Firm transfer and capital gains rules applied where business was sold as a going concern without dissolution.

A supplementary reference on a new question was held incompetent because it was sought under section 66(4) rather than the proper route under section 66(2), and it was not shown to be within limitation. On the substantive tax issues, the business sale was treated as a transfer by the assessee-firm, not by the partners individually, because the firm was named as transferor and the business was conveyed as a going concern without dissolution. The excess realised on depreciable assets was chargeable under the second proviso to section 10(2)(vii), and the capital sum was chargeable as capital gains under section 12B since the dissolution-based exemption did not apply.

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Issues: (i) whether the supplementary reference called for under section 66(4) of the Indian Income-tax Act, 1922, was competent; (ii) whether the sale of the business on 21 January 1948 was by the assessee-firm or by its partners individually; (iii) whether the excess amount of Rs. 5,06,557 was chargeable under the second proviso to section 10(2)(vii) of the Indian Income-tax Act, 1922; and (iv) whether the sum of Rs. 19,59,258 was chargeable as capital gains under section 12B of the Indian Income-tax Act, 1922.

Issue (i): Whether the supplementary reference called for under section 66(4) of the Indian Income-tax Act, 1922, was competent.

Analysis: The application for the additional question was made under section 66(4), whereas a further question of law not referred by the Tribunal could be required only under section 66(2). The application was not shown to have been made within the period of limitation for a section 66(2) application, and it could not retrospectively be treated as one made under that provision.

Conclusion: The supplementary reference was incompetent, and the court declined to answer the additional question.

Issue (ii): Whether the sale of the business on 21 January 1948 was by the assessee-firm or by its partners individually.

Analysis: The agreement and sale deed described the assessee-firm as the transferor, there was no deed of dissolution, and the business was transferred as a running concern. The surrounding documents and circumstances showed that the firm continued as the transferor and that the sale was not by the partners in their individual capacity.

Conclusion: The sale was by the assessee-firm and not by its partners individually.

Issue (iii): Whether the excess amount of Rs. 5,06,557 was chargeable under the second proviso to section 10(2)(vii) of the Indian Income-tax Act, 1922.

Analysis: The transfer of depreciable assets for consideration exceeded their written-down value, and the case did not establish such complete identity between transferor and transferee as to negate the transaction of sale. The proviso applied to a sale of machinery, plant or building where the sale price exceeded the written-down value within the statutory limits.

Conclusion: The amount of Rs. 5,06,557 was chargeable under section 10(2)(vii), and the answer was in favour of the Revenue.

Issue (iv): Whether the sum of Rs. 19,59,258 was chargeable as capital gains under section 12B of the Indian Income-tax Act, 1922.

Analysis: The third proviso to section 12B protected only gains arising from distribution of capital assets on dissolution of a firm. As the firm had not dissolved and there was no distribution of capital assets on dissolution, the exemption did not apply.

Conclusion: The sum of Rs. 19,59,258 was chargeable as capital gains, and the answer was in favour of the Revenue.

Final Conclusion: The reference failed on the substantive questions, the additional reference was not maintainable, and the taxable additions were upheld.

Ratio Decidendi: A supplementary reference on an un-referred question cannot be invoked under section 66(4) of the Indian Income-tax Act, 1922, and where a firm transfers its business as a going concern without dissolution, the statutory charges on sale of depreciable assets and capital gains apply according to the actual transfer and the absence of the dissolution-based exemption.

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