Commissioner of Income Tax vs Babulal Nathmal Sharma

Bharucha, J.—Rule has been issued in this application under s. 256(2) of the Income Tax Act, 1961 (hereinafter referred to as ''the Act'') made at the instance of the Commissioner. We do not propose to make the rule absolute for the reasons we now state.

The questions proposed read thus :

"1. Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was correct in confirming the decision of the AAC holding that the amount of Rs. 15,000 received by the assessee was exempt under s. 47(ii) of the IT Act, 1961 ?

Whether the Appellate Tribunal was correct in holding that the amount of Rs. 15,000 received by the assessee for relinquishing his rights in the firm was exempt under s. 47(ii) of the IT Act 1961 ?

Whether the amount of Rs. 15,000 received by the assessee for relinquishing his interest in the firm was exempt under s. 47(ii) of the IT Act 1961 ?"

The assessee was a partner along with only one other. A deed was executed between the assessee and his partner. Under it the assessee relinquished his share in the partnership for the sum of Rs. 15,000. The ITO and the AAC taxed the sum of Rs. 15,000 but the Tribunal declined to consider the sum of Rs. 15,000 as business income or profit. It concluded that the sum of Rs. 15,000 was exempt under s. 47(ii) of the Act which reads :

"47. Transactions not regarded as transfer. Nothing contained in section 45 shall apply to the following transfers -

(i) xxx xxx xxx

(ii) any distribution of capital assets on the dissolution of a firm, body of individuals or other association of persons."

There were only two partners. Upon the assessee relinquishing his share in the partnership, there was a dissolution, for a partnership cannot subsist with only one partner. There was an agreement between the partners that the assessee should get Rs. 15.000 for his share in the partnership. It was not necessary that there should be a division of the assets of the partnership or a valuation thereof. It was open to the partners to agree that the amount of Rs. 15,000 was the value of the assessee''s share in the partnership. Sec. 47(ii) was, therefore, attracted.

Mr. Jetley''s reliance upon this Court''s judgment in Commissioner of Income Tax, Bombay City-II, Bombay Vs. H.R. Aslot, , is misplaced. That was a case where there were more than two partners. Two partners retired and the others continued the partnership. In those circumstances it was held that the retiring partners had received monetary consideration in lieu of relinquishment of their rights in the partnership and the provisions of s. 47(ii) did not apply.

Rule discharged. No order as to costs.