1. This is a petition under Article 226 of the Constitution.
2. In the previous year, relevant to the assessment year 1954-55, the petitioner purchased an X-Ray machine for Rs. 32,000. He started an X-Ray clinic in the name of M.S. Kackkar's X-Ray Home. Depreciation was allowed to him on the value of the X-Ray machine in the assessment years 1954-55 onwards until the written down value became nil. Thus, in the assessment years 1963-64 and 1964-65, no depreciation was allowed. During the previous year, relevant to the assessment year 1965-66, the petitioner took in his son as a partner and continued to carry on the business in the same name and style. Thus, Kackkar X-Ray Home became a partnership concern. The petitioner valued the X-Ray machine at Rs. 20,000 and in the books of accounts of the firm a credit was given to him of Rs. 20,000 in his capital account. In other words, he handed over the X-Ray machine to the firm after valuing it at Rs. 20,000. During the assessment proceedings for the year 1965-66, the Income-tax Officer called upon the petitioner to explain as to why the credit of Rs. 20,000 in his capital account should not be treated as his income chargeable to tax under Section 41(2) of the Income-tax Act, 1961. The petitioner furnished an explanation setting out the circumstances under which the sum of Rs. 20,000 came to be credited in his capital account. The Income-tax Officer, however, still thought that the sum of Rs. 20,000 was chargeable to tax under Section 41(2) of the Act. The assessee filed a revision before the Commissioner of Income-tax which was dismissed. Hence, this petition.
3. The only question which falls for consideration is as to whether the sum of Rs. 20,000 can be treated to be the income of the assessee under Section 41(2) of the Act. That section reads :
'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.'
4. There is no doubt that the X-Ray machine was a business asset which was previously being used by the petitioner in his profession. The written down value of the machine being nil, a sum of Rs. 20,000 would be taxable as profit under Section 41(2), if the machine had been sold for that amount. The contention of the department is that, in the circumstances, the X-Ray machine should be deemed to have been sold to the firm for Rs. 20,000 or it should be deemed to have been exchanged for a sum of Rs. 20,000. In our opinion, the transaction involved in the present case amounts to neither sale nor exchange. When a person hands over a business asset to a partnership firm, of which he is a partner, he cannot be said to have sold the same to the partnership firm for the simple reason that the firm is not a legal entity apart from the partners who constitute it. He himself being a partner in the firm, it cannot be said that the petitioner sold the X-Ray machine to himself. The same would be true about an exchange. For a transaction of exchange to take place, there must be two parties. Here there is no second party. A similar question arose before the Supreme Court in Commissioner of Income-tax v. Hind Construction Ltd.,  83 I.T.R. 211, 214 (S.C.). There it was observed:
'If a person revalues his goods and shows a higher value for them in his books, he cannot be considered as having sold those goods and made profit therefrom. Nor can a person by handing over his goods to a partnership of which he is a partner as his share of the capital be considered as having sold the goods to the partnership.'
5. Thus, there being neither sale nor exchange, Section 41(2) of the Act could not be applicable. The order passed by the Income-tax Officer and confirmed by the Commissioner of Income-tax cannot, therefore, be sustained.
6. The petition is accordingly allowed, the order of the Income-tax Officer dated March 18, 1970 (annexure '3'), so far as it seeks to levy tax on Rs. 20,000, is quashed. The order of the Commissioner of Income-tax dated November 12, 1971 (annexure '5'), is also quashed. The petitioner is entitled to his costs, which we assess at Rs. 100.