Substance over form in partnership asset transfers: notional revaluation gain was held outside taxable income.

Revaluation of machinery followed by its introduction into a partnership firm did not create taxable profit where the transaction was, in substance, only a readjustment of assets among the same commercial owners. The High Court treated the firm as not a separate purchaser for this purpose and held that the book entry reflected only a notional advantage, not real income arising in the accounting year. As no actual sale or transfer profit was generated, the amount was excluded from the assessee's total income and could not be taxed as profit from sale or transfer.

---

---

Issues: Whether the sum of Rs. 4,00,000 arising from revaluation and transfer of machinery to a partnership firm was includible in the assessee's total income as profit from a sale or transfer.

Analysis: The transaction was examined in its true substance and not merely by its accounting form. The assessee and the other partner transferred their respective interests in the machinery to a firm constituted by them, in which each held a substantial interest. The firm was not treated as a separate juristic person capable of being a distinct purchaser from the assessee. The revaluation of the machinery before its introduction into the firm created only a notional advantage in the books and did not produce any real income or profit in the accounting year. Tax could not be imposed on a potential future advantage or on a fictional profit arising from a transaction which was, in substance, a readjustment of assets between the same commercial owners.

Conclusion: The amount of Rs. 4,00,000 was not taxable as profit from sale or transfer and was rightly excluded from the assessee's total income.

---