Kasliwal, J. -
(1.)BOTH the above references are disposed of by one single order as identical questions of law arise in the above cases. We shall first deal with the facts and circumstances of Income Tax Reference No. 42 of 1974 in detail in order to appreciate and decide the controversy raised in these cases.
(2.)THE Income-tax Appellate Tribunal, Jaipur Bench, by their order dated September 24, 1974, has referred the following questions of law for the opinion of this court arising out of the order passed in ITA No. 885/JP/1972-73 dated 22-2-1974 and ITA No. 886/JP/1972-73 dated 22-2-1974 :
Case No. 42 of 1974:
"Whether, on the facts and in the circumstances of the case, the Tribunal was justified in deleting the addition of Rs. 47,436 by holding that it was not a revenue receipt and as such not liable to tax ?"
Case No. 43 of 1974:
"Whether, on the facts and in the circumstances of the case, the Tribunal was justified in deleting the addition of Rs. 30,000 by holding that it was a capital receipt and as such not liable to tax ?"
Brief facts leading to Case No. 42 of 1974 are that M/s. Brahm Swaroop & Bros. (hereinafter referred to as "the assessee") filed a return declaring an income of Rs. 32,280 for the assessment year 1966-67. The assessee had shown income from shares in the firms of M/s. Gurunanak Steel Rolling Mills, Bharatpur, M/s. Rama Steel Rolling Mills & General Engineering Works, Jaipur, and interest from Banks. The assessee held 31 per cent. share in the firm, M/s. Gurunanak Steel Rolling Mills. Formerly, the Hindu undivided family was a partner in the firm, M/s. Gurunanak Steel Rolling Mills, Bharatpur, but subsequently, the Hindu undivided family was dissolved on December 30, 1984. After dissolution of the Hindu undivided family, the assessee became a partnership firm. The present shares received from these two firms were to be assessed in the assessee-firm styled as Brahm Swaroop Bros., Industrial area, Bharatpur. On behalf of the assessee-firm, Shri Brahm Swaroop was one of the partners of the firm, M/s. Gurunanak Steel Rolling Mills. Shri Brahm Swaroop retired from the partnership firm on June 30, 1965, and was paid an amount of Rs. 47,436 by the other partners of the said firm. The assessee-firm claimed exemption with regard to the above amount of Rs. 47,436 before the Income-tax Officer on the ground that the aforesaid amount was neither revenue receipt nor capital gain. The Income-tax Officer after considering the material on record held that the amount of Rs. 47,436 was received by Brahm Swaroop, partner of the assessee-firm, as revenue receipt and as such was liable to tax. He was also of the view that the amount in question can also be considered as compensation received by the assessee and as such was liable to tax. In view of the above finding, the Income-tax Officer added the sum of Rs. 47,436 as income of the assessee in the relevant year of account. As such, the assessment was completed on a total income of Rs. 85,800. The assessee, aggrieved against the order of the Income-tax Officer, filed an appeal before the Appellate Assistant Commissioner, but he also upheld the order of the Income-tax Officer and dismissed the appeal.
The assessee then filed an appeal before Income-tax Appellate Tribunal. It was contended before the Tribunal that Brahm Swaroop, Jagannath, Prem Chand, Shiv Dayal Singh, Swaran Singh and Shivdev Singh had been carrying on business of re-rolling scrap and old material into saria, patti and other allied goods of the same type at Bharatpur under the name and style of M/s. Gurunanak Steel Rolling Mills in pursuance of a deed of partnership dated November 11, 1964, executed between the partners. It was further submitted that the parties mutually agreed to dissolve the partnership on June 30, 1965, and according to the said dissolution deed, the partnership stood dissolved at the end of June 30, 1965. Complete accounts of all the assets and liabilities of the said partnership firm were taken as it stood on June 30, 1965, and balance-sheet was prepared and signed by all the partners. It was thus submitted that the continuing partners had agreed to take over the business including the assets, liabilities, machinery and building of the said partnership and had agreed to pay to Shri Brahm Swaroop an amount of Rs. 93,984.63 as retiring partner which included the value of his share, being the credit balance standing in his favour in the books of the partnership as it stood on June 30, 1965, in full and final settlement of his claim. After that date, Shri Brahm Swaroop, who was acting on behalf of the Hindu undivided family of M/s. Brahm Swaroop & Bros., from that date onwards assigned to the continuing partners all his shares and interest in the said partnership, the fixture, fittings, machinery, building and other debts, benefits of contracts and all effects thereof, that after that date, the continuing partners may hereinafter along or in partnership with other or others continue and carry on the said business of the dissolved partnership under the same name of M/s. Gurunanak Steel Rolling Mills. It was thus submitted that after dissolution of the firm, the assessee's trading activity had come to an end and the assessee had parted with his rights of goodwill and the amount in question was a capital asset within the meaning of Section 2(14) of the Income-tax Act, 1961 (hereinafter referred to as "the Act"), and it was not a revenue receipt. The Tribunal found favour with the contention raised by the assessee and placing reliance on CIT v. Mohanbhai Pamabhai  91 ITR 393 (Guj) observed as under:
"In view of the aforesaid decision, it is clear that goodwill is a capital asset. The assessee was paid a sum of Rs. 47,436 over and above the share of his profit from the firm. According to the assessee, the firm had goodwill and at the time of dissolution of the firm, the goodwill was taken away and as a result of it, the assessee was paid a sum of Rs. 47,436. Thus, it was submitted that it was only a capital receipt."
The Tribunal then discussed in detail the ratio of the decision in the case of CIT v. Gangadhar Baijnath  86 ITR 19 (SC). The Tribunal distinguished the above case and ultimately held that the sum of Rs. 47,436 was a capital receipt and was not liable to be taxed. In the above circumstances, the Tribunal has referred the above question for the opinion of this court.
We have heard Shri Surolia appearing on behalf of the Department. Nobody has appeared on behalf of the assessee in spite of notice served on him.
(3.)A perusal of the records shows that Brahm Swaroop as karta of the Hindu undivided family was one of the partners in the firm, M/s. Gurunanak Steel Rolling Mills, in pursuance of the partnership deed dated November 7, 1964. The Hindu undivided family represented by Brahm Swaroop was dissolved on December 30, 1964. Thereafter, Brahm Swaroop became partner in the asses-see-firm, M/s. Brahm Swaroop & Bros. Brahm Swaroop was also one of the partners in the firm, M/s. Rama Steel Rolling and General Engineering Works, in pursuance of the partnership deed dated June 1, 1965. On June 30, 1965, Brahm Swaroop retired as partner from the firm, M/s. Gurunanak Steel Rolling Mills. The Tribunal has recorded the finding that there was no evidence to show that after June 30, 1965, Brahm Swaroop carried on the business in some other firm by investing the amount which he got as a result of his retiring from the firm, M/s. Gurunanak Steel Rolling Mills. Brahm Swaroop also retired from the firm, M/s. Rama Steel Rolling and General Engineering Works, with effect from March 9, 1968. The Tribunal further found that there was no material to show that the trading activity of Brahm Swaroop after retirement from the firm, M/s. Gurunanak Steel Rolling Mills, on June 30, 1964, continued. There was no evidence to show that after June 30, 1965, Brahm Swaroop again became partner in any of the firms for carrying on the same business. The Tribunal further found that the lower authorities had nothing on record to establish that the assessee-firm had various business activities and by the agreement dated June 30, 1965, Brahm Swaroop was only carrying on a trading activity. In the absence of such material and also the finding of the authorities below, the Tribunal observed that the departmental representative could not be heard to say that the assessee by entering into an agreement dated June 30,1965, was carrying on a trading activity. It was thus found that as a result of the dissolution deed dated June 30,1965, only the goodwill of the assessee was taken away.
The view taken by the Gujarat High Court was followed by the Allahabad High Court in Addl. CIT v. Mahinderpal Bhasin  117 ITR 26. The Allahabad High Court in identical circumstances held as under (headnote) :
"The interest of a partner is a right to obtain his share of profits from time to time during the subsistence of the partnership and on the dissolution of the partnership to get the value of his share which remains after satisfying the debts and liabilities of the partnership. When a partner retires, what he receives is really his share in the partnership assets after deducting the liabilities. It is not consideration for transfer of his interest in the partnership to the continuing partners. In the transaction of retirement of a partner, just as in the case of a dissolution of partnership, there is no element of transfer. The transaction is in law an adjustment of the rights of the partners and not relinquishment or even extinguishment of interest of the retiring partner.
Where a partner retired from a firm and received Rs. 20,000 as consideration for relinquishment of her interest in the partnership :
Held, that there was no material to sustain the submission that the assessee entered into the partnership as part of her trading activity. With the relinquishment of her partnership interest, her source of income was entirely extinguished. The receipt of Rs. 20,000 could not, therefore, be held to be a revenue receipt. As no transfer of any capital asset took place within the meaning of Section 45, the sum of Rs. 20,000 was not assessable as capital gains."
In the above Allahabad case, the case of the Supreme Court in CIT v. Ganga-dhar Baijnath  86 ITR 19 was distinguished and the view taken by the Gujarat High Court  91 ITR 393 was followed. Similarly, the Madras High Court in A. K. Sharfuddin v. CIT  39 ITR 333 held that (headnote) :
"Compensation received by one partner of a partnership from another partner for relinquishing all his rights in the partnership is compensation for loss of a capital asset and is not a trading receipt."