Depreciation recapture requires an actual sale for price; mere transfer of proprietary assets into partnership is not enough.

Transfer of proprietary business assets into a partnership firm did not amount to a sale because the assets were introduced without any sale deed, sale agreement, or ascertainable price. Since the second proviso to section 10(2)(vii) of the Indian Income-tax Act, 1922 applies only where machinery, plant or buildings are sold for a price, the depreciation recapture provision could not be invoked. The earlier depreciation allowance was therefore not includible in the assessee's income, and the reference was answered in favour of the assessee.

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Issues: Whether the transfer of assets from a proprietary business to a partnership firm, in which the proprietor became a partner, amounted to a sale so as to attract the second proviso to section 10(2)(vii) of the Indian Income-tax Act, 1922 and justify inclusion of the earlier depreciation allowance in the assessee's income.

Analysis: The second proviso applies only where a building, machinery or plant is sold, and sale necessarily imports a transfer for a price. On the facts, the assets of the proprietary concern were introduced into the partnership without any agreement for sale, sale deed, or ascertainable sale price. The conversion of the assets into partnership assets did not amount to a sale. Once there was no sale, the statutory proviso could not be invoked. The absence of a price element was fatal to the department's case.

Conclusion: The answer to the referred question was in the affirmative and against the department. The depreciation amount was not includible in the assessee's income under the second proviso to section 10(2)(vii) of the Indian Income-tax Act, 1922.

Final Conclusion: The reference was answered in favour of the assessee, holding that introduction of proprietary assets into a partnership firm did not constitute a sale for the purpose of depreciation recapture under the provision in question.

Ratio Decidendi: For the second proviso to section 10(2)(vii) of the Indian Income-tax Act, 1922 to apply, there must be an actual sale involving a transfer for a price; a mere conversion of proprietary assets into partnership assets does not satisfy that requirement.

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