COMMISSIONER OF INCOME-TAX VS PALANIAPPA TRANSPORT, 2001 PTD-MADRAS-HIGH-COURT-INDIA 3607 (1998)

Income‑tax‑‑‑

‑‑‑‑Business‑‑‑Balancing charge‑‑‑Firm‑‑‑Adjustment of mutual rights of partners on dissolution of firm or retirement of partners does not amount to sale within the meaning of S.41(2)‑‑‑Firm carrying on transport business‑‑. Buses allotted to partner fin dissolution of firm‑‑‑No sale of buses‑‑‑Excess of value of buses over their written down value was not assessable under S.41(2)‑‑‑Indian Income Tax Act, 1961, S.41(2).

The Supreme Court has held in Malabar Fisheries Co. v. CIT (1979) 120 ITR 49 and CIT v. Dewas Cine Corporation (1968) 68 ITR 240 that the adjustment of mutual rights on dissolution of a partnership firm does not result in a sale of the firm's assets by the firm to the erstwhile partner and section 41(2) of the Income Tax Act, 1961, is not attracted to such adjustment. It has also been held by the Supreme Court that even if the adjustment is with reference to a retiring partner, there is no sale by the firm to the retiring partner of the assets of the firm given to the retiring partner by way of adjustment of his rights in the firm at the time of retirement:

Held, that, in the instant case, the Tribunal had found that the assessee lima had three partners and that the firm was dissolved and on such dissolution, one of the retiring partners, M was allotted buses valued at Rs.1,88,448, the firm being one engaged in the business of transport. The buses were taken over by him by way of adjustment of his rights in the firm. There was clearly no sale of business attracting the application of section 41(2).

CIT v. Dewas Cine Corporation (1968) 68 ITR 240 (SC) and Malabar Fisheries Co. v. CIT (1979)120 ITR 49 (SC) fol.

CIT (Addl.) v. Mohanabhai Pamabhai (1987) 165 ITR 166 (SC) ref.

C.V. Rajan for the Commissioner.

Aparna Nandakumar for the Assessee.

JUDGMENT

R. JAYASIMHA BABU, J.‑‑‑ Three questions have been referred to us at the instance of the Revenue which relate to the assessment year 1973‑74. The questions referred are the following:‑‑

"(1) Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was justified in holding that there has been a dissolution of the partnership on February 29, 1972, and not a mere retirement of partners, Sri S. Manickam?

(2) Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was justified in holding that even if it is construed that Sri S. Manickam had only retired from the firm on February 29, 1972, the legal position would be the same as applicable to a case of dissolution of the partnership?

(3) Whether, on the facts and in the circumstances of the case, the Appellate Tribunal's decision that there is no liability under section 41(2) of the Act in respect of buses taken over by the partner Shri S. Manickam is correct?"

Counsel agree that the first two questions are to be answered against the Revenue, and in favour of the assessee, in the light of the decisions of the Supreme Court in Malabar Fisheries Co. v. CIT (1979) 120 ITR 49 and CIT v. Dewas Cine Corporation (1968) 68 ITR 240, insofar as the first question is concerned and the decision of the Supreme Court in the case of Addl. CIT v. Mohanbhai Pamabhai (1987) 165 ITR 166, insofar as the second question is concerned.

The apex Court has held that the adjustment of mutual rights on dissolution of a partnership firm does not result in a sale of the firm's assets by the firm to the erstwhile partner and section 41(2) of the Income‑tax Act is not attracted to such adjustment. It has also been held by the apex Court that even if the adjustment is with reference to a retiring partners, there is no sale by the firm to the retiring partner of the assets of the firm given to the retiring partner by way of adjustment of his rights in the firm at the time of retirement. The first two questions are answered in favour of the assessee.

The surviving question, which was argued at some length by counsel for the Revenue, is the third question.

The Tribunal has found that the assessee‑firm had three partners and that the firm was dissolved and on such dissolution, one of the retiring partners, Manickam, was allotted buses valued at Rs.1,88,448, the firm being a firm engaged in the business of transport. It was contended by the counsel for the Revenue that as the said Manickam, was not entitled to receive any money at the time of dissolution, but in fact was required to pay some amount to the firm, the allotment of the buses as and by way of adjustment of his rights in the firm was not a genuine adjustment, but, was only a camouflage for cutting off the links with him.

The argument so raised is one raised by closing one's eyes deliberately to the realities and the factual position which have been set out at some length in the order of the Tribunal. It is useful to set out the same:

"It is the finding of the Income‑tax Officer that Shri Manickam owed the firm Rs.1,35,461. But that is because he undertook only the liabilities as per Schedule 'A' of the dissolution deed and as per closing entries in the accounts whereby he was debited with hire purchase loans to the extent of Rs.2,18,243.88 and other loans to the extent of Rs.2,90,750. Even assuming that hire purchase loans could not be separated from the business, Shri S. Manickam took over the liabilities to the extent of Rs, 2,90,750. But for his taking over the assets to the extent of about Rs.6.5 Lakhs the question of his having to pay Rs.1.35 Lakhs would not have arisen at all."

The liability of Manickam to pay a sum of Rs.1,35,000 as noted by the Tribunal was a liability which arose only after he took over the assets in addition to the buses allotted to him and the value of the assets so taken over were found to be in excess of what he was entitled to and, therefore, the debit of Rs.1,35,000.

That the buses were taken over by him by way of adjustment of his rights in the firm is evident. There was clearly no sale of buses to the said Manickam attracting the application of section 41(2) of the Income‑tax Act. We do not find any error in the order of the Tribunal and the third question referred to us is, therefore, answered in favour of the assessee, and against the Revenue. The assessee shall be entitled to costs in a sum of Rs.1,000.

M.B.A./569/FC

Reference answered.