The judgment of the court was delivered by
PANDEY J. - Under section 66(1) of the Income-tax Act, 1922, the Income-tax Appellate Tribunal, Bombay, has, at the instance of the assessee, referred to this court for its opinion the following question of law :
'Whether, on the facts and in the circumstances of the case, the amount of Rs. 44,380 was rightly included in the total income of the assessee for the year 1952-53 under the second proviso to section 10(2) (vii) of the Income-tax Act ?'
The facts material for this reference are these. The assessment year is 1952-53 and the relevant period of the corresponding previous year is 1st April, 1951, to 30th September, 1951. By and agreement made on the last mentioned date, the firm Dewas Cine Corporation, Dewas, was dissolved. It had come into being presumably as a result of an oral agreement between the two partners, S. G. Sanghi and Hariprasad, with effect from 1st March, 1947. While S. G. Sanghi owned the theatre called Vikas, the other partner owned another theatre called Nagar Niwas. They allowed the two theatres to be used for the business of the firm. Actually, the theatres were brought into the books of partnership as assets valued at Rs. 1,65,000 and Rs. 1,00,000 respectively and depreciation on these assets were adjusted and claimed at the prescribed rates as under :
Less depreciation on furniture
When the firm was dissolved on September 30, 1951, the theatres were 'handed over from this date to the owner of the respective cinema houses.' In the books maintained by the partners, the assets were shown as taken over on October 1, 1951, at the prices shown above less the amount of depreciation.
The Income-tax Officer treated the firm as a registered firm under section 23(5) (b) of the Act and included under the second proviso to section 10(2) (vii) of the Act the amount of Rs. 44,380 in the total income of the firm on the view that the theatres were taken back by the partners at the original cost prices. Being aggrieved, the assessee appealed to the Appellate Assistant Commissioner, who allowed the appeal and excluded Rs. 44,380 from the total income mainly on the ground that the theatres had really been transferred back to the partners at the depreciated values. Against this order, the Revenue appealed to the Tribunal, which, by its order dated April 19, 1962 set aside the earlier order and restored the one passed by the Income-tax Officer.
The reasons which impelled the Tribunal to take a different view may be given in its own words :
'When the partnership was formed, it has been by consent of both the partners that the two theatres had been taken into its books by due credit to the respective partners for the value in them contributed by each of them. There has thus been a transfer of the theatres in fact. When these theatres are re-transferred to the respective owners through entries in the ?) books, there is a sale of the nature contemplated under section 10(2) (vii). Any profit or loss on such sale has necessarily to come in for attention under that section.
The entries adjusting the depreciation and writing up the assets to their original value on the date of dissolution amount to total recoupment by way of a writing back of the entire depreciation till then claimed. This had nothing to do with writing down the assets over again by the individual partners. After taking over, they can deal with the valuation in any manner they please. If the situation is as Mr. Mulla presented, the credit to the partners for the write back must be for Rs. 26,403 to Mr. Sanghi and Rs. 19,719 to Hariprasad and not Rs. 23,021 equally as has been shown. This only shows that, between both the partners who had equal interest in the firm, for purpose of dissolution, both the assets had been assumed not to depreciated at all during the period of partnership. In other words, it is an admission that whatever depreciation had been already claimed by the assessee before the income-tax authorities and allowed by them constituted a wrong claim which had been righted by those entries. Thus is just the situation that the section 10(2) (vii) has been designed to cover.
In our opinion, the Appellate Assistant Commissioner has misinterpreted and wrongly understood the nature of the book entries. The book entries in this case are not just meaningless entries. It is on the basis of these entries the firm has obtained de facto ownership of the assets, claimed depreciation during the period of the partnership and also has restored the assets to their former owners. These entries have a clear meaning and must be given due importance. The Appellate Assistant Commissioners order is accordingly set aside and the Income-tax Officers order restored.'
It is urged before us that the two partners had merely allowed the use of their theatres and had not by any means known to law transferred them to the partnership and that, in these circumstances, there is no evidence to support the conclusion that the theatres were assets of the partnership. In our opinion, the theatres had to be, in the circumstances of the case, regarded as 'property originally brought into the stock of the firm' within the meaning of section 14 of the Indian Partnership Act, 1932, and so constituting property of the firm. A direct authority on the point is Robinson v. Ashton. In that case, on the formation of a partnership, it was agreed that the business would be carried on at a mill belonging to John Robinson, one of the partners. In the books of the partnership, the value of the mill was credited in favour. Thereafter, from time to time, sums were expended in making additions to, and improvements in, the mills. In the yearly balance-sheets, the mill was valued at the original value increased by the amounts expended on it but less a certain amount on account of depreciation. The partners were also allowed interest on the amount standing to their credit in the capital accounts. It was held that, in the absence of any special agreement, the mill was an asset of the partnership and that on the sale of the business, under which the purchase money of the mill was largely in excess of its value in the books, the difference of profit divisible amongst partner. Since this aspect of the question was not strongly pressed before us, we do not consider it necessary further to dwell thereon.
It is, however, urged that the second proviso to section 10(2) (vii) of the Act is not attracted because, in this case, there was no sale of any building, plant or machinery. On behalf on the Revenue, it is contended that this question was not referred and should not be considered, or answered, by this court. The question referred to us is framed in general terms but, as paragraph 7 of the statement of the case shows, it was specifically urged before the Tribunal that, following the dissolution of the partnership, there was no sale. In this situation, the question must be regarded as arising out of the order and so included in the general question referred to this court : Commissioner of Income-tax v. Scindia Steam Navigation Co. Ltd.
On the main aspect of the question canvassed before us, we think that there was, in this case, no sale. The word 'sale' is not defined in the Act and its ordinary conception is that property in something is transferred for a price as a result of negotiation and agreement. So, compulsory acquisition is not regarded as a sale within the meaning of the second proviso to section 10(2) (vii) of the Act : Calcutta Electric Supply Corporation v. Commissioner of Income-tax. It is the real nature of the transaction and not merely the book entries which are material : Rogers & Co. v. Commissioner of Income-tax. Further, up to the time of dissolution, the two partners were co-owners of the two theatres. That being so, if, upon dissolution, immovable property jointly owned by them is merely distributed, there is, or can be, no sale. The transaction is, if we may say so, analogous to an exchange because the arrangement, which is brought about by the distribution, signifies the surrender of a portion of a joint right in exchange for a similar right from the co-share. Having regard to these considerations, we are of opinion that the distribution of immovable property of the dissolved firm was not a sale of building, machinery or plant within the meaning of the second proviso to section 10(2) (vii) of the Act and the amount of Rs. 44,380 could not be included in the total income of the firm.
We answer the question referred to us in the manner indicated above and direct that the Revenue shall pay all costs of this reference. Hearing fee is fixed at Rs. 100.