Appeal No 1223 of 1967
Appeal from the judgment and decree dated March 5 1964 of the Allahabad High Court in Income tax Reference No 71 of 1959
section K Mitra B B Ahuja R N Sachthey and B D Sharma for the appellant
Ram Lal and A T M Sampat for the respondent
The Judgment of the Court was delivered by Shah CJ
The respondent who is the Karta of a Hindu Un divided Family entered on behalf of the family into a partnership with one Devi Sharan Garg to carry on the business of 407 manufacturing and selling pharmaceutical products and literature relating thereto
On July 27 1946 the partnership was dissolved 
The assets of the firm which included goodwill Machinery furniture medicines library and copyright in respect of certain publications were valued at the date of dissolution at Rs 250000 
The respondent was paid a sum of Rs 125000 in lieu of his share and the business together with the goodwill was taken over by Devi Sharan Garg
In proceedings for assessment of the respondent for the year 1947 48 the Income tax Officer sought to bring an amount of Rs 70000 to tax as capital gains
The contention raised by the respondent that no part of the amount of Rs 125000received by the respondent represented capital gains was rejected by the Income tax Officer Appellate Assistant Commissioner and the Income tax Appellate Tribunal
The Tribunal however reduced the amounts capital gains brought to tax to Rs 65000 
The Tribunal referred the following question to the High Court of Allahabad under section 661 of the Indian Income tax Act 1922 Whether on a true interpretation of sub section 1 of section 12 B of the Income tax Act the sum of Rs 65000 has been correctly taxed as capital gains
The High Court answered the question in the negative
Against that order with certificate granted by the High Court this appeal has been preferred
Section 12 B1 insofar as it is relevant provides The tax shall be payable by an assessee under the head Capital gains in respect of any profits or gains arising from the sale exchange or transfer of a capital asset effected after the 31st day of March 1946 
and such profits and gains shall be deemed to be income of the previous year in which the sale exchange or transfer took place Provided
Provided further
Provided further that any transfer of capital assets  
on the dissolution of a firm or other association of persons   shall not for the purposes of this section be treated as sale exchange or transfer of the capital assets 408 Liability to pay capital gains arises under section 12 B1 if there be a sale exchange or transfer of capital assets
There was no sale or exchange of his share in the capital assets of the firm by the respondent to Shri Devi Sharan Garg
Nor did he transfer his share in the capital assets
The assets of the firm included the goodwill machinery furniture medicines library and the copyright in respect of certain publications
A large majority of the assets were incapable of physical division and the partners agreed that the assets be taken over by Devi Sharan Garg at a valuation and the respondent be paid his share of the value in money
Such an arrangement in our judgment amounted to a distribution of the assets of the firm on dissolution
There is no clause in the partnership agreement providing for the method of dissolution of the firm or for winding up of its affairs
In the course of dissolution the assets of a firm may be valued and the assets divided between the partners according to their respective shares by allotting the individual assets or paying the money value equivalent thereof
This is a recognized method of making up the accounts of a dissolved firm
In that case the receipt of money by a partner is nothing but a receipt of his share in the distributed assets of the firm
The respondent received the money value of his share in the assets of the firm he did not agree to sell exchange or transfer his share in the assets of the firm
Payment of the amount agreed to be paid to the respondent under the arrangement of his share was therefore not in consequence of any sale exchange or transfer of assets
To persuade us to take a different view reliance was placed on behalf of the Revenue upon James Anderson vs Commissioner of Income tax Bombay City1
In that case the assessee held a power of attorney from the executor of a deceased person in the course of the administration of his estate
He sold certain shares and securities belonging to the deceased for distribution among the legatees
The excess realized by sale was treated by the Income tax Department as Capital gains
The contention of the assessee that since the sale of the shares and securities fell within the purview of the third proviso to section 12 B 1 it could not be treated as a sale of capital assets within the meaning of section 12 B1 was rejected by this Court
This Court observed that the object of the third proviso to section 12 B1 in providing that any distribution of capital assets under a will shall not be treated as sale exchange or transfer of capital assets for the purpose of section 12 B was that as long as there was distribution of capital assets in specie and no sale there was no transfer for the purposes of that section but if there was a sale of the capital assets and profits or gains arose therefrom the liability to tax 1 409 arose whether the sale was by the administrator or executor or a legatee and that the expression distribution of capital assets in the third proviso to section 12 B1 meant distribution in specie and not distribution of sale proceeds
That case has no application
There was no distribution of capital assets between the legatees  the assessee had pursuant to the authority reserved to him from the executor of the deceased person sold the shares and securities and from the sale of shares and securities capital gains resulted
In the case in hand there is no sale and payment of price but payment of the value of share under an arrangement for dissolution of the partnership and distribution the assets
The rights of the parties were adjusted by handing over to one of the partners the entire assets and to the other partner the money value of his share
Such a transaction is not in our judgment a sale exchange or transfer of assets of the firm
In Commissioner of Income tax Madhya Pradesh Nagpur  Bhandara vs Dewas Cine Corporation1 in dealing with the meaning of the expressions Sale and sold as used in section 10 2 vii of the Income tax Act 1922 this Court observed that the expression sale in its ordinary meaning is a transfer of property for a price and adjustment of the rights of the partners in a dissolved firm by allotment of its assets is not a transfer for a price
In that case the assets were distributed among the partners and it was contended that the assets must in law be deemed to be sold by the partners to the individual partners in consideration of their respective shares and the difference between the written down value and the price realised should be included in the total income of the partnership under the second proviso to section 102 vii
This Court observed that a partner may it is true in an action for dissolution insist that the assets of the partnership be realised by sale of its assets but property allotted to a family in satisfaction of his claim to his share cannot be deemed in law to be sold to him
We therefore agree with the High Court that the question referred must be answered in the negative
The appeal fails and is dismissed with costs
GC Appeal dismissed


Summary:
The respondent who was the karta of his Hindu undivided family entered into partnership with one D to carry on the business of manufacturing and selling pharmaceutical products etc
On July 27 1946 the partnership was dissolved
The assets of the firm which included goodwill machinery furniture etc were valued on the date of dissolution at Rs 250000 and the respondent was paid the sum of Rs 125000 in lieu of his share and the business together with the goodwill was taken over by D
The question in income tax proceedings was whether the transaction was one of sale liable to capital gains tax under section 12B1 of the Income tax Act
The assessing and appellate authorities held against the respondent
The High Court in reference however held in his favour
The revenue appealed
HELD  There was no clause in the partnership agreement providing for the method of dissolution of the firm or for winding up of its affairs
In the course of dissolution the assets of the firm may be valued and the assets divided between the partners according to their respective shares by allotting the individual assets or paying money value equivalent thereof
This is a recognised method of making up the accounts of the dissolved firm
In that case the receipt of money by a partner is nothing but a receipt of his share in the distributed assets of the firm
The respondent received the money value of his share in the assets of the firm he did not agree to sell exchange on transfer his share in the assets of the firm
Payment of the amount agreed to be paid to the respondent under the arrangement of his share was therefore not consequence of any sale exchange or transfer of assets
408 C E James Anderson vs Commissioner of Income tax Bombay City and Commissioner of Income tax Madhya Pradesh and Nagpur  Bhandara vs Dewas Cine Corporation 68 ITR 240 distinguished