Case: C.I.T., U.P Vs. Bankey Lal Vaidya (Dead) By L.R.S

1. The respondent who is the Karta of a Hindu Undivided Family entered on behalf of the family into a partnership with one Devi Sharan Garg to carry on the business of 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. 2,50,000/-. The respondent was paid a sum of Rs. 1,25,000 /- in lieu of his share and the business together with the goodwill was taken over by Devi Sharan Garg.2. In proceedings for assessment of the respondent for the year 1947-48 the Income-tax Officer sought to bring an amount of Rs. 70,000/- to tax as capital gains. The contention raised by the respondent that no part of the amount of Rs. 1,25,000/- received by the respondent represented capital gains was rejected by the Incometax Officer, Appellate Assistant Commissioner and the Income-tax Appellate Tribunal. The Tribunal however reduced the amounts of capital gains brought to tax to Rs. 65,000/-. The Tribunal referred the following question to the High Court of Allahabad under S. 66 (1) of the Indian Income-tax Act,on a true interpretation of sub-section (1) of section 12-B of the Income-tax Act, the sum of Rs. 65,000/- has been correctly taxed as capitalHigh Court answered the question in the negative. Against that order, with certificate granted by the High Court, this appeal has been preferred.

Reasoning: Liability to pay tax on capital gains arises under S. 12-B (1) 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 vaid 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 reconginzed 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 assests 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 ofwas 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 of 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 parties of his share. Such a transaction is not in our judgment a sale, exchange or transfer of assets of theconsideration 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 S. 10 (2) (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.6. We therefore agree with the High Court that the question referred must be answered in the negative.