C.S.P. Singh, J. - (1.) THE Tribunal has referred the following question for opinion of this court: " Whether, on the facts and in the circumstances of the case, the Tribunal was correct in holding that the amount of Rs. 11,250 received by the assessee from M/s. G.W. Lawrie and Co. was not liable to tax ? "
(2.) THE assessee was a partner in a firm, M/s. G. W. Lawrie andamp; Co. Madan Lal Bhargava, the assessee, and two others, Kishan Lal Bhargava and Vishwanath Bhargava, who were three out of the six partners withdrew from the firm with effect from 30th June, 1969, by an agreement dated July 1, 1969. THE reason for their withdrawing, from their firm was that differences and disputes had arisen between the partners, which was standing in the way of effective running of the business. However, as it was not feasible to dissolve the firm owing to its business commitments and involvements, the three partners decided to retire. Under para. 4, of the retirement deed, the partners were allowed to withdraw their capital and their proportionate share of audited profits for nine months up to the 30th June, 1969. In addition the three retiring partners were given certain amounts, as the value of their share of the goodwill of the firm. Madan Lal Bhargava was given an amount of Rs. 11,250. THE ITO brought this amount to tax as a capital gain treating it as compensation received on retirement from the firm. He was obviously relying on Section 28(2) of the Act for including this amount. THE assessee appealed. THE AAC relying on the case, CIT v. Gangadhar Baijnath [1972] 86 ITR 19 (SC), treated the amount as a taxable business receipt. He was of the view that the amount had been received in lieu of profits which the assessee had got on retirement from the firm. On further appeal to the Tribunal, the Tribunal found that the agreement dated 1st July, 1969, on the basis of which the payment was received, did not indicate that the amount paid to the assessee for his share in the goodwill was compensation for surrendering his profits. Relying upon the decision of the Gujarat High Court in the case of CIT v. Mohanbhai Pamabhai [1973] 91 ITR 393 and the decision of the Supreme Court in the case of CIT v. Bankey Lal Vaidya [1971] 79 ITR 594, the Tribunal held that the amount was exempt under Section 47(ii) of the Act. Counsel for the department urged that the goodwill of a firm is its capital asset, and the amount of money paid to a retiring partner for his share in the goodwill is a transfer of a capital asset as defined in Section 2(47). This being so, as the case of retirement of partner from a firm is not exempt under Section 47(ii), the amount received by the partner for his share in the goodwill is liable to tax under Section 45. Cases of payment made to a retiring partner for goodwill have been considered by the Gujarat High Court in the case of CIT v. Mohanbhai Pamabhai [1973] 91 ITR 393 and our own court in the case of Addl. CIT v. Smt. Mahinderpal Bhasin[1979] 117 ITR 26. In Mohanbhai's case two questions were considered, one whether the goodwill of a firm is a capital asset and, secondly, whether compensation received by a retiring partner amounts to a transfer as defined in Section 2(47) of the Act. The Gujarat High Court, disagreeing with the view of the Madras High Court in CIT v. Rathnam Nadar [1979] 71 ITR 433 and the decision of the Calcutta High Court in the case of CIT v. Chunilal Prabhudas andamp; Co. [1970] 76 ITR 566, held that the goodwill of a firm is a capital asset. The Madras and the Calcutta High Courts have held that the goodwill of a firm is not a capital asset as contemplated by Section 45, for the capital asset contemplated by Section 45 is one the acquisition of which had cost the transferor something in terms of money, and as growth of goodwill does not cost anything in terms of money to the firm it is not a capital asset as contemplated by Section 45, although it may be so under the general Act. The decisions of the Madras High Court and the Calcutta High Court were given while interpreting the provisions of the Indian I.T. Act, 1922. This view of the Madras High Court and the Calcutta High Court has been followed by the Delhi High Court in the case of Jagdev Singh Mumick v. CIT [1971] 81 ITR 500 and the Kerala High Court in the case of CIT v. E. C. Jacob [1973] 89 ITR 88 [FB] and the Karnataka High Court in the case of CIT v. B.C. Snnivasa Setty [1974] 96 ITR 667. The word 'capital asset' had been defined in Section 2(4A) of the Indian I.T. Act, 1922, and is now defined in Section 2(14) in the present Act. The definition of the word ' capital asset' in the present Act so far as it is relevant for this case is in pari materia with the definition contained in the old Act. The Gujarat High Court, however, went on to hold that when a partner retires all that he receives is his share of the partnership asset, and as no consideration is received as a result of the extinguishment of his interest in the partnership asset. The amount received would not be chargeable under Section 44. In the case of Addl. CIT v. Smt. Mahinderpal Bhasin [1979] 117 ITR 26 (All), it has been held that the goodwill of a firm is a capital asset, but the provisions of Section 45 are not attracted in case a partner retires, as what he receives is his share of the partnership assets and not compensation for goodwill. Mr. Gulati contends on behalf of the department that these decisions require reconsideration. The reasons set forth are these. It is urged that Section 2(47) defines transfer in very wide terms, and where a partner retires -from a firm there is an extinguishment of his rights, and the asset which he receives in consideration for this extinguishment would be a transfer as contemplated by Section 2(47). It was also urged that, as Section 47(ii) exempts distribution of capital assets only on dissolution of a firm, it is obvious that the legislature intended that a distribution of capital assets otherwise made should be liable to tax. Section 47, on a first reading, creates an impression that distribution of capital asset on dissolution of a firm is a transfer, but when one has a look at the other clauses, specially Section 47(i), it appears that this provision was put in by way of abundant caution as has been observed by their Lordships of the Supreme Court in the case of CIT v. Madurai Mitts Co. Ltd. [1973] 89 ITR 45. It is, however, urged that the decision of the Supreme Court in Madurai Mills' case no longer holds good, as the word " transfer " has been defined now by the present Act in very wide terms, while Section 12B of the old Act did not embrace cases of the type which now fall within the purview of Section 2(47). It will be useful to read Section I2B(1) of the old Act along with its first proviso: "12B. (1) The tax shall be payable by an assessee under the head ' Capital gains ' in respect of any profits or gains arising from the safe, exchange, relinquishment or transfer of a capital asset effected after the 31st day of March, 1956, and such profits and gains shall be deemed to be income of the previous year in which the sale, exchange, relinquishment or transfer took place: Provided that any distribution of capital assets on the total or partial partition of a Hindu undivided family or under a deed of gift, bequest or will shall not for the purposes of this section be treated as a sale, exchange, relinquishment or transfer of the capital assets...... "
(3.) IT will be noticed that Section 12B also referred to cases of sale, exchange, relinquishment and transfer, and the third proviso also provided that the distribution of capital assets of a firm on its dissolution shall not be treated as a sale, exchange or transfer of capital assets. This proviso was thereafter deleted by the Finance (No. 2) Act of 1956 with effect from April 1, 1957. When one compares the language of the third proviso to Section 126(1) with Section 47(ii) there is no difference, for, like Section 47(ii), which treats such distribution as not amounting to a transfer, the third proviso to Section 12B(1) did likewise. The Supreme Court expressly considered this provision and observed as under (p. 51): " This contention, in our opinion, is not well founded. IT appears to us that the cases of the distribution of capital assets on dissolution of a firm or other association of persons of liquidation of a company were mentioned in the third proviso under the earlier Act, as a matter of clarification to allay fears even though the language of Sub-section (1) of Section 12B was not intended to apply to such cases. Provisos, as mentioned on page 221 of Craies on Statute Law, sixth edition, are often inserted to allay fears. A proviso is inserted to guard against the particular case of which a particular person is apprehensive, although the enactment was never intended to apply to his case or to any other similar case at all." It is, however, suggested that the transfer as now defined in Section 2(47) includes not only sale, exchange or relinquishment but also extinguishment of any right and, thus, the scope of Section 45 is wider than Section 12B. This argument omits from consideration the fact that Section 12B applies not only to cases of sale, exchange and relinquishment but 'also to cases of transfer. The word "transfer" was not defined in the Act. When a transfer takes place there is an extinguishment of the right of one person, i. e., the transferor and the creation of right in another, viz., the transferee. Thus, although Section 12B did not contain the word " extinguishment" it took care of such cases by making the provision applicable in the cases of transfer. This being so, the decision of the Supreme Court cannot be distinguished on the ground suggested. We must, in view of these considerations, read Section 47 in the same light as Section 12B of the old Act, i.e., it is a provision introduced as a matter of abundant caution. This being so, the contention based on Section 47 fails.;