# C.I.T., U.P v. BANKEY LAL VAIDYA (DEAD) BY L.RS~

- **Citation:** [1971] 3 S.C.R. 406
- **Court:** Supreme Court of India
- **Decided:** 1971-01-21
- **Case number:** Civil Appeal No. 1223 of 1967
- **Bench:** J. C. Shah, K. S. Hegde, A. N. Grover
- **Source:** https://unisonlegal.in/judgment/supreme-court-of-india/c-i-t-u-p-v-bankey-lal-vaidya-dead-by-l-rs-5142
- **Pages:** 4

## Headnote

Income-tax Act, 1922, s. 128(1)-Partition of asset• of a firm 011 dis-·
K
solution-Assets of
firms valuett--Outgoing
partner paid value of his
share-Whet.her transaction amounts to sale resulting· iii capital gain.
The respondent who was the karta of his Hindu undivided family
entered into partnership with one D to carry on the business of manufacturing and selling pharmaceutical products etc.
On July 27, 1946 the
partnership was dissolved. The assets of the firm which included goodwill, machinery, furniture etc. were valued on tile date of dissolution at
Rs. 2,50,000 and the respondent was paid the sum of Rs. 1,25,000 in
lieu of his share and the business together with the goodwill was taken
over by D. The question in income-tax proceedings was
whether_ the
transaction was one of sale liable to capital gains tax under s. 12B(l) of
the Income-tax Act. 1922.
The assessing and appellate authorities held
against the respondent. The High Court in reference, however, held in
hi< favour. The revenue appealed.
HELD : There was no clause in the partnership agreement providing
for the method of dissolution of the firm or .for winding up ol. its affairs.
In the course of dissolution the assets of the firm may be valued and the
assets divided between the partners according to their respective shares by
allotting the individual assets or paying money value equivalent thereof.
This is a recognised method of making up the accounts elf the dissolved
firm.
In that case the receipt of money by a partner is nothing but a receipt of bis 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 on transfer his share in the assets of the firm.
Payment of the amount agreed to be paid to the respondent under the
arrWJgernent elf his share was
therefore not consequence
of any sale,
exchange .or transfer of assets. [408 C-EJ
James ,foderson v. Commissioner of Income-tax, Bombay City,. 39I.T.R. 1!3 and Commissioner of lncome:tax, Madhya Pradesh and Nagpur & "1handara v. Dewas Cine Corppration, 68 I.T.R. 240, distinguished.

## Text

406
C.I.T., U.P.
v.
BANKEY LAL VAIDYA (DEAD) BY L.RS~
January 21, 1971
A
[J. C. SHAH, C.J., K. S. HEGDE AND A. N. GROVER, JJ.]
Income-tax Act, 1922, s. 128(1)-Partition of asset• of a firm 011 dis-·
K
solution-Assets of
firms valuett--Outgoing
partner paid value of his
share-Whet.her transaction amounts to sale resulting· iii capital gain.
The respondent who was the karta of his Hindu undivided family
entered into partnership with one D to carry on the business of manufacturing and selling pharmaceutical products etc.
On July 27, 1946 the
partnership was dissolved. The assets of the firm which included goodwill, machinery, furniture etc. were valued on tile date of dissolution at
Rs. 2,50,000 and the respondent was paid the sum of Rs. 1,25,000 in
lieu of his share and the business together with the goodwill was taken
over by D. The question in income-tax proceedings was
whether_ the
transaction was one of sale liable to capital gains tax under s. 12B(l) of
the Income-tax Act. 1922.
The assessing and appellate authorities held
against the respondent. The High Court in reference, however, held in
hi< favour. The revenue appealed.
HELD : There was no clause in the partnership agreement providing
for the method of dissolution of the firm or .for winding up ol. its affairs.
In the course of dissolution the assets of the firm may be valued and the
assets divided between the partners according to their respective shares by
allotting the individual assets or paying money value equivalent thereof.
This is a recognised method of making up the accounts elf the dissolved
firm.
In that case the receipt of money by a partner is nothing but a receipt of bis 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 on transfer his share in the assets of the firm.
Payment of the amount agreed to be paid to the respondent under the
arrWJgernent elf his share was
therefore not consequence
of any sale,
exchange .or transfer of assets. [408 C-EJ
James ,foderson v. Commissioner of Income-tax, Bombay City,. 39I.T.R. 1!3 and Commissioner of lncome:tax, Madhya Pradesh and Nagpur & "1handara v. Dewas Cine Corppration, 68 I.T.R. 240, distinguished.
CIVIL APPELLATE JURISDICTION : Civil Appeal No. 1223 of
1967.
Appeal from the judgment and decree dated Mardi.• 5i 1964 of
the Allahabad High Court in l11eome-tax Reference No:. 7;1; of
c
E
F
1959.
G
S. K. Mitra, B. ]J. Ahuja, R. N. Sachtht!y and B. D. Sharma:,
for the appellaμt.
Ram Lal and A. T. M. Sampat, for the respondent.
The Judgment of the Court was delivered by
. . Shah, C.~. The respondent who is the Karta of a Hindu UnH
. d1.v1de~ Famliy eD:tered on behalf of the family into a partnership. with one Devi Sharan Garg to carry oi:i
the
business ot
t
C.I.T. V. B. L. VAIDYA (Shah, C./.)
407
A manufacturing and selling pharmaceutical products and literaturerelating thereto.
On July 27, 1946 the partnership was dissolved . The assets of the firm which included goodwill, machinery, fUl)lliture, 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
B Rs. 1,25,000/- ·in lieu of his share and the business together
with the goodwill was taken over by Devi Sharan Garg.
In proceedings for assessment of the respondent foJ the year
194 7-48 the Income-tax Officer sought to bring an amount of
Rs. 70,000/- to tax as capital gains. The contention raised by
c the respondent that no part of the amount of Rs. 1,25,000/-
received by the respondent represented capital gains was rejected
by the Income-tax Officer, Appellate Assistant Commissioner and
the Income-tax Appellate Tribunal.
The
Tribunal
hiwever
reduced the amounts capital gains brought to tax to Rs. 65,000/-.
Th~ Tribunal referred the following question to the High Court
0
of Allahabad under s. 66 (1) of the Indian Income-tax Act,.
1922:
"Whether 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 capital gains".
E The High Court answered the question in the negative. Against
that order, with certificate granted by the High Court, this appeal
has been preferred.
F
G
H
Section 12-B ( 1), insofar as it is relevant provides :
"The tax shall be payable by an assessee under the
he.a~ "Capital gains" in respect of any profits or gaLns
ansmg f1om the sale, exchange or transfer of a capital
asset effected after the 31st day of March 1946 .
~nd such profits and gains shall be deemed to be
mcome of the previous year in which the sale, exchange or transfer took place :
Provided
Provided further
Provided further that any transfer of capital assets
. . . . . . . . on the dissolution of a firm
or
other association of persons.
. . . . . . shall not
for the purposes of this section, be treated as sale ex-
<"1ange or transfer of the capital assets;
'
"
408
SUPREME COURT REPORTS
[1971] 3 S.C.R.
Liability to pay capital gains arises under s. 12-B ( 1) if there be
A
a sale, exchange or transfer of capital assi;ts, There was no sale
or exchange of his share in the capital assets of the firm by the
respondent to Shri Devi Shara.n Garg.
N.or did he transfer his
share in the capital assets.
The assets of the firm included the goodwill, machijllery, furniture, medicines library
and the copyright in respect of certain publications.
A large
B
majority of the assets were incapable of physical division, and
the partners agreed that the assets be taken over by Devi Shara.n
Garg at a valuation, and the respondent be paid his share' of the
value in money. Such an arrangement, in our judgment, amounted to a distribution.of the ;issets of the firm on dissolutiqn, There
is no clause in the partnership agreement providing for the methqd c
of d!i;solution 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 _§_hares by allotting the individual assets or paying the money
value equivalent thereof. This is a recognized method of making
up the accounts of a dissolved firm. In that case the receipt_ of
D
.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 tr3JJ1Sfer his share in the assets 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 'E
<>f any sale exchange or . transfer of assets.
To persuade us to take a different view, reliance was placed
on behalf of the Revenue upon James Anderson v. C:ommissioner
of Income-tax B•'mbay C:ity(11). In that case the assessee held
a power of attorney from the executor of a deceased person, in
the course of the administration of hise estate. He sold certain F
shares and securities belanging to the deceased for distribution
among the legatees. The excess realized by sale was treated by
the Income-tax Department as Capital gains. The contention of
the ·assessee that since the sale of the shares and securities fell
within the purview of the third proviso to s. 12-B(i)-it could
not be treated as a sale of capital assets within the meaning of
s. 12-B(l) was rejected by this Court. This Court observed that
the object of the third proviso to s. 12-B(l ), in providing that
"any distribiitjon of capital assets under a will" shall not be
treated as safe, exchange or transfer of capital assets
for the
purpose of s. 12-B was that as Jong as there was distribution of
capital assets in specie and no sale, there was no transfer for the
purposes of that sectioo. but if there was a sale of the capital
assets and profits or gains arose therefrom, the liability to tax
(1) 39 I.TR. 123.
G
H
-
'
C.I.T. v. B. L. VAIDYA (Shah, C.J.)
409
A arose, whether the sale was by the administrator or executor or
a legatee, and that the expression "distribution of capital assets"
in the third proviso to s. 12-B(l) meant distribution in specie
and not distribution of sale proceeds.
That case has no application.
There was no distribution of capital assets between the
legatees : the assessee had pursuant to the authority reserved to
B 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 ain arrangement
for dissolution of the partnership and distribution the assets. The
rights of the parties were adjusted by handing over to one of the
C partners the entire assets and to the other partner the moneyvalue of his share.
Such a transaction is 111ot in our judgment
a sale, exchange or transfer of assets of the firm.
In Commissioner of Income-tax, Madhya Pradesh, Nagpur &
Bhandara v. Dewas Cine Corporaiion(') in dealing with the
meaning of the expressions "Sale" and "sold" as us~ ~n s. (l 0)
D (2)(vii) of the Income-tax Act, 1922, this Court observed that
the expression "sale" in its ordinary meaning is a transfer of
property for a price, and adjustment of the rights of the partners
in a dissolved firm by allotment of its assets is [!lot a transfer for
a price. In that case the assets were distributed among the partners and it was contended that the assets must in law be deemed
E
to be sold by the partners to the individual partners in consideration of their respective shares, and the dilferf!llce 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 i1nsist that the assets of the partnerF ship 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.
G
We therefore agree with the High Court that the question
referred must be answered in the negative.
The appeal fails and is dismissed with costs.
G.C.
Appeal dismissed.
(2) 68 I.T.R. 240