1. This is a reference under section 66(2) of the Indian Income-tax Act, 1922, to be hereinafter referred to as the 'Act'. It was made on the direction given by this court in C. P. No. 258 of 1962 on the file of this court. The reference in question was called for at the instance of the Commissioner of Income-tax Mysore, at Bangalore. The question referred for the opinion of this court is :
'Whether, on the facts a1d circumstances of the case, the amount of Rs. 48,749 is not properly assessable to income-tax ?'
2. The material facts are these :
One Krishna Rao and his brother-in-law, Babu Rao, entered into a partnership on June 13, 1936, for running the hotel, Udipi Sri Krishna Bhavan at Mangalore. The hotel in question was run for a number of years. The partnership in question was registered under section 26A of the 'Act'. It came to be dissolved by agreement on March 31, 1952. During the continuance of the partnership, the firm had claimed and obtained depreciation allowances in respect of buildings, plants and machineries used for the purpose of the business. At the time of the dissolution of the partnership, the partners valued the buildings, plants and machineries at Rs. 40,000 and the interest of each of the partners in them was valued at Rs. 20,000. Krishna Rao transferred his interest in the dissolved partnership to Babu Rao for a consideration of Rs. 20,000. Later on, it came to the notice of the Income-tax Officer that Babu Rao and another had executed a promissory note in a sum of Rs. 1,50,000 in favour of Krishna Rao on March 31, 1952. Hence, proceedings were initiated under section 34 of the 'Act' on the basis that the real value of the share assets that fell to the share of Krishna Rao was Rs. 1,50,000 and not Rs. 20,000. The assessee (the dissolved firm) represented to the Income-tax Officer that Rs. 1,50,000, included in the promissory note represented Rs. 20,000 which was fixed as the value of the share of Krishna Rao in the tangible assets of the dissolved-firm, and Rs. 1,30,000, the value of his share in the goodwill of the firm. The assessee's case was that the goodwill of the firm was valued at Rs. 2,60,000 and Krishna Rao's share therein was valued at Rs. 1,30,000; it is under those circumstances Babu Rao came to execute a promissory note in favour of Krishna Rao in a sum of Rs. 1,50,000. The Income-tax Officer did not accept that explanation. He came to the conclusion that the real value of the buildings, plants and machineries of the firm, on the date of the dissolution was Rs. 2,90,662, and that being so, the price fetched for buildings, plants and machineries in excess of the depreciation allowance allowed in the previous years should be considered a profits assessable to tax under the 2nd proviso to section 10(2) (vii) of the 'Act'. He accordingly added on a sum of Rs. 48,749 to the profits returned by the assessee for the assessment year 1952-53.
3. The decision of the Income-tax Officer was affirmed by the Appellate Assistant Commissioner, in appeal. The Tribunal, on an appeal by the assessee, disagreed with the Income-tax Officer and the Appellate Assistant Commissioner, and came to the conclusion that the addition made was not correct. It proceeded on the basis that the valuation of the goodwill made by the partners is correct, which means that the true value of the buildings, plants and machineries was only Rs. 40,000. Further, it was of the view that the transfer of his interest in the partnership assets by Krishna Rao cannot be considered as a 'sale' within the contemplation of section 10(2) (vii) of the 'Act'. We have now to see whether those conclusions are in accordance with law.
4. It is true, as contended by the learned counsel for the revenue, that the Tribunal did not give any positive finding as to the value of the goodwill of the firm. But, from a reading of its order as a whole, it is clear that it was of the view that there are no grounds to reject the valuation put on the goodwill by the partners themselves. That is undoubtedly a finding of fact. That finding is not open to review by this court. The sale of goodwill cannot be considered as a sale of building, plant or machinery.
5. Even if the conclusions reached by the Income-tax Officer are accepted as correct, the assignment of the interest Krishna Rao in the assets of the firm cannot be considered as a sale of 'building, machinery or plant' within the meaning of section 10(2) (vii) of the 'Act'. That section has in view of the sale of 'building, machinery or plant' by the assessee and not the assignment of the interest of a partner in the partnership assets, much less the relinquishments by one partner of his interest in the partnership in favour of the other partner or partners. The sale by a partner of his partner of his interest in the partnership is not the same thing as a sale by the firm of any of its assets. Under section 10(2) (vii), what is relevant is the sale by an assessee of his buildings, machineries of plants. The assessee before us is the firm and not Krishna Rao. Hence, profits, if any, made by Krishna Rao cannot be considered as the profits of the firm. It is only the profit deemed to have been made by the firm by the sale of buildings, plants or machineries owned by it and used in the course of its business that comes within the mischief of the 2nd proviso to section 10(2) (vii) of the 'Act'. Such is not the position here.
6. For the reasons mentioned above, our conclusion is that, on the facts and in the circumstances of the case, the amount of Rs. 48,749 is not properly assessable to income-tax. The assessee is entitled to his costs from the department. Advocate's fee Rs. 250.