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Commissioner of Income-tax Vs. Srinivas Bus Service - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtAndhra Pradesh High Court
Decided On
Case NumberCase Referred No. 41 of 1969
Judge
Reported in[1974]94ITR454(AP)
ActsIncome Tax Act, 1922 - Sections 10(2)
AppellantCommissioner of Income-tax
RespondentSrinivas Bus Service
Appellant AdvocateP. Rama Rao, Adv.
Respondent AdvocateJ.V. Srinivasa Rao, Adv.
Excerpt:
.....of section 10 (2) (vii) were applicable to transaction in issue - contended that there was no sale of vehicles by firm to two partners - two vehicles were taken over by two partners of firm and thereafter run on their own account - partnership itself dissolved and partners divided assets of dissolved partnership - allotment or transfer of assets cannot be termed as sale - held, transaction did not amount to sale within meaning of provisions of section 10 (2) (vii) of act. - all india services act, 1951. sections 32(c) (as amended by section 3 of amendment act, 2005] & 10 & general clauses act, 1897, section 6: [g.s. singhvi, cj, dr.g. yethirajulu, ramesh ranganathan, g.bhavani prasad, c.v. nagarjuna reddy, jj] exemption of building from applicability of provisions of act held,..........the firm was dissolved with effect from april 1, 1960. as per the terms of the dissolution of the firm, two vehicles belonging to it, viz., ado. 840 and adc. 854 were taken over by two partners of the firm and thereafter, run on their own account. at the time of the division the value of those two vehicles was taken at the written down value arrived in at the order of assessment of the firm for the year 1960-61. the income-tax officer was of the view that the value at which the partners took over the vehicles from the firm at the time of its dissolution represented a profit under the second proviso to section 10(2)(vii) of the act as the written down value of the vehicles was nil if the initial depreciation allowed on them was also taken into account, the contention of the assessee that.....
Judgment:

Kondaiah, J.

1. At the instance of the Commissioner of Income-tax, Andhra Pradesh, Hyderabad, under Section 256(1) of the Indian Income-tax Act, 1922 (hereinafter called ' the Act '), the following question has been referred for our opinion :

' Whether, on the facts and in the circumstances of the case, the provisions of Section 10(2)(vii) were applicable to the transaction in question '

2. In order to appreciate the scope of the question it is necessary to refer briefly to the facts that gave rise to the same. Srinivasa Bus Service, Puttur, the respondent-assessee, was a registered firm of three partners carrying on business in bus transport. For the assessment year 1960-61, corresponding to the relevant accounting period ending with March 31, I960, the assessment was completed on February 27, 1963, by the Income-tax Officer who determined its total income at Rs. 1,09,932. The firm was dissolved with effect from April 1, 1960. As per the terms of the dissolution of the firm, two vehicles belonging to it, viz., ADO. 840 and ADC. 854 were taken over by two partners of the firm and thereafter, run on their own account. At the time of the division the value of those two vehicles was taken at the written down value arrived in at the order of assessment of the firm for the year 1960-61. The Income-tax Officer was of the view that the value at which the partners took over the vehicles from the firm at the time of its dissolution represented a profit under the second proviso to Section 10(2)(vii) of the Act as the written down value of the vehicles was nil if the initial depreciation allowed on them was also taken into account, The contention of the assessee that there was no sale of the vehicles by the firm to the two partners in order to attract the provisions of Section 10(2)(vii) did not find favour with the Income-tax Officer. He, therefore, held that, as the value of the vehicles was ascertained and the same had been adopted in the assessment of the individual partners for subsequent years and necessary depreciation was allowed, it was a clear case where the profit arising out of the sale had to be taxed. In the result, he included a sum of Rs. 9,136 in the assessment as provided under Section 10(2)(vii) of the Act. On appeal to the Appellate Assistant Commissioner, it was held that there was no transfer of the two vehicles by the assessee to the two partners on April 1, 1960, when the firm was dissolved and, hence, the provisions of Section 10(2)(vii) are not attracted. He, therefore, deleted the addition of Rs. 9,136 from the assessment. Aggrieved by the decision of the Appellate Assistant Commissioner, an appeal before the Income-tax Appellate Tribunal was preferred by the Income-tax Officer contending, inter alia, that the transaction in substance amounted to sale attracting the provisions of Section 10(2)(vii) of the Act. Reliance was placed by the department in support of its plea on the decision of the Mysore High Court in Y.V. Srinivasamurthy v. Commissioner of Income-tax, [1967] 64 I.T.R. 292 (Mys.). However, the Tribunal, on a consideration of the facts and circumstances and relying upon the decision of the Madhya Pradesh High Court in Dewas Cine Corporation v. Commissioner of Income-tax, [1965] 55 I.T.R. 456 (M.P.), held that there was no sale so as to attract the provisions of Section 10(2)(vii) of the Act and affirmed the decision of the Appellate Assistant Commissioner. Hence, this reference.

3. Sri P. Rama Rao, the learned counsel for the revenue, contended before us that the written down value of the vehicles on the date of the dissolution of the firm, i.e., April 1, 1960, being nil after allowing the initial depreciation, it must be held that the transaction amounts to sale within the meaning of Section 10(2)(vii) of the Act and the Tribunal's finding is not correct. This claim of the standing counsel for the income-tax department has been opposed by Mr. Srinivasa Rao appearing for the assessee, contending, inter alia, that the reference is devoid of any merit.

4. The answer to the question turns upon the provisions of the second proviso to Section 10(2)(vii) and their application to the facts of the present case. Section 10 deals with business income. Sub-section (2) to Section 10 provides for certain allowances specified therein in computing the profits or gains of business, profession or vocation under Section 10(1). Under Clause (ii) of Sub-section (2) to Section 10 the amount by which the written down value of a building, machinery or plant exceeds the amount for which such building, machinery or plant has been sold or discarded or demolished or destroyed, is liable to be deducted in computing the business income of an assessee under Section 10(1). The second proviso to Subsection (2)(vii) of Section 10 which is material for our purpose reads thus :

' Provided further that where the amount for which any such building, machinery or plant is sold, whether during the cominuance of the business or after the cessation thereof exceeds the written down value, so much of the excess as does not exceed the difference between the original cost and the written down value shall be deemed to be profits of the previous year in which the sale took place.'

5. Though Clause (vii) of Sub-section (2) of Section 10 provides for the deduction of the difference between the written down value and the sale price of any building, machinery or plant which has been sold or discarded or demolished or destoryed, from the business income chargeable under Section 10(1), the second proviso empowers the Income-tax Officer to add so much of the sale price which is in excess of the written down value of such building, machinery or plant as the same shall be deemed to be profits of the previous year in which the sale took place. The second proviso will apply when there is sale of any building, machinery or plant either during the continuance of the business or after its cessation. Where the sale price is more than the original cost price, the depreciation allowed in respect of such building, machinery or plant in the prior years would be deemed to be the profit of the previous year and the price received in excess of the original cost price would be considered as capital gains of the previous year in which the sale took place. In order to attract the second proviso to Sub-clause (vii) of Sub-section (2) to Section 10, it must be established by the department that a sale of any such building, machinery or plant in the previous year had taken place. The profits and gains sought to be charged under the aforesaid proviso are not actual profits earned or received by the assessee, but they are deemed to be profits of the previous year if the requisite conditions specified therein are established. Hence, this proviso should be strictly construed as it is a deeming provision in a taxing statute. The burden is undoubtedly on the revenue to establish the ingredients of this provision in order to bring the case within its purview.

6. As pointed out earlier, in order to attract the aforesaid provisions, there must invariably be a sale of any building, machinery or plant in the previous year. Secondly, the amount received from such a sale must exceed the written down value of such building, machinery or plant. If the sale price exceeds the original cost of the building, machinery or plant, such excess amount could be charged as capital gains. True, as urged by the learned counsel for the revenue, the written down value on the date of the dissolution of the firm and the transfer of the two vehicles in question belonging to the assessee-firm to its two partners was nil. But the pertinent question that still falls for decision is whether there was a sale of the machinery, i.e., the two vehicles, by the firm to the partners in the instant case so as to attract the provisions of Section 10(2)(vii), second proviso. The two motor vehicles in the instant case can no doubt be termed to be machinery within the meaning of Section 10(2)(vii), but unless and until it is established that there was a sale of the two vehicles in the instant case by the firm to the two partners on the date of the dissolution of the firm, it cannot be said that the deeming provisions of the second proviso to Section 10(2)(vii) come into play. The sale contemplated under Section 10(2)(vii) as well as the second proviso thereof must be of any building, machinery or plant by one entity to another. If there is no sale at all, there can be no sale price nor can it be said that it exceeds the written down value thereof which can be deemed to be income or profits chargeable to tax. We shall, therefore, examine whether there was any sale of the two vehicles in the present case by the firm which was dissolved on April 1, 1960, to the two erstwhile partners of the firm who thereafter began to run those vehicles on their own account.

7. The expressions 'sale ' and 'sold ' are not defined in the Act (Income-tax Act) and, hence, the ordinary meaning of the word ' sale' in Section 10(2)(vii) has to be construed as stated in the Sale of Goods Act, According to Section 4 of the Sale of Goods Act, there should be a transfer on sale of goods or property in goods by the seller to the buyer for a price. No doubt, the contract of sale of goods may be one entered into between one part-owner and another. It may also be absolute or conditional. However, the heart of the matter is that there should be a transfer of property by the vendor called the seller and the purchaser, the vendee, for a price. Unless these ingredients of a valid sale are satisfied or established, it cannot be said that the transaction in question would amount to sale attracting the provisions of Section 10(2)(vii) of the Act (Income-tax Act).

8. In the present case as per the terms of the dissolution of the firm, two vehicles belonging to it were taken over by two partners of the firm and, thereafter, run on their own account. Under the law of partnership, each partner is the owner of the assets of the partnership. They are collectively entitled to the assets of the firm. Where the assets of the firm are divided amongst the partners at the time of the dissolution of the partnership, it can, by no stretch of reasoning, be held that the firm and the partners are entering into a transaction of sale. When the two vehicles in question have been allotted to the two partners in the division of their partnership assets, it can, by no stretch of reasoning, be said that they have purchased those vehicles from the dissolved firm. In fact and in substance, those two vehicles have been allotted to the two partners towards their shares. They have lost their right in the other vehicle which was not allotted to them and, instead, they became the owners of the two vehicles allotted to them although the other vehicle had gone to the share of the other partner. In other words, each one of the two partners has been allotted one vehicle towards his share. Where the partnership itself has been dissolved and the partners divided the assets of the dissolved partnership, we are of the firm view that such an allotment or transfer of the assets cannot be termed to be sale within the meaning of the Sale of Goods Act. This view of ours gains support from the decision of the Supreme Court in Commissioner of Income-tax v. Dewas Cine Corporation, : [1968]68ITR240(SC) , wherein each theatre was deemed to have been returned to the original owner in satisfaction of his claim to a share in the residue of the assets on the disssolution of the partnership. It was held that there was no sale by the partnership to the partners when the assets of the partnership were divided or allocated in respect of those assets, depreciation was allowed and they were taken at their written down value. We may also add that the decision of the Supreme Court in Commissioner of Income-tax v. Bankeylal Vaidya, : [1971]79ITR594(SC) also supports the view taken by us.

9. For these reasons, our answer to the question is in the negative and against the department. The Commissioner shall pay the costs of this reference. Advocate's fee is fixed at Rs. 250.


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