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

Citation: [1971] 3 S.C.R. 406 · Decided: 21-01-1971 · Supreme Court of India · Bench: J.C. SHAH · Disposal: Dismissed

Judgment (excerpt)

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 manufac-
turing and selling pharmaceutical products etc. 
On July 27, 1946 the 
partnership was dissolved. The assets of the firm which included good-
will, 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 re-
ceipt 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,. 39-
I.T.R. 1!3 and Commissioner of lncome:tax, Madhya Pradesh and Nag-
pur & "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 Un-
H 
. d1.v1de~ Famliy eD:tered on behalf of the family into a partner-
ship. 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 literature-
relating thereto. 
On July 27, 1946 the partnership was dis-
solved . The assets of the firm which included goodwill, machi-
nery, 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 a

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