COMMISSIONER OF INCOME TAX Vs. TRIBHUVANDAS G PATEL

JUDGEMENT

(1.) IN this reference made to this Court by the Tribunal at the instance of the CIT, Bombay City III, Bombay, under S. 256(1) of the IT Act, 1961, the following three questions have been referred to us for our opinion :

(2.) THE questions relate to the asst. year 1962 63 and arise out of the assessment proceeding of the assessee (Tribhuvandas G. Patel), a retired partner of the firm of Kumar Engineering Works, Bombay. The facts giving rise to the questions may be stated : the assessee was a partner in the firm of Kumar Engineering Works up to 31st Aug., 1961, whereafter he retired therefrom. It appears that on 5th Dec., 1960, he served on the remaining partners a notice of his intention to dissolve the firm w.e.f. 31st Dec., 1960, but as the remaining partners opposed the move the assessee to dissolve the firm and contended that the firm continued to exist notwithstanding the notices served on them by the assessee, the assessee filed Suit No. 72 of 1961 on the original side of this Court on 8th March, 1961, for a declaration that the firm was dissolved w.e.f. 31st Dec., 1960, and for accounts and other reliefs. The dispute was ultimately settled by the partners out of Court and under a deed, dt. 19th Jan., 1962, the assessee retired from the firm w.e.f. 31st Aug., 1961, and the remaining partners continued to carry on the business of the firm. On the occasion of such retirement the assessee was paid in all Rs. 9 lakhs which, inter alia, comprised three items, viz., (a) Rs. 1 lakh as his share of profit of the firm for the broken period ended 31st Aug., 1961, (b) Rs. 50,000 as his share of the value of goodwill, and (c) Rs. 4,77,941 as his share in the remaining assets of the firm (by appreciation of assets, etc.). The entire break up has been set out by the Tribunal in the statement of case but the other items received by the assessee which were included in the total amount of Rs. 9 lakhs are not material for the purpose of this reference. It appears that the assessment of the firm Kumar Engineering Works as a registered firm for the asst. yr. 1962 63 was completed by the 1st ITO (A IV Ward) and on apportionment a sum of Rs. 1,72,155 was allocated to the assessee as his share of profit under S. 158 and an intimation thereof was given to the ITO (8th ITO, BSD(W), Bombay) dealing with the case of the assessee as an individual. During the course of his individual assessment the assessee raised three contentions. In the first place, he urged that only a sum of Rs. 1 lakh and not Rs. 1,72,155 as "share from the firm M/s. Kumar Engineering Works now assessed by 1st ITO, A IV Ward, taken as intimated by the ITO" without much discussion on the point. He further held that this was not a case of dissolution of the firm but a case where the assessee had retired from the firm and the remaining partners had continued the partnership business and as such S. 47(ii) did not apply and the entire amount of Rs. 4,47,941 was chargeable to capital gains tax as all the assets other than the land at Kalina were purchased after 1st Jan., 1954, and as the land at Kalina had not appreciated in value by 1st Jan., 1954. He also included the sum of Rs. 50,000 in the total income as an item being liable for capital gains tax. In the appeal that was preferred by the assessee, the AAC substantially confirmed the ITO's order in regard to the said three items. He confirmed the inclusion of Rs. 1,72,155 in the total income of the assessee on the ground that the partner in his personal assessment could not challenge the allocation of profit made under S. 158 of the Act and that if he were aggrieved by the said allocation he should have preferred an appeal on behalf of the firm. He also supported the inclusion of the said amount on the ground that the assessee was liable to tax not merely on the income received by him but on income which accrued or was deemed to accrue to him. As regards the entire amount of Rs. 4,77,941 which was held liable to capital gains tax by the ITO he took a different view on the point of valuation of certain assets and held that the sum of Rs. 4,27,108 only was liable to capital gains tax. As regards the assessee's share in the value of goodwill amounting to Rs. 50,000 he upheld the ITO's order.

(3.) AT the outset we may state that out of the three questions that have been referred to us, question No. 2 which pertains to the sum of Rs. 50,000 received by the assessee as his share of the value of goodwill is, in our view, completely covered by the latest decision rendered by this Court in the case of CIT vs. Home Industries and Co. 1977 CTR (Bom) 238 : (1977) 107 ITR 609 (Bom) and, therefore, it will not be necessary to discuss and deal with the same in any detail. Admittedly, on the occasion of retirement from the firm, the assessee had received this sum of Rs. 50,000 as his share in the value of the goodwill of the firm of Mrs. Kumar Engineering Works under the deed, dt. 19th Jan., 1962. There was no dispute before us that the firm of Kumar Engineering Works commenced its business afresh from Kartik Sud 1st, S.Y. 2004, 13th Nov., 1947, and it was commenced by the assessee and two other partners, and it was during the course of working of the said partnership business that the goodwill grew. In other words, the goodwill of the firm in the instant case was admittedly a self generated asset which had cost nothing to the partners of the firm in terms of money. In the case of such goodwill this Court in Home Industries and Co.'s case (supra) has taken the view that the same will not be a capital asset the transfer of which will give rise to chargeable capital gain either under S. 12B(1) of the 1922 Act or under S. 45 of the 1961 Act. In view of this position, Mr. Joshi appearing for the Revenue stated before us that so far s this Court is concerned the answer to question No. 2 will be covered by that decision. Question No. 2 is, therefore, answered in the negative and in favour of the assessee.