Partnership dissolution and asset distribution do not amount to a sale unless property is transferred for price.

On dissolution of a partnership firm, property brought into the firm becomes partnership property, and distribution of the surplus under the Partnership Act, 1932 is only an adjustment of the partners' rights in the assets of the dissolved firm. That adjustment does not amount to a transfer of property unless there is a sale for a price. The note explains that the ordinary meaning of "sale" in section 10(2)(vii) of the Income-tax Act, 1922 requires a transfer of property for consideration, so the return of theatres in settlement of accounts on dissolution was not a sale and could not be treated as income under the second proviso.

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Issues: Whether, on dissolution of a partnership firm, the return of theatres brought into the firm by the partners constituted a sale by the firm to the partners so as to attract the second proviso to section 10(2)(vii) of the Income-tax Act, 1922.

Analysis: Under the Partnership Act, 1932, property brought into the firm becomes partnership property, and on dissolution the partners are entitled to have the firm's property applied in discharge of liabilities and the surplus distributed according to their rights. The distribution of surplus under sections 46 and 48 of the Partnership Act, 1932 is only a mode of adjustment of the partners' rights in the assets of the dissolved firm and does not amount to a transfer of those assets. The word "sale" in section 10(2)(vii) of the Income-tax Act, 1922 bears its ordinary meaning of a transfer of property for a price, and the return of the theatres in settlement of accounts on dissolution was neither a transfer nor a sale for a price.

Conclusion: The return of the theatres on dissolution was not a sale within the second proviso to section 10(2)(vii) of the Income-tax Act, 1922, and the amount could not be included in the assessee's income.

Ratio Decidendi: Adjustment of partners' rights on dissolution of a firm and distribution of partnership assets in settlement of accounts do not constitute a sale unless there is a transfer of property for a price.

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