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of <h1>Partners' shop distribution deemed business transaction, not asset division; upheld valuation at book value.</h1> <h3>COMMISSIONER OF INCOME-TAX, GUJARAT Versus KESHAVLAL CHANDULAL.</h3> COMMISSIONER OF INCOME-TAX, GUJARAT Versus KESHAVLAL CHANDULAL. - [1966] 59 ITR 120 (Guj) Issues Involved:1. Nature of the transaction involving the distribution of shops among partners.2. Valuation of the shops distributed among partners for tax purposes.Detailed Analysis:Issue 1: Nature of the TransactionThe primary issue was whether the distribution of twenty-eight shops among the partners of the assessee-firm constituted a business transaction. The assessee-firm argued that the distribution was not a business or commercial transaction but merely a division of assets among partners, and thus, no further profit should be considered beyond the disclosed amount of Rs. 4,831. The Income-tax Officer, however, viewed the twenty-eight shops as stock-in-trade and considered the distribution a business transaction, thus liable to tax. The Tribunal, relying on the principles laid down in Sir Kikabhai Premchand v. Commissioner of Income-tax and Commissioner of Income-tax v. Sir Homi Mehta's Executors, concluded that the transaction was a division and distribution of assets, not a business transaction.The court examined the substance of the transaction, noting that the partners formed three groups and distributed the shops among themselves, fixing a book value for the shops. The court found that the partners inter se conveyed their right, title, and interest in the shops to the respective groups, making them absolute owners. The court distinguished this case from Sir Kikabhai's case, where the transaction was a withdrawal of trading assets for non-trading purposes, and from Sir Homi Mehta's Executors, where the transfer was essentially to the same individuals in a different legal form. The court concluded that the transaction was a business transaction, as the partners, while discontinuing the business, distributed the trading assets among themselves, leaving a surplus of Rs. 4,831, which was carried to the profit and loss account and shown as taxable income.Issue 2: Valuation of the ShopsThe second issue was whether the revenue could substitute its own market value of Rs. 1,70,000 for the book value of Rs. 89,000 agreed upon by the partners. The Income-tax Officer had rejected the book value and estimated the market value based on previous sales, resulting in higher computed profits. The court held that the revenue could not substitute the market value unless the transaction was shown to be a sham or the price paid was other than what was recorded in the books of account. The court cited Sri Ramalinga Choodambikai Mills Ltd. v. Commissioner of Income-tax, where it was held that sales at concessional rates could not be taxed at market value unless proven to be sham transactions. The court found no evidence suggesting that the transaction was not bona fide or that the book value was not genuine. Therefore, the valuation agreed upon by the partners should stand.Conclusion:1. The distribution of shops among the partners was indeed a business transaction.2. The valuation of the shops should be based on the book value of Rs. 89,000, not the market value of Rs. 1,70,000.The court answered both questions in the affirmative, ruling in favor of the assessee-firm and awarding costs to the assessee-firm.
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