1981 (1) TMI 157 - AT - Income Tax

Summary

Issues Involved:

1. Taxability of alleged profit under Section 41(2) of the Income Tax Act.
2. Set off of unabsorbed depreciation against the profits of the year.
3. Claim for brokerage expenses.

Issue-Wise Detailed Analysis:

1. Taxability of Alleged Profit under Section 41(2) of the Income Tax Act:

M/s. Palaniappa Transport, a partnership firm, dissolved on 20th March 1972, with one partner, Shri S. Manickam, taking over the Virudhunagar branch and certain liabilities. The Income Tax Officer (ITO) viewed this as a sale and taxed the difference between the book value and the written down value of buses amounting to Rs. 1,82,841 under Section 41(2). The Appellate Assistant Commissioner (AAC) upheld this view, relying on the Supreme Court decision in CIT vs. Dewas Cine Corporation (1968) 68 ITR 240 (SC). However, the Tribunal remitted the matter back to the ITO for fresh consideration, questioning the applicability of the Dewas Cine Corporation decision.

Upon reassessment, the ITO maintained the taxability of the profit under Section 41(2), noting that Shri Manickam remained in debt to the firm. The CIT (A) upheld this view, dismissing the assessee's reliance on the Supreme Court decision in Malabar Fisheries Co. vs. CIT (1979) 120 ITR 49 (SC), stating it applied only to dissolution, not retirement.

The Tribunal, upon further appeal, found that there was indeed a dissolution of the partnership, as evidenced by the deed of dissolution referenced in the partnership deed for the assessment year 1973-74. It concluded that the legal effects of dissolution under Partnership Law could not be negated by treating it as a change in constitution for registration purposes. The Tribunal cited several Supreme Court decisions, including Dewas Cine Corporation, Bankey Lal Vaidya, and Malabar Fisheries, to establish that there is no transfer when there is an adjustment of accounts between partners, whether on formation, dissolution, or retirement. The Tribunal held that the arrangement did not constitute a sale and allowed the appeal on this point, granting relief of Rs. 1,82,841.

2. Set Off of Unabsorbed Depreciation Against the Profits of the Year:

The assessee claimed the set off of unabsorbed depreciation from previous years against the profits of the current year. The ITO disallowed this, and the AAC allowed it. However, the Tribunal, in its earlier order dated 1st February 1978, found against the assessee, following conflicting High Court decisions. The assessee's attempts at rectification and further reference were unsuccessful. The Tribunal, in the present appeal, reiterated that it could not reopen this issue as it had become final. Consequently, the appeal on this point failed.

3. Claim for Brokerage Expenses:

The assessee claimed Rs. 1,400 as brokerage expenses related to the sale of buses. The ITO initially disallowed this, but upon remittance by the Tribunal for fresh consideration, the ITO allowed the brokerage expenses. This issue did not see further contention in the present appeal.

Conclusion:

The Tribunal allowed the appeal in part. The claim for set off of unabsorbed depreciation was disallowed, adhering to the finality of the previous Tribunal's decision. However, the Tribunal found in favor of the assessee regarding the alleged profit under Section 41(2), concluding that there was no sale and thus no taxable profit, granting relief of Rs. 1,82,841. The brokerage expenses claim was allowed by the ITO upon remittance and did not face further dispute.