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TMI Blog2005 (7) TMI 73X X X X Extracts X X X X X X X X Extracts X X X X ..... - 21-7-2005 - Judge(s) : V. C. DAGA., A. S. AGUIAR. JUDGMENT The judgment of the court was delivered by V.C. Daga J.- By this reference under section 256(1) of the Income-tax Act, 1961 ("the I.T. Act"), the Income-tax Appellate Tribunal ("the Tribunal" for short), Mumbai, has referred the following questions for the opinion of this court. The assessment year involved is 1980-81. "(1) Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the assessee had claimed depreciation on the machinery and, therefore, the assessee is liable to tax on profits of Rs. 2,13,705 under section 41(2) of the Income-tax Act, 1961? (2) Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the assessee is liable to tax on profits under section 41(2) of the Income-tax Act, 1961, even though depreciation was claimed by the partnership firm which was dissolved and the machinery were allotted to the assessee who sold the same after dissolution of the firm?" The facts: In this case, the assessee was a partner of the firm, known and styled as M/s. Publicity Printers, with his wife. The said ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... geable to income-tax as the income of that previous year, whether the business or profession in respect of which the allowance or deduction has been made is in existence in that year or not. (2) Where any building, machinery, plant or furniture which is owned by the assessee and which was or has been used for the purposes of business or profession is sold, discarded, demolished or destroyed and the moneys payable in respect of such building, machinery, plant or furniture, as the case may be, together with the amount of scrap value, if any, exceed the written down value, so much of the excess as does not exceed the difference between the actual cost and the written down value shall be chargeable to income-tax as income of the business or profession of the previous year in which the moneys payable for the building, machinery, plant or furniture became due: Provided that... Provided further that ... Explanation.- Where the moneys payable in respect of the building, machinery, plant or furniture referred to in this sub-section become due in a previous year in which the business or profession for the purpose of which the building, machinery, plant or furniture was being used is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ss or profession in respect of which the allowance or deduction has been made is in existence in that year or not. Clause (b) of this sub-section makes similar provision in the case of a successor in business in regard to any amount in respect of which loss or expenditure etc. was incurred by the predecessor. 28.2 It was found that a number of assessees were escaping tax liability under this sub-section in regard to the credit of trading liabilities to profit and loss account, even when the recovery of the debt had become barred by limitation or when there was no likelihood of the liability being enforced against them. This was on account of the fact that some courts held that the liability can remit or cease only by a bilateral or a multilateral act between the creditor(s) on the one side and the debtor on the other and not by a unilateral act. By an amendment the expression 'loss or expenditure or some benefit in respect of any such trading liability by way of remission or cessation thereof, occurring in this sub-section, has been defined to include the remission or cessation of any liability by a unilateral act by the first mentioned person under clause (a) or the successor in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... xed in the hands of the assessee, i.e., successor to the property. Learned counsel appearing for the applicant placed reliance on the judgment of the apex court in the case of Bist and Sons v. CIT [1979] 116 ITR 131, wherein the Hindu undivided family consisting of a father and his son carried on the business of forest contractors. Three trucks were used in the course of business and the family availed of all the depreciation allowance thereon and their written down value had become "nil". On total disruption in the family, the father and son formed a partnership firm and took over the business as a running concern. The firm, thereafter, sold the three trucks for an aggregate sum of Rs. 24,252. The question was whether the sum could be brought to tax in the hands of the firm as deemed profit under the second proviso to section 10(2)(vii) of the Indian Income-tax Act, 1922. These facts had given rise to the question as to whether a sum of Rs. 24,252 was an item taxable in the previous year under the provisions of section 10(2)(vii). While dealing with the above question, the apex court held that "the Hindu undivided family" and "the firm" were distinct entities, the depreciation ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... firm's business, that would not per se make him the 'assessee' covered under section 41(1). The High Court relied upon section 2(31) of the Act, which defines 'person' to include an 'individual' and a 'firm' separately. Section 2(7) of the Act defines an 'assessee'. The High Court ruled that by no stretch of imagination could the firm in respect of whom the expenditure was allowed be treated to be the assessee who was an individual. The amount of Rs. 18,255 representing refund of additional licence fee received from the Excise Department was held not taxable under section 41(1) in the hands of the assessee." Learned counsel for the applicant also relied upon one more judgment from the Punjab and Haryana High Court in the case of CIT v. Shri Sat Parkash [1989] 178 ITR 393, wherein the assessee-firm was originally constituted in 1958 with three partners. There were changes in the constitution of the firm in the years 1960 and 1962. During the assessment years 1961-62 and 1962-63, the firm discharged its sales tax liability amounting to Rs. 8,261. In the year 1967, a sum of Rs. 4,500 was received by the firm as refund of sales tax which was credited to the account of the then exist ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... court in the case of Malabar Fisheries Co. v. CIT [1979] 120 ITR 49. Mr. Kotangle submits that the partnership firm under the Indian Partnership Act, 1932, is not a distinct legal entity apart from the partners constituting it and equally in law the firm as such has no separate rights of its own in the partnership assets. According to him, when one talks of the firm's property or the firm's assets all that is meant is property or assets in which all partners have a joint and common interest. In his submission, it cannot, therefore, be said that upon dissolution, the firm's right in the partnership assets are extinguished. It is the partners who own jointly or in common the assets of the partnership and, therefore, the consequence of the distribution, division or allotment of assets to the partners which flows upon dissolution after discharge of liabilities is nothing but a mutual adjustment of rights between the partners and there is no question of any extinguishment of the firm's rights in the partnership asset amounting to a transfer of asset within the meaning of section 2(47) of the Income-tax Act, 1961. In his submission even after dissolution of the partnership, if the asset ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rm has no legal existence, the partnership property will vest in all the partners and in that sense every partner has an interest in the property of the partnership. During the subsistence of the partnership, however, no partner can deal with any portion of the property as his own. Nor can he assign his interest in a specific item of the partnership property to any one. His right is to obtain such profits, if any, as fall to his share from time to time and upon the dissolution of the firm to a share in the assets of the firm which remain after satisfying the liabilities set out in clause (a) and sub-clauses (i), (ii) and (iii) of clause (b) of section 48." Having regard to the above, it is clear that so long as the partnership continues, the firm possesses the distinct status of partnership and continues to be so, so long as the business of the firm continues. In the case of Malabar Fisheries Co. v. CIT [1979] 120 ITR 49, the apex court was dealing with the question of transfer of properties of the dissolved firm; whereas in the case of Bist and Sons v. CIT [1979] 116 ITR 131, the apex court was considering the case of a running partnership firm; which was a partnership firm dist ..... X X X X Extracts X X X X X X X X Extracts X X X X
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