Partnership asset distribution on dissolution is not a transfer for withdrawing development rebate under income tax law.

Distribution of partnership assets on dissolution is treated as an adjustment of the partners' mutual rights and liabilities, not as a sale or other transfer by the firm. The Kerala HC considered whether the words "sold or otherwise transferred" in section 34(3)(b), read with section 155(5), covered such distribution for withdrawal of development rebate. It held that the widened definitions of "transfer" and "person" in the Income-tax Act did not change the legal character of dissolution distribution, so the assets were not transferred by the assessee for this purpose. The consequence was that development rebate was not withdrawn on that basis.

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Issues: Whether the distribution of partnership assets on dissolution between the partners amounts to a sale or otherwise transferred by the assessee so as to attract withdrawal of development rebate under section 34(3)(b) read with section 155(5) of the Income-tax Act, 1961.

Analysis: The question turned on whether the words "sold or otherwise transferred" in section 34(3)(b) and the corresponding machinery under section 155(5) covered distribution of assets on dissolution of a firm. The Court examined the earlier Supreme Court rulings on dissolution of partnership assets and noted the principle that distribution of surplus assets on dissolution is an adjustment of the rights of partners and not a transfer for a price. The Court further considered the widened definition of "transfer" in section 2(47) and the definition of "person" in section 2(31), but held that these did not alter the legal character of a dissolution distribution so as to make it a transfer by the assessee within the meaning of section 34(3)(b).

Conclusion: The distribution of assets of the dissolved firm did not amount to a sale or transfer within section 34(3)(b) read with section 155(5) of the Income-tax Act, 1961, and the issue was answered in favour of the assessee.

Ratio Decidendi: Distribution of partnership assets on dissolution is an adjustment of mutual rights and liabilities, not a transfer or sale by the firm to the partners for purposes of withdrawing development rebate.

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