1983 (10) TMI 99 - AT - Income Tax

Summary

Issues Involved:
1. Whether the transfer of assets by the partners was in their individual capacity or by the firm.
2. Whether the firm was dissolved on 12-4-1974 or on 24-6-1974.
3. Taxability of capital gains and profits under section 41(2) of the Income-tax Act, 1961.

Issue-Wise Detailed Analysis:

1. Transfer of Assets by Partners in Individual Capacity or by the Firm:

The assessee-firm claimed that the transfers by the partners were in their individual capacity and not by the firm. The Commissioner (Appeals) accepted this contention, recognizing the transfer of a partner's interest as per section 29 of the Indian Partnership Act, 1932. However, the ITAT rejected this claim, emphasizing that during the subsistence of the partnership, no partner can deal with any portion of the property as his own. The ITAT referred to the Supreme Court decision in Addanki Narayanappa v. Bhaskara Krishnappa AIR 1966 SC 1300, which held that a partner cannot transfer his interest in any particular property of the firm. The ITAT concluded that the effective transfer of properties occurred only after the release deed by the remaining partners on 17-4-1974, indicating that the transfer was by the firm and not by individual partners.

2. Date of Dissolution of the Firm:

The firm contended that it was dissolved on 12-4-1974, but the ITAT found no evidence supporting this claim. The deed of dissolution executed on 24-6-1974 stated that the firm "shall be deemed to have been dissolved by mutual consent with effect from 12-4-1974." The ITAT cited Kanga and Palkhivala's commentary, stating that no deed can alter the past and that a partnership cannot be deemed to have dissolved earlier than the actual date of dissolution. Additionally, the ITAT referenced the Madras High Court decision in K. P. V. Shaik Mohamed Rowther & Co. v. CIT [1956] 30 ITR 747, which held that the dissolution took place only when the dissolution deed was executed. The ITAT concluded that the firm was not dissolved on 12-4-1974 but on 24-6-1974, the date of the dissolution deed.

3. Taxability of Capital Gains and Profits under Section 41(2):

The ITAT upheld the ITO's decision to assess capital gains and profits under section 41(2) in the hands of the firm. The ITAT reasoned that since the firm was not dissolved on 12-4-1974, the transfer of assets was by the firm and not by the individual partners. The ITAT also noted that the attempt to claim that the sale was by individual partners was likely to save on stamp duty and registration charges. Consequently, the capital gains and profits arising from the transfer were taxable in the hands of the firm.

Conclusion:

The ITAT allowed the appeal by the revenue, rejecting the assessee-firm's claims. The ITAT held that the transfer of assets was by the firm, the firm was dissolved on 24-6-1974, and the capital gains and profits under section 41(2) were taxable in the hands of the firm. The appeal was thus decided in favor of the revenue.