Transfer of partnership assets to selected partners was treated as a legal transfer, triggering withdrawal of development rebate.

Where all partners of a continuing firm agreed to vest specific machinery and plant exclusively in some partners, the firm's rights in those assets were extinguished and the transferee partners acquired exclusive rights. That arrangement was treated as a transfer in law, including for the purposes of section 5 of the Transfer of Property Act, 1882, and therefore attracted withdrawal of development rebate under section 155(5)(i) read with section 34(3)(b) of the Income-tax Act, 1961. The ruling distinguished cases concerning distribution of assets on dissolution because the firm here continued and there was no general dissolution-based distribution.

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Issues: Whether the development rebate allowed in the assessment year 1965-66 was rightly withdrawn under section 155(5)(i) of the Income-tax Act, 1961, on the footing that the machinery and plant had been transferred within the period prescribed by section 34(3)(b) of the Act.

Analysis: The machinery and plant formed part of the assets of the firm, and the partners had no exclusive interest in any specific asset during the subsistence of the partnership. When all the partners, acting for the firm, agreed to vest particular assets exclusively in some partners, the firm's rights in those assets stood extinguished and the transferee partners acquired exclusive rights. Such an arrangement amounted to a transfer in law within the meaning of the Act and also answered the concept of transfer under section 5 of the Transfer of Property Act, 1882. The case relied on by the assessee relating to distribution of assets on dissolution was distinguished because the firm here continued and there was no dissolution or general distribution of assets among all partners.

Conclusion: The development rebate was validly withdrawn, and the question was answered in the affirmative, in favour of Revenue.

Ratio Decidendi: An arrangement by which all partners of a continuing firm convey specific partnership assets exclusively to some partners is a transfer in law, attracting withdrawal of development rebate where the statutory conditions for such withdrawal are satisfied.

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