1971 (8) TMI 85 - HC - Income Tax

Transfer of assets to partners during firm dissolution not considered sale under tax law

The High Court of Andhra Pradesh ruled against the revenue, determining that the transfer of assets to partners during the dissolution of a firm did not ... Firm carrying on business in bus transport was dissolved and the buses were allotted to two partners - the written down value is nil after allowing initial depreciation - whether the value at which the partners took over the vehicles amounts to profits - whether the allotment to the partners can be treated as a sale - Whether, on the facts and in the circumstances of the case, the provisions of section 10(2)(vii) were applicable to the transaction in question Issues:Interpretation of section 10(2)(vii) of the Indian Income-tax Act, 1922 regarding the applicability of provisions to a transaction involving the dissolution of a firm and transfer of assets to partners.Detailed Analysis:The judgment delivered by the High Court of Andhra Pradesh involved a reference made under section 256(1) of the Indian Income-tax Act, 1922, regarding the application of section 10(2)(vii) to a specific transaction. The case revolved around a registered firm of three partners engaged in bus transport, which was dissolved, and two vehicles were transferred to the partners. The Income-tax Officer contended that the transfer of vehicles represented a profit under the provisions of section 10(2)(vii) due to the written down value being nil after initial depreciation. The Appellate Assistant Commissioner, however, ruled in favor of the assessee, stating that there was no transfer of vehicles, leading to an appeal before the Income-tax Appellate Tribunal.The Tribunal, considering relevant precedents, held that there was no sale of the vehicles to attract the provisions of section 10(2)(vii) and upheld the decision of the Appellate Assistant Commissioner. The matter was brought before the High Court, where the counsel for the revenue argued that the transaction amounted to a sale under section 10(2)(vii), while the counsel for the assessee contended otherwise.The key issue in the case was the interpretation of the second proviso to section 10(2)(vii) of the Income-tax Act. The Court analyzed the provisions of section 10, emphasizing the conditions for applying the second proviso, which pertained to the sale of assets exceeding the written down value. The Court highlighted that the burden of proof rested on the revenue to establish the conditions for deeming a profit under the provision.The Court further delved into the concept of 'sale' under the Sale of Goods Act, emphasizing the necessity of a transfer of property for a price to constitute a sale. It examined the dissolution of the firm and the allocation of assets to partners, concluding that such allocation did not amount to a sale under the Act. The Court cited relevant case law, including decisions of the Supreme Court, to support its interpretation.Ultimately, the Court ruled against the revenue, holding that the transfer of assets to partners during the dissolution of the firm did not meet the criteria for a sale under section 10(2)(vii). The Court directed the Commissioner to bear the costs of the reference and fixed the advocate's fee.