1972 (8) TMI 30 - HC - Income Tax

Transfer of individual property by the partner to the firm - difference between the written down value and the amount credited in partnership account whether it should be treated as capital gain - whether the sum of Rs. 20,000 can be treated to be the income of the assessee under section 41(2)

Summary

Issues:
- Interpretation of section 41(2) of the Income-tax Act, 1961 regarding treatment of a transaction involving transfer of a business asset to a partnership firm.

Analysis:
The case involved a petition under article 226 of the Constitution concerning the treatment of a transaction where a petitioner transferred an X-Ray machine to a partnership firm after valuing it at Rs. 20,000. The Income-tax Officer treated the credit of Rs. 20,000 in the petitioner's capital account as income chargeable to tax under section 41(2) of the Income-tax Act, 1961. The main issue was whether the sum of Rs. 20,000 could be considered as the income of the assessee under section 41(2) of the Act.

The court analyzed the provisions of section 41(2) which deal with the taxation of excess money received upon the sale, discard, demolition, or destruction of business assets. The court noted that the X-Ray machine, being a business asset previously used by the petitioner, would be taxable as profit under section 41(2) if it had been sold for Rs. 20,000. However, the department contended that the machine should be deemed to have been sold or exchanged for Rs. 20,000 to the partnership firm.

The court, citing a previous Supreme Court judgment, emphasized that the transaction did not amount to a sale or exchange. It explained that when a partner transfers a business asset to a partnership firm, it cannot be considered as a sale because the firm is not a separate legal entity from the partners. Similarly, for an exchange to occur, there must be two parties involved, which was not the case here. The court highlighted that revaluing goods or transferring them to a partnership as capital contribution does not constitute a sale or profit-making transaction.

Based on the analysis, the court concluded that since there was neither a sale nor an exchange in the transaction, section 41(2) of the Act could not be applied. Consequently, the orders of the Income-tax Officer and the Commissioner of Income-tax, which sought to levy tax on Rs. 20,000, were quashed. The petitioner was allowed costs of Rs. 100, and the petition was allowed in favor of the assessee.