Commissioner of Income Tax, Gujarat-II vs Chunilal M. Pandya

B.K. Mehta J.

The assessee is an individual and the assessment year involved is 1971-72. The assessee was a partner in the firm of M/s. Shiv Rolling Mills

(Old), Udhna. According to the Income Tax Officer, the assessee retired from the firm on June 30, 1970. At that point of time, in his personal

account in the books of the firm, there was a debit balance of Rs. 62,520 which was built up on account of earlier years'' losses and cash

withdrawals by the assessee. BY a writing which is described as ""retirement and dissolution deed"" executed on June 25, 1970, the firm had

forgone its right to recover the amount from the assessee with the result that the assessee had not to pay any amount to the firm on account of the

amount standing to his debit in the books of the firm.

According to the Income Tax Officer, this was a case of retirement of the assessee from the firm and the decision of the firm not to enforce

recovery from the assessee brought the case of the assessee within the purview of section 41(1) of the Income Tax Act, 1961. In the alternative,

the Income Tax Officer held that in any case this was a capital gain u/s 45. The Income Tax Officer, therefore, added back Rs. 27,645 u/s 41(1)

without giving any details as to how he worked out the said amount, though the debit balance in the books of the firm was to the tune of Rs.

62,520.

The appeal preferred by the assessee to the Appellate Assistant Commissioner was allowed as the Appellate Assistant Commissioner held that

section 41(1) had no application and section 45 was never attracted. He, therefore, disallowed the addition of Rs. 27,645 which according to the

Appellate Assistant Commissioner was without any basis. The Appellate Assistant Commissioner decided some other aspects agitated by the

assessee against him.

Both the parties went in appeal before the Tribunal. So far as the appeal of the Revenue against the reversal of the order of the Income Tax

Officer in adding the amount of Rs. 27,645 was concerned, the Tribunal agreed with the Appellate Assistant Commissioner and held that the

conditions laid down in section 41(1) have not been satisfied inasmuch as no liability or loss had ever been allowed in the hands of the assessee in

the sense in which section 41(1) prescribes. The Tribunal held that this was a case of settlement of accounts and in that case remission or cessation

of loss or other liabilities could not be taken as income. The Tribunal read the writing described as dissolution of the firm and concluded, on

reading the deed of dissolution, that it was nothing but a settlement of accounts between the parties and, therefore, section 41(1) could not be

pressed into service. As regards the alternative view of the Income Tax officer to tax it u/s 45 of the Income Tax Act, 1961, the Tribunal found it

difficult to sustain it in view of the decision of this court in Commissioner of Income Tax, Gujarat Vs. Mohanbhai Pamabhai, . The Commissioner of

Income Tax, therefore. sought two questions by way of reference for our opinion. They are as under :

(1) Whether, on the facts and in the circumstances of the case, the Tribunal was justified in coming to the conclusion that Rs. 27,645 were not

taxable in the assessment year in question u/s 41(1) of the Income Tax Act, 1961 ?

(2) Whether, on the facts and in the circumstances of the case, the Tribunal was justified in coming to the conclusion that the provisions of section

45 of the Income Tax Act, 1961, were not applicable in respect of Rs. 62,520 relinquished by the firm on dissolution of the partnership ?

At the time of hearing of this reference, the learned counsel for the Revenue did not press question No. 2, since it is concluded by the decision

of this court in Commissioner of Income Tax, Gujarat Vs. Mohanbhai Pamabhai, .

As regards the first question, we had asked the learned advocate for the assessee to file additional paper book with the consent of the learned

counsel for the Revenue, so as to furnish us with the copies of the original deed of partnership, dissolution and the balance-sheets and the trading

accounts from the books of the firm for the different years right up to the date of dissolution. We have been taken through this additional paper

book and we find that the assessee had the largest share in the firm to the extent of 40 paise per rupee, and in clauses 4 and 5 of the dissolution

deed, it is clearly agreed between the partners of the firm that the firm would not insist on the recovery of the amount standing to the debit of the

assessee as due and payable to the firm in consideration of the assessee not claiming any share in the assets of the firm. We have looked into the

relevant balance-sheets of the relevant years and we are of the opinion that if the capital account had been made, the assessee would have got

further amounts from the firm. It, therefore, cannot be said by any stretch of imagination that the assessee had got any amount against the loss or

had got some benefit against the trading liability. As a matter of fact, the assessee has never claimed any deduction on account of the trading

liability in his personal assessment. What he claimed was the adjustment of the losses which have been adjusted to his account against his income

from other sources. Apart from this technical aspect of the matter, even on a consideration of the broad facts, namely, if the capital account had

been made, it could not be said that the assessee had got any amount against the loss. In that view of the matter, we have not gone into the other

question as to whether the Revenue has been able to discharge the burden which lay heavily on it to satisfy that the amount which has been paid, if

any, at all to the assessee is against the loss of any particular year. As a matter of fact, nothing has been paid to him in consideration of his forgoing

of his share in the capital assets of the firm. In that view of the matter, we do not think that the Tribunal has committed any error of law in holding

that the Income Tax Officer was not justified in adding Rs. 27,645 to the income of the assessee.

The result is that we answer question No. 1 referred to us in the affirmative, that is, in favour of the assessee and against the Revenue. As stated

above, question No. 2 was not pressed. In the facts and circumstances of this case, there should be no order as to costs in this reference.