Shah, C. J. - (1.) The respondent who is the Karta of a Hindu Undivided Family entered on behalf of the family into a partnership with one Devi Sharan Garg to carry on the business of manufacturing and selling pharmaceutical products and literature relating thereto. On July 27, 1946 the partnership was dissolved. The assets of the firm which included goodwill, machinery, furniture, 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 Rs. 1,25,000 /- in lieu of his share and the business together with the goodwill was taken over by Devi Sharan Garg.
(2.) In proceedings for assessment of the respondent for the year 1947-48 the Income-tax Officer sought to bring an amount of Rs. 70,000/- to tax as capital gains. The contention raised by the respondent that no part of the amount of Rs. 1,25,000/- received by the respondent represented capital gains was rejected by the Incometax Officer, Appellate Assistant Commissioner and the Income-tax Appellate Tribunal. The Tribunal however reduced the amounts of capital gains brought to tax to Rs. 65,000/-. The Tribunal referred the following question to the High Court of Allahabad under S. 66 (1) of the 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". The High Court answered the question in the negative. Against that order, with certificate granted by the High Court, this appeal has been preferred.
(3.) Section 12-B (1) , insofar as it is relevant provides: "The tax shall be payable by an assessee under the head "Capital gains" in respect of any profits or gains arising from the sale, exchange or transfer of a capital asset effected after the 31st day of March 1946 x x x x and such profits and gains shall be deemed to be income of the previous year in which the sale, exchange or transfer took place: Provided ********** Provided further ********** Provided further that any transfer of capital assets x x x on the dissolution of a firm or other association of persons, x x x shall not, for the purposes of this section, be treated as sale, exchange or transfer of the capital assets; ********** " Liability to pay tax on capital gains arises under S. 12-B (1) if there be a sale, exchange or transfer of capital assets. There was no sale or exchange of his share in the capital assets of the firm by the respondent to Shri Devi Sharan Garg. Nor did he transfer his share in the capital assets. The assets of the firm included the goodwill, machinery, furniture, medicines, library and the copyright in respect of certain publications. A large majority of the assets were incapable of physical division, and the partners agreed that the assets be taken over by Devi Sharan Garg at a valuation, and the respondent be vaid his share of the value in money Such an arrangement, in our judgment amounted to a distribution of the assets of the firm on dissolution. There is no clause in the partnership agreement providing for the method of dissolution 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 shares by allotting the individual assets or paying the money value equivalent thereof. This is a reconginzed method of making up the accounts of a dissolved firm. In that case the receipt of 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 transfer his share in the assests 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 of any sale, exchange or transfer of assets.;