COMMISSIONER OF INCOME TAX Vs. MADAN LAL BHARGAVA

JUDGEMENT

(1.) THE Tribunal has referred the following question for opinion of this court:

(2.) THE assessee was a partner in a firm, M/s. G. W. Lawrie andamp; Co. Madan Lal Bhargava, the assessee, and two others, Kishan Lal Bhargava and Vishwanath Bhargava, who were three out of the six partners withdrew from the firm with effect from 30th June, 1969, by an agreement dated July 1, 1969. THE reason for their withdrawing, from their firm was that differences and disputes had arisen between the partners, which was standing in the way of effective running of the business. However, as it was not feasible to dissolve the firm owing to its business commitments and involvements, the three partners decided to retire. Under para. 4, of the retirement deed, the partners were allowed to withdraw their capital and their proportionate share of audited profits for nine months up to the 30th June, 1969. In addition the three retiring partners were given certain amounts, as the value of their share of the goodwill of the firm. Madan Lal Bhargava was given an amount of Rs. 11,250. THE ITO brought this amount to tax as a capital gain treating it as compensation received on retirement from the firm. He was obviously relying on Section 28(2) of the Act for including this amount. THE assessee appealed. THE AAC relying on the case, CIT v. Gangadhar Baijnath [1972] 86 ITR 19 (SC), treated the amount as a taxable business receipt. He was of the view that the amount had been received in lieu of profits which the assessee had got on retirement from the firm. On further appeal to the Tribunal, the Tribunal found that the agreement dated 1st July, 1969, on the basis of which the payment was received, did not indicate that the amount paid to the assessee for his share in the goodwill was compensation for surrendering his profits. Relying upon the decision of the Gujarat High Court in the case of CIT v. Mohanbhai Pamabhai [1973] 91 ITR 393 and the decision of the Supreme Court in the case of CIT v. Bankey Lal Vaidya [1971] 79 ITR 594, the Tribunal held that the amount was exempt under Section 47(ii) of the Act.

(3.) IT will be noticed that Section 12B also referred to cases of sale, exchange, relinquishment and transfer, and the third proviso also provided that the distribution of capital assets of a firm on its dissolution shall not be treated as a sale, exchange or transfer of capital assets. This proviso was thereafter deleted by the Finance (No. 2) Act of 1956 with effect from April 1, 1957. When one compares the language of the third proviso to Section 126(1) with Section 47(ii) there is no difference, for, like Section 47(ii), which treats such distribution as not amounting to a transfer, the third proviso to Section 12B(1) did likewise. The Supreme Court expressly considered this provision and observed as under (p. 51):