971 72. The assessee was a partner in the firm of M/s Shiv Rolling Mills (Old), Udhna. According to the ITO, the assessee retired from the firm on 30th June, 1970. At that point of time, in his personal account in the books of the firm, there was a debit balance of Rs. 62,520 which was built up on account of earlier years' losses and cash withdrawals by the assessee. By a writing which is described as "retirement and dissolution deed" executed on 25th June, 1970, the firm had forgone its right to recover the amount from the assessee with the result that the assessee had not to pay any amount to the firm on account of the amount standing to his debit in the books of the firm.

(2.) ACCORDING to the ITO, this was a case of retirement of the assessee from the firm and the decision of the firm not to enforce recovery from the assessee brought the case of the assessee within the purview of S. 41(1) of the IT Act, 1961. In the alternative, the ITO held that in any case this was a capital gain under S. 45. The ITO, therefore, added back Rs. 27,645 under S. 41(1) without giving any details as to how he worked out the said amount, though the debit balance in the books of the firm was to the tune of Rs. 62,520.

(3.) BOTH the parties went in appeal before the Tribunal. So far as the appeal of the Revenue against the reversal of the order of the ITO in adding the amount of Rs. 27,645 was concerned, the Tribunal agreed with the AAC and held that the conditions laid down in S. 41(1) have not been satisfied inasmuch as no liability or loss had ever been allowed in the hands of the assessee in the sense in which S. 41(1) prescribes. The Tribunal held that this was a case of settlement of accounts and in that case remission or cessation of loss or other liabilities could not be taken as income. The Tribunal read the writing described as dissolution of the firm and concluded that on reading the deed of dissolution, it was nothing but a settlement of accounts between the parties and, therefore, s. 41(1) could not be pressed into service. As regards the alternative view of the ITO to tax it under S. 45 of the IT Act, 1961, the Tribunal found it difficult to sustain it in view of the decision of this Court in CIT vs. Mohanbhai Pamabhai (1973) 91 ITR 393 (Guj). The CIT, therefore, sought two questions by way of reference for our opinion. They are as under :