1976 (6) TMI 29 - HC - Income Tax

Court rules no income tax on asset conversion to partnership assets without sale.

The court ruled in favor of the assessee, holding that the conversion of assets into partnership assets without a sale involving a price did not trigger ... A Partner Issues: Interpretation of the second proviso to section 10(2)(vii) of the Indian Income-tax Act, 1922 regarding the inclusion of a sum in the total income under certain circumstances.Analysis:The case involved a question of law referred by the Income-tax Appellate Tribunal, Madras Bench, regarding the inclusion of a sum of Rs. 28,622 in the total income under the provisions of the second proviso to section 10(2)(vii) of the Indian Income-tax Act, 1922. The assessee, an individual running multiple businesses, admitted his sons as partners in these businesses and converted the assets of his proprietary concern into assets of the partnership firm. The Income-tax Officer added back the depreciation allowed to the assessee in earlier years to his income for the assessment year 1961-62. The Appellate Tribunal reversed this decision, leading to the current challenge. The key issue was whether the conversion of assets into partnership assets constituted a 'sale' under the relevant provision (section 10(2)(vii)).The court analyzed the relevant legal provision, which required a sale of the building, machinery, or plant for the provision to apply. Referring to precedents, the court noted that the conversion of assets from an individual to a partnership firm does not amount to a sale under the law. Citing previous decisions, the court emphasized that for the provision to apply, there must be an actual sale involving a transfer for a price. In the absence of a sale agreement or deed, and without a specific price being fixed or paid for the assets transferred to the partnership, the element of sale was deemed to be missing in the present case. Therefore, the court held that the second proviso to section 10(2)(vii) did not apply, and the sum in question was not includible in the total income.In conclusion, the court answered the referred question in the affirmative, ruling against the department. The court awarded costs to the assessee and fixed the counsel fee. The judgment clarified that the conversion of assets into partnership assets without a sale involving a price did not trigger the provisions of section 10(2)(vii) of the Income-tax Act.