1980 (10) TMI 41 - HC - Income Tax

Summary

Issues Involved:
1. Whether the addition of Rs. 14,924 as profit under section 41(2) of the Income-tax Act, 1961, was justified.
2. Whether the value of machinery and land received by the partners on retirement is a transfer attracting the provisions of section 41(2) of the Income-tax Act, 1961.

Issue-wise Detailed Analysis:

Issue 1: Addition of Rs. 14,924 as Profit under Section 41(2)
The Income-tax Officer (ITO) added Rs. 14,924 as profit under section 41(2) of the Income-tax Act, 1961, arguing that the allotment of machinery to retiring partners amounted to a sale. The Appellate Assistant Commissioner (AAC) and the Income-tax Appellate Tribunal (ITAT) both disagreed, stating that there was no transfer of assets that could be taxed under section 41(2). The Tribunal's decision was based on the fact that the partnership deed allowed for the allotment of machinery and land to retiring partners in lieu of their share, which did not constitute a sale. The High Court upheld this view, referring to Supreme Court decisions in CIT v. Dewas Cine Corporation and CIT v. Bankey Lal Vaidya, which clarified that the adjustment of partnership assets among partners does not amount to a sale.

Issue 2: Transfer of Machinery and Land on Retirement
The ITO argued that the retirement of partners and the subsequent allotment of machinery and land constituted a transfer, attracting the provisions of section 41(2). However, the High Court referred to the statutory provisions and previous case law, including the Supreme Court's decisions in CIT v. Dewas Cine Corporation and CIT v. Bankey Lal Vaidya, and the Full Bench decision of the Gujarat High Court in Velo Industries v. Collector, Bhavnagar. These cases established that the allotment of assets to retiring partners in lieu of their share does not constitute a sale or transfer. The High Court concluded that the transaction did not attract section 41(2) as there was no sale involved.

Conclusion:
The High Court answered both questions in the affirmative, in favor of the assessee and against the revenue. The Tribunal was correct in holding that the addition of Rs. 14,924 as profit under section 41(2) was not justified and that the transaction did not constitute a transfer attracting the provisions of section 41(2). The Commissioner was ordered to pay the costs of the reference to the assessee.