Commissioner of Income Tax vs P.R.A.L.M. Muthukaruppan Chettiar

Beasley, C.J.—The question referred to us is whether on the facts of this case the sum of Rs. 38,305 is a receipt of capital or of profit

assessable u/s 4 (2), Income Tax Act. The petitioner was a partner in the S.P.K.A.A.M. Firm in Colombo. He retired from that firm; and an

account was taken of the capital and of the profits, etc., and the petitioner was given his share and went out of the firm with it. His contention is that

his retirement from the firm brought about a dissolution of the firm and that on such a dissolution the profits and capital etc., of the firm became

consolidated into capital for distribution amongst the partners. He therefore contends that the sum in question cannot be assessed to Income Tax as

profits following the decision in Commissioner of Income Tax, Madras v. Sidaha Gowder & Sons 1932 Mad. 375 in which the decision in Inland

Revenue Commissioner v. Burrell (1924) 2 K.B. 52 was applied. The Commissioner of Income Tax contests this position and contends that the

principle of the latter decision cannot be applied to the case of a partnership which is not a corporate body. That argument of course proceeds to

the length of saying that the decision in Commissioner of Income Tax, Madras v. Sidaha Gowder & Sons 1932 Mad. 375, was incorrect. I may

here observe however that in that case it was put in the forefront of the Income Tax Commissioner''s case that the principle laid down in Inland

Revenue Commissioner v. Burrell (1924) 2 K.B. 52 should be extended to the case of a partnership in India; and if the facts of this case are similar

to the facts in that case, then as I see DO reason for thinking that that case was incorrectly decided it must be applied. He seeks also to distinguish

this case from that because he says that there was no stoppage of business or final dissolution of partnership accompanied by a distribution of

assets.

This view completely ignores the provisions of Section 253(7), Contract Act which provides that, in the absence of any contract to the contrary,

if from any cause whatsoever, any member of partnership ceases to be so, the partnership is dissolved as between all the other members. The legal

position therefore is that upon the retirement of the petitioner from the partnership the partnership was dissolved as between all the other members.

It follows therefore that there must be deemed to have been an ascertainment of the shares of all the partners and indeed there certainly was one

with regard to the petitioner and distribution of the partnership assets. It does not in the least degree, in my opinion, affect the question that, the

other partners continued in business together. Their doing so was merely in the capacity of partners in a new firm, the legal position clearly being

that the old firm had ceased to exist. This case is not at all similar to another case relied upon by the Commissioner of Income Tax, viz.

Arunachalam Chettiar v. Commissioner of Income Tax, Madras 1929 Mad. 769. There what was being considered was a partition of a Hindu

joint family. In my view, totally different considerations apply to such a case as that, for the reasons I have already stated, the answer to the

question referred must be that upon the facts of this case the sum of Rs. 38,305 is a receipt of capital and not of profit. The assessee will be

allowed Rs. 250 costs.

Ramesam, J.

I agree.

Sundaram Chetty, J.

I agree.