1967 (11) TMI 1 - SC - Income Tax

Dissolution of firm - the cinema was returned to original owners - sale and sold are not defined in the IT Act those expressions are used in s. 10(2)(vii) in their ordinary meaning - amount received should not be included in total income under the second proviso to s. 10(2)(vii) - Revenue's appeal is dismissed

Summary

Issues:
1. Whether the amount of depreciation recouped by a partnership on dissolution should be included in the total income of the assessee under the Income-tax Act.
2. Whether the return of assets to original owners on dissolution of a partnership constitutes a sale for the purpose of taxation under section 10(2)(vii) of the Income-tax Act.

Analysis:
1. The case involved an agreement between two partners to carry on a partnership business as exhibitors of cinematograph films. The partnership was dissolved, and the theatres were returned to their original owners. The issue was whether the depreciation recouped on the assets should be included in the total income of the assessee. The Appellate Tribunal held that the depreciation recouped by the partnership constituted a transfer by the firm, triggering the application of proviso 2 to section 10(2)(vii) of the Income-tax Act. The High Court was asked to determine if the inclusion of the depreciation amount in the total income was correct for the year 1952-53.

2. The main legal question revolved around whether the return of assets to the original owners on dissolution of the partnership amounted to a sale for taxation purposes under section 10(2)(vii) of the Income-tax Act. The Income-tax Appellate Tribunal considered the return of theatres to the partners as a sale, while the High Court disagreed. The partnership law was examined, highlighting that property brought into a partnership becomes the property of the partnership. On dissolution, partners are entitled to a share in the assets' value. However, the distribution of surplus does not constitute a transfer of assets. The court analyzed the ordinary meaning of "sale" and emphasized that adjusting partners' rights in a dissolved firm does not qualify as a sale under the Income-tax Act.

3. The Solicitor-General argued that on dissolution, partners are entitled to have partnership assets sold to discharge debts and obligations. It was contended that when property is allotted to partners in satisfaction of their claims, it should be deemed a sale. Reference was made to legal principles stating that partners have a right to demand the conversion of partnership property into money by sale on dissolution. However, the court held that the allocation of property to partners in satisfaction of their claims does not equate to a sale under the Income-tax Act. The High Court's decision in favor of the assessee was upheld, dismissing the appeal and awarding costs.

In conclusion, the Supreme Court ruled that the return of assets to original owners on dissolution of a partnership does not constitute a sale for taxation purposes under the Income-tax Act. The court emphasized that the distribution of surplus among partners upon dissolution does not amount to a transfer of assets, and the adjustment of partners' rights does not fall within the definition of a sale.