Strict construction of deemed sale provisions: allotment of partnership assets on dissolution is not a sale for tax purposes.

The second proviso to section 10(2)(vii) of the Indian Income-tax Act, 1922 applies only where building, machinery or plant is sold and the amount realised exceeds the written down value. As a deeming provision in a taxing statute, it must be strictly construed, and the revenue had to prove a sale in the legal sense. Since sale under section 4 of the Sale of Goods Act requires transfer of property by a seller to a buyer for a price, the mere allotment of partnership assets to partners on dissolution was not a sale. The proviso was therefore not attracted, and the transaction was outside its scope.

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Issues: Whether, on the facts and in the circumstances of the case, the second proviso to section 10(2)(vii) of the Indian Income-tax Act, 1922 applied to the allotment of vehicles to the partners on dissolution of the firm.

Analysis: The second proviso to section 10(2)(vii) operates only where there is a sale of building, machinery or plant, and the amount realised exceeds the written down value. The provision is a deeming provision in a taxing statute and must be strictly construed. The revenue therefore had the burden of proving that a sale, in the legal sense, had taken place. Sale, as understood in section 4 of the Sale of Goods Act, requires a transfer of property by a seller to a buyer for a price. On dissolution of the partnership, the assets were merely divided and allotted among the partners toward their shares. Such allotment of partnership assets to partners on dissolution does not amount to a sale by the firm to the partners.

Conclusion: The transaction did not amount to a sale and the second proviso to section 10(2)(vii) of the Indian Income-tax Act, 1922 was not attracted; the answer was against the revenue and in favour of the assessee.

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