Dissolution-related transfer of partnership assets is not a sale and does not trigger assessable profit under tax law.
A transfer of partnership machinery and other assets made as part of the dissolution settlement between partners was treated as an adjustment of rights on dissolution, not as a separate sale by the firm or by a retiring partner. On that factual basis, the profit alleged to arise from the transfer was held not to fall within section 10(2)(vii) of the Indian Income-tax Act, 1922. The legal effect was that no assessable profit arose from the dissolution-related adjustment, and such a transfer did not attract deemed profit taxation as a sale.
Issues: Whether profit arising from the transfer of machinery and other assets on dissolution of the firm and adjustment between the partners was liable to be assessed under section 10(2)(vii) of the Indian Income-tax Act, 1922.
Analysis: The assets were taken over by one partner in the course of the dissolution arrangement reflected in contemporaneous dissolution and release deeds executed on the same date. The transfer formed part of the settlement of rights between the partners on dissolution and not a separate sale by the firm or by the retiring partner. On the facts found, the taking over of the machinery was part of the dissolution transaction and the legal consequence was controlled by the Supreme Court authorities relied upon by the Court, which negatived assessment of such profit as arising from a sale.
Conclusion: No assessable profit arose under section 10(2)(vii) from the dissolution adjustment, and the answer was against the Revenue and in favour of the assessee.
Final Conclusion: The reference was answered in the negative, affirming that the dissolution-related transfer of assets did not attract deemed profit taxation.
Ratio Decidendi: A transfer of partnership assets made as part of the adjustment on dissolution of the firm does not constitute a sale giving rise to assessable profit under section 10(2)(vii) of the Indian Income-tax Act, 1922.
TaxTMI 
AI Drafter ✕
TaxTMI 
