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Issues:
1. Whether there was a sale of the bus MDR 3569 by the assessee to Chellappa Chettiar during the relevant previous year? 2. Whether the Tribunal was right in reducing the penalty levied on the assessee under section 271(1)(a) for the assessment year 1968-69? Analysis: The judgment pertains to two references made under section 256(1) of the Income Tax Act, raising questions about the sale of a bus and the reduction of penalty. The firm of four partners, including Chellappa Chettiar, was involved in a dispute leading to a compromise decree where Chellappa Chettiar was to be paid a sum and given the bus MDR 3569 along with the route permit. The Income Tax Officer (ITO) brought to tax the depreciation of the bus under section 41(2) of the Act, initiating penalty proceedings for late filing of returns. The Appellate Authority Commissioner (AAC) and the Tribunal held that there was no sale of the bus, leading to a reduction in penalty. The Commissioner contended that the transaction constituted a sale, invoking section 41(2) for tax liability. The court analyzed the definition of "sold" under section 32 of the Act and referred to a Supreme Court decision in CIT v. Dewas Cine Corporation, emphasizing that adjustment of rights in a dissolved firm does not constitute a sale. The court considered whether the compromise decree indicated a dissolution, which would impact the tax liability. It was argued that the retirement of Chellappa Chettiar did not align with the provisions of the Indian Partnership Act, leading to a unique situation of neither dissolution nor retirement. The court referenced the Gujarat High Court's decision in Velo Industries v. Collector, Bhavnagar, supporting the view that retirement does not entail a sale. The court distinguished cases involving assignment or exchange of partnership interests from the present scenario of retirement, emphasizing that the compromise decree did not indicate a sale of partnership assets. The terms of the compromise did not suggest a sale of any specific asset, leading to the conclusion that section 41(2) did not apply. The court ruled in favor of the assessee, answering the first question in the negative and the second in the affirmative, entitling the assessee to costs. The judgment highlights the nuanced interpretation of partnership transactions and their implications on tax liability, emphasizing the legal distinctions between dissolution, retirement, and sale in the context of partnership assets.
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