COMMISSIONER OF INCOME TAX Vs. RAGHU KUMAR L

JUDGEMENT

(1.) : This reference under S. 256(1) of the IT Act of 1961, at the instance of the Revenue raises an interesting question of law as to the scope and ambit of S. 45 of the Act relating to capital gains tax.

(2.) THE assessee is the Karta of an HUF. He was previously a partner in two firms (1) M/s Chegu Krishnamurthy, Guntur, and (2) M/s Southern Tobacco Packers, Guntur. THE assessee retired from the above two firms w.e.f. 1st Jan., 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. THE firms from which the assessee retired were carrying on business with the remaining partners. THE ITO observed that the amount of Rs. 46,500 received by the assessee from these two firms was to be treated as capital gains in the hands of the assessee. Accordingly, the ITO assessed the capital gains in the hands of assessee. THE main contention that the case was governed by S. 47(2) of the Act and the transaction cannot be regarded as a transfer so as to attract the liability under S. 45 of the Act was rejected by the ITO on the ground that it was not a case of a dissolution of the firm. THE matter was carried in appeal. THE assessee reiterated the same contention, namely, that the sum of Rs. 46,500 could not be treated as capital gains in view of S. 47(2) of the IT Act, 1961. THE AAC negatived the contention of the assessee and upheld the order of the ITO.

(3.) MR. Suryanarayana Murthy, the learned counsel for the Revenue, mainly contended that on retirement of a partner from the firm, a transfer, within the extended meaning given in cl. (47) of s. 2 of the Act is involved. There is a relinquishment of the interest of the partner in the partnership assets and an extinguishment of his rights in the partnership assets. He submits that a distinction has to be drawn between a case of the retirement of a member and dissolution of the firm. He says that in the case of the former, the retiring partner relinquishes his rights in the partnership assets resulting in an extinguishment of his rights in the existing partnership, whereas in the case of a dissolution of a firm the position is different as the partnership itself comes to an end.