1. BY this application, the Commissioner of Income-tax, Bombay North, Kutch and Saurashtra, Ahmedabad, requires the Appellate Tribunal to refer to the High Court a question of law which is said to arise out of the Tribunal's Order in I. T. A. No. 1410 of 1953-54. In-asmuch as, in out opinion, a question of law does arise out of the aforesaid order of the Tribunal, we hereby draw up a statement of the case to which the parties agree and refer it to the High Court of Judicature at Bombay under section 66(1) of the Indian Income-tax Act, 1922.
2. The assessment year under consideration is 1948-49, the 'previous year' being S. Y. 2003 (25th October, 1946, to 12th November, 1947). The assessee firm, which is unregistered in status, was constituted of the following two partners :-
Share of profit or loss1. Mr. Valji Damji 0 13 0 in the rupee2. Mr. Thakersey Raiji 0 3 0 in the rupee
Owing to differences between the partners, a suit, being Civil Suit No. 62/45, was instituted by partner No. 2 in the Court of Civil Judge, S. D. Jalgaon, for dissolution of the partnership, for rendition of accounts and for recovery of the plaintiff's share in the assets of the partnership. The said Court granted a decree dated 12th December, 1946, inter alia declaring that the suit partnership stands dissolved on and form 15th June, 1944. The plaintiff's share was declared to be 3 annas while that of defendant No. 1, 13 annas. Receivers were appointed to sell the partnership property detailed in the decree. A 3copy of this order passed on 12th December, 1946, is annexure 'A' and forms part of the case. In pursuance of this order the receivers sold the partnership property on 10th March, 1947, by means of a public auction for a sum of Rs. 57,000. This date fell during the 'previous year' under consideration. The Income-tax Officer found that the written down value of the assets sold came to Rs. 13,633 and the sale, therefore, resulted in a capital gain of Rs. 43,367. Section 12B was inserted by section 6 of the Income-tax and Excess Profits Tax (Amendment) Act, 1947 (22 if 1947). According to sub-section (1) of section 12B, an assessee was liable to pay tax under the head 'capital gains' in respect of any profits or gains arising from the sale, exchange or transfer of a capital asset effected after the 31st day of March, 1946, and before the 1st day of April, 1948, and such profits and gains shall be deemed to be income of the 'previous year' in which the sale, exchange, or transfer took place. The Income-tax Officer consequently included this sum of Rs. 43,367 in the assessment of the assessee. A copy of the Income-tax Officer's order is annexure 'B' and forms part of the case.
3. In appeal before the Appellate Assistant Commissioner, the assessee raised the following two grounds :-
(1) That the firm was dissolved on 15th June, 1944, and the receivers were appointed by the Civil Court to auction the firm's property and as the sale was effected after the dissolution of the firm the amount was not liable to be assessed under the head 'capital gains.'
(2) That the amount of capital gains computed by the Income-tax Officer was erroneous. The Appellate Assistant Commissioner did not agree with the first contention of the assessee and held that the surplus was liable to be assessed under the head 'capital gains' for the reasons mentioned in his order dated 25th March, 1953, which is made a part of the statement of the case and is marked as annexure 'C'. Regarding the quantum, however, the Appellate Assistant Commissioner came to the conclusion that, the surplus after taking into consideration the expenses etc. really came to Rs. 30,447 as against Rs. 43,367 taxed by the Income-tax Officer.
4. The matter coming up in second appeal before the Tribunal it was contended that in view of the third proviso to section 12B (1) the amount of Rs. 30,447 was not liable to be assessed. The relevant provisions of section 12B read as follows :-
Section 12B. Capital Gains :- (1) : 'The tax shall be payable by an assessee under the head 'capital gains' in respect of any profits or gains arising from the sale, exchange or transfer of a capital asset effected after the 31st day of March, 1946. ...........................
Provided further that any transfer of capital assets by reason of the compulsory acquisition thereof under any law for the time being in force relating to the compulsory acquisition of property for public purposes or any distribution of capital assets on the total or partial partition of a Hindu undivided family, or on the dissolution of a firm or other association of persons, or on the liquidation of a company, or under a deed of gift, bequest, will or transfer on irrevocable trust shall not, for the purposes of this section, be treated as sale, exchange or transfer of the capital assets,'
The Tribunal on a careful reading of these provisions came to the conclusion that the section only applied to capital gains arising as a result of sale; exchange or transfer of a capital effected after the 31st March, 1946, and that such sale, exchange or transfer of a capital asset if effected on the dissolution of a firm shall not for the purposes of this sub-section be treated as the sale, exchange or transfer of the capital asset. The Tribunal held that the language of section 12B referred to above led to the irresistible conclusion that a sale effected on the dissolution of a firm with the object of distribution of the capital assets of the firm was saved by the third proviso 12B (1) of the Indian Income-tax Act and the capital gain was not liable to the assessed. Consequently, the Tribunal accepted the assessee's appeal and deleted the addition of the sum of Rs. 30,447 included in the assessee's assessment. A copy of the Tribunal's order dated 8th July, 1947, is annexure 'D' and forms part of the case.
5. On the above facts, the following question of law arises :-
Whether on the facts and in the circumstances of the case the sum of Rs. 30,447 is exempt from assessment under the third proviso to section 12B (1) of the Indian Income-tax Act
The Advocate-General, for the Commissioner.
R. B. Kotwal, for the assessee.