2009 (11) TMI 42 - HC - Income Tax

Taxability of sale of machine by the firm to one partner and by such partner to another firm - The assessee firm had three partners and sold its harvestor combine to one of its partners. The said partner became partner of another firm and she transferred the said combine to that firm. Thereafter, the combine was further sold by the firm to two individuals - The Assessing Officer held that by transferring the harvestor to the partner and thereafter to another firm of which the said partner had become partner was just a device and, thus, the harvestor continued to be that of the assessee firm. Income derived from use of the said harvestor combine was required to be added to the income of the assessee, apart from capital gain to be calculated with reference to ultimate sale price. The Assessing Officer added income from running of the combine and profit on sale under Section 41 (2) ITAT deleted the addition revenue submitted that neither registration was done with the competent authority under the rovisions of Motor Vehicle Act, nor the partner to whom sale was made was earlier partner of the earlier firm. She became partner only two days before the sale held that - Even though there may be substance in the submissions made, having regard to the fact that the matter relates to period of more than 20 years ago and the amount is not substantial nor the issue is of recurring nature, we do not consider it appropriate to take a final view on merits and consider it proper to return the reference unanswered, leaving the question open

Summary

Issues:
Assessment of profit on sale of combine and capital gains in different assessment years.

Analysis:
The primary issue in this case revolved around the assessment of profit on the sale of a combine and capital gains in different assessment years. The assessee firm had three partners and sold its harvestor combine to one of its partners, who later transferred it to another firm where she became a partner. Subsequently, the combine was sold to two individuals. The Assessing Officer contended that the transfers were a device to avoid tax, and thus, the income from the combine's use and profit on sale needed to be added to the assessee's income. This decision was upheld by CIT (A) but overturned by the Tribunal, which deemed the transactions genuine. The Tribunal held that capital gains should be added to the second firm, M/s S.V. harvestor Co.

The Tribunal's findings highlighted that the income from the combine should have been assessed in the hands of the assessee firm, as the transfer was deemed a device. However, the transfer to M/s S.V. harvestor Co. by one of the partners was considered genuine. The Tribunal concluded that profit under Section 41(2) and capital gains should have been assessed in the hands of M/s S.V. harvestor Co. for the relevant assessment year, not the assessee firm for the subsequent year. Therefore, the Tribunal ordered the deletion of profit under Section 41(2) and capital gains from the assessee's total income for the particular assessment year, partially allowing the appeal.

The appellant argued that there were discrepancies in the transaction, such as the lack of registration with the competent authority under the Motor Vehicle Act and the timing of the partner's association with the firm before the sale. The appellant contended that the price differences indicated a tax avoidance scheme. Despite acknowledging the substance in the appellant's submissions, the Court decided not to provide a final verdict due to the historical nature of the case, the insignificant amount involved, and the non-recurring nature of the issue. Consequently, the Court returned the reference unanswered, leaving the question open for future considerations.

In conclusion, the judgment addressed the complex issues surrounding the assessment of profit on the sale of a combine and capital gains across different assessment years, emphasizing the genuineness of transactions and the appropriate allocation of tax liabilities based on the factual circumstances of the case.