Delhi Safe Deposits Co. vs Commissioner Of Income-Tax
2004 Latest Caselaw 169 Del

JUDGMENT

B.C. Patel, C.J.

1. As For assessment years 1968-69, 1969-70 and 1970-71, the Tribunal has referred the following two questions for adjudication.

1. Whether on the facts and circumstances of the case, the assets recovered by virtue of the decree of the High Court dated 29.6.1967 was in satisfaction of the loan of Rs. 5,00,000/- inclusive of interest allegedly due to the assessed from the partnership and it became a part of the stock-in-trade of the assessed?

2. Whether on the facts and in the circumstances of the case, the assessed was entitled to set off the liabilities of partnership in the computation of the capital gain and if so, to what extent?

2. So far as question No. 3 is concerned, it does not arise and, therefore, we are not required to examine it and is returned unanswered.

3. The facts relevant to decide the aforesaid questions are as under:

4. The assessed- Delhi Safe Deposits Company Ltd. entered into an agreement of partnership with John Elliot on 15-2-1964. A copy of the agreement is produced at Annexure-A. The said firm was known as M/S Bombay Tool and Dye, having its office at Bombay. (We may mention that originally there were three partners, but, at the time of dispute there were two partners). The assessed virtually brought the entire finance to run the partnership concern. It is clear from the record that the assessed on 22.7.66 filed a suit ( No. 381/66) in the High Court of Judicature at Bombay for dissolution of partnership and for rendition of accounts of the partnership firm. On 29.6.77, the said Court passed an ex parte decree declaring that the partnership shall stand dissolved w.e.f. 22-7-1966, the date of filing the suit, and that the partnership business assets, credits and effects including the goodwill and the firm M/S Bombay Tool and Die, plant and machinery and the amount receivable by the said partnership be and they are hereby transferred as a going concern to the assessed(the plaintiff) and the same do belong to the assessed (the plaintiff) and the assessed (the plaintiff) is hereby empowered to receive and get any outstanding debts and claims of the said partnership and the assessed ( the plaintiff) do pay all debts and liabilities of the said partnership and the defendant ( outgoing partner) do pay the assessed (plaintiff) the sum of Rs. 1,31,854.92 being the amount due by the defendant (outgoing partner) to the plaintiff. (Words indicated in the bricket are the original as appearing in the decree)

5. After sometime, the assessed disposed of the plant and machinery in piecemeal in three different years and a question with regard to the capital gain arose and the assessing officer after examining the matter in greater detail arrived at a conclusion that the total cost to the assessed came to Rs. 6,29,801/- while the total sale proceeds received were Rs. 8,61,233/- which resulted in capital gain of Rs. 2,32,432/-. The assessing officer divided the capital gain in three different assessment years in which the machinery came to be disposed of. The said bifurcation is as under:

  1968.69             Rs 1,25,816/- 
1969-70             Rs. 354/- 
1970.71             Rs.1,05,262/- 
                  ----------------- 
                    Rs.2,31,432/- 
                  ----------------- 
 

6. Against the order made by the Assessing officer, the Commissioner (Appeals) was approached, who dismissed the appeal. Thereafter the Tribunal was approached and the Tribunal after examining the matter in detail dismissed the appeal on 19.1.1977 vide Annexure-I. It appears that an application under Section 254(2) was submitted being Misc Application being ITA 674/Delhi/75-76. The same has been rejected by an order dated 21-6-1978.

7. At the instance of the assessed, the aforesaid two questions have been referred by the Tribunal. It may be noted that the questions, which were never raised earlier were tried to be raised but, the Tribunal has not given importance to the questions and did not allow the assessed to raise the question at the second appellate stage. It was suggested that the assessed was the money lender and the amount was given in advance. It also transpires that the assessed contended that in view of the decree drawn by Bombay High Court, in satisfaction of the loan of Rs. 5 lakhs, inclusive of interest, the same should be treated as the stock-in-trade of the assessed.

8. We have to examine the nature of the decree drawn by the Court at the instance of the assessed. The nature of the decree has much bearing on the subject-matter. The Tribunal after examining the contents of the decree and the ex-parte order as well as the contents of the plaint arrived a conclusion that it was a clear case of dissolution of partnership by a Court and it cannot be said that it was a suit filed by a creditor against a debtor. A question was raised that a partner who has advanced money to the partnership has a right to recover the amount which he has given by way of loan and on this basis it was contended that the assessed who has given a loan to the partnership firm of which the assessed was a partner, is to be treated in the capacity of a creditor. However, an interesting thing to be seen in the instant case is whether the decree was in satisfaction of the loan of Rs. 5 lakhs inclusive of interest due to the assessed from the partnership firm or the decree was a consequence of a suit filed for dissolution of partnership firm and rendition of account. If the High Court has made a decree on its original side on the suit for dissolution of the partnership firm and for rendering the accounts, then the Tribunal has committed no error, in our opinion, in not considering the same as stock-in-trade of the assessed. We are in agreement with the finding recorded in para 12 by the Tribunal : ''Merely because a partner has advanced some money over and above the capital he has agreed to subscribe does not convert the suit for dissolution of partnership and winding up of the affairs of the partnership into an action to recover a debt, it remains a suit for a declaration to dissolve the partnership and winding up of its affairs''. In absence of finding of the facts by the Tribunal that the plaint disclosed that the suit was also filed to recover the debt, the Tribunal was justified in arriving at a conclusion.

9. At this stage, it would be relevant to refer to Section 48 of the Partnership Act which refers to mode of settlement of account between the partners. Section 48 reads as under :-

''48. Mode of settlement of accounts between partners. - In settling the accounts of a firm after dissolution, the following rules shall, subject to agreement by the partners, be observed: -

(a) losses, including deficiencies of capital, shall be paid first out of profits, next out of capital, and, lastly, if necessary, by the partners individually in the proportions in which they were entitled to share profits;

(b) the assets of the firm, including any sums contributed by the partners to make up deficiencies of capital, shall be applied in the following manner and order: -

(i) in paying the debts of the firm to third parties;

(ii) in paying to each partner rateably what is due to him from the firm for advances as distinguished from capital;

(iii) in paying to each partner rateably what is due to him on account of capital; and

(iv) the residue, if any, shall be divided among the partners in the proportions in which they were entitled to share profits.''

10. From the decree or the order made by the High Court of Bombay, there is nothing to indicate that there was any sum paid by way of advance as distinguished from capital. In this case accounts are to be settled as per the mode as indicated in Section 48 alone consequent upon dissolution of the firm, not independently for recovery of amount and accordingly we answer question No.1 in favor of the revenue and against the assessed.

11. So far as question No.2 is concerned , the assessing officer, has examined the matter in detail and has arrived at a figure as to what would be the capital gain. Question No.2 refers to the entitlement of the assessed to set off the liability of partnership in computation of capital gain. So far as the computation of capital gain is concerned, Section 48 of the Income-tax Act, 1961 refers to computation and deduction. At the relevant time, the said Section read as under :-

''Mode of Computation and deductions.

48. The income chargeable under the head '' Capital gains'' shall be computed by deducting from the full value of the consideration received or accruing as a result of the transfer of the capital asset the following amounts, namely :-

(i) expenditure incurred wholly and exclusively in connection with such transfer;

(ii) the cost of acquisition of the capital asset and the cost of any improvement thereto.''

12. Only expenditure incurred in connection with the said transfer of the capital assets or cost of acquisition of the capital or cost of any improvement thereto can be deducted from the value of the plant or machinery so as to come to a conclusion as to what is the capital gain. The assessing officer has followed the said procedure. In the instant case, it would be relevant to quote Section 49(1)(iii)(b):-

''49. (1) Where the capital asset became the property of the assessed-

xxx xxx xxx xxx xxx xxx

(iii)(b) on any distribution of assets on the dissolution of a firm, body of individuals or other association of persons, or.

(c) xxx xxx xxx 9(d) xxx xxx xxx

the cost of acquisition of the assets shall also be deemed to be cost for which the previous owner of the property acquired it, as increased by the cost of any improvement of the assets incurred or borne by the previous owner or the assessed, as the case may be.

13. Reading the said Section, it is clear that where the capital asset became property of the assessed on dissolution of a firm then the cost of acquisition is deemed to be the cost for which the previous owner of the property acquired it. In the instant case the property was acquired by the partnership firm and hence cost of acquisition by firm is to be considered. Written down value as per balance sheet is required to be taken into consideration which in the instant case has been taken into consideration. There is no provision for entitlement to set off the liability of the partnership in computation of capital gain. Therefore, we answer question No.2, as indicated above, in favor of the revenue and against the assessed. Accordingly, the reference stands disposed of.