1. This appeal by the revenue is directed against the order of the Commissioner (Appeals) granting the claim of the assessee for depreciation on the ground that Section 34(2)(ii) of the Income-tax Act, 1961 ('the Act'), has no application.
2. The assessee is a firm which was originally constituted with seven partners. During the previous year ended 18-4-1977, there was a recons-titution on 30-11-1976, when five of the partners retired leaving the remaining two to carry on the business of the firm. In settling the accounts of the retiring partners each of them was given a bus belonging to the firm. In computing the income for the first period from 1-4-1976 to 30-11-1976, the assessee had taken into account depreciation of Rs. 27,431 in respect of buses which have been taken'away by the retiring partners. The depreciation was computed for the period of use by the firm up to 30-11-1976 in its business. The ITO was of the opinion that since the buses had been transferred to the retiring partners they did not belong to the firm and, hence, depreciation could not be allowed on such buses in computing the total income of the assessee.
3. On appeal, the Commissioner was of the opinion that the transfer of a bus in settling the accounts of a retiring partner could not be regarded as the bus being sold, discarded, demolished or destroyed within the meaning of Section 34(2)(iii) under which section alone depreciation could be denied. He, therefore, allowed the claim of the assessee.
4. In this appeal, it was urged for the revenue that since the buses ceased to be those of the assessee-firni during the previous year, the buses must be taken to have been discarded even if they could not be considered to have been sold since the transfer was in consideration of the amount due to the retiring partners. It was, therefore, contended that the disallowance made by the ITO was justified under Section 34(2)(ii). On the other hand the contention of the assessee was that the buses were neither sold nor discarded and there could be no disallowance of the claim for depreciation especially when there was nothing in the Act to say that the buses should belong to the assessee on the last day of the previous year to enable the assessee to get the deduction for depreciation.
5. On consideration of the rival submissions, we are not inclined to interfere with the order of the Commissioner (Appeals). No doubt, the scheme of the Act is that in the year in which an asset is acquired by the assessee and put into use in the business, depreciation is given for the entire year even if the asset has been purchased and put to use on the last day of the previous year under Section 32(1)(ii) of the Act, read with Rule 5. In the same way, Section 34(2)(iii) provides that where the assets have ceased to have been used in the business in the middle of the previous year by reason of its being sold, discarded or destroyed, no depreciation will be given for that asset even if it had been used for most part of the previous year. Normally, these two provisions would seem to complement each other and what the assessee gains in the year of installation may be offset by the depreciation lost in the year in which the asset is sold or discarded. In the present case, the revenue apprehends a lacuna in this scheme by reason of the Commissioner holding that the transfer of buses to the retiring partners in the settlement of their account would not fall within the scope of Section 34(2)(ii). It is to avert this situation that it is claimed by the revenue that the transfer of the bus to a retiring partner in settlement of his account would amount to a sale. We are unable to accept this contention because the distribution of the assets of the firm on dissolution of a firm in settling the accounts of the partners is not treated as a transfer. In the case of Addanki Narayanappa v. Bhaskara Krishtappa  3 SCR 400, a document recording the previous fact of dissolution of partnership and relinquishment of the interest of a partner in the partnership assets by way of adjustment was held to be not registrable because there was no transfer of any interest in the immovable property since a partner has no exclusive right over any property of the firm. It was observed that the partner's right during the subsistence of the partnership is to get his share of profits from time to time as may be agreed upon among the partners and after the dissolution of the partnership or with his retirement from partnership, of the value of his share in the net partnership assets as on the date of dissolution or retirement after deduction of liabilities and prior charges. Therefore, when a retiring partner receives an asset in lieu of the net value of his share of the net partnership assets, he is only receiving his share of the capita] contributed by him which he always owned and does not obtain anything new. Therefore, there is no transfer of any asset by the firm to the retiring partner unless by way of a separate agreement the retiring partner had purchased an asset of the firm for an agreed price. The contention of the revenue is untenable from a different point of view also. The firm as such not being a distinct legal entity, has no separate rights of its own in the partnership asset which are owned jointly or in common by the partners with the result that the distribution of the assets to the partners upon dissolution is nothing but a mutual adjustment of rights between the partners. The Supreme Court has held in the case of Malabar Fisheries Co. v. CIT  120 ITR 49 that such distribution or allotment of assets to erstwhile partner does not amount to a transfer of asset at all. The conversion of an asset from that of a partner to that of a firm or again from that of a firm to that of a partner is entirely a matter of agreement between the partners and does not. involve any transfer of rights in the asset. The Supreme Court has clarified that what applies to a transfer to third parties is irrelevant with respect of agreement between the partners inter se concerning retirement or dissolution [Bhaskara Krishnappa (supra)]. Hence, as in the case of dissolution so also in the case of retirement the partner to whom an asset is allotted is only receiving, in the words of Lindley, his proportion of partnership asset after they all have been realised and converted into money and all the partnership debts and liabilities have been paid and discharged. The argument of the revenue was that since the assessee was entitled only to his share of the net amount of capital, the allotment of a bus only in lieu of that amount must be cons;dered to be a sale of the bus for that amount. We are unable to accept this contention because it has been held by the Supreme Court that tie allotment of an asset is by way of mutual adjustment of rights and, therefore, there is no transfer of that asset by the firm to the partner. It is not the case of the revenue that there was any separate purchase of the bus by the erstwhile partners for stipulated amounts. In the circumstances, we are convinced that the allotment of the buses to the retiring partners in lieu of their share of adjustment of account could not amount to a sale of the buses.
6. In the alternative, it was argued that the buses having been ceased to have been used by the firm, they must be taken to have been discarded in the sense of having been given up. The word 'discarded' has not been judicially defined or noticed and the dictionary meaning is of no particular assistance in deciding this issue. The buses have been treated by mutual consent of the partners as partnership asset and after the date of retirement of certain partners was ceased to be treated as partnership assets. An agreement by the partners not to use the asset in the business does not appear to be consistent with the asset being discarded in the sense of being thrown away as useless or not usable in the business. In the circumstances, we have to agree with the Commissioner that the buses handed over to the retiring partners could not be regarded as having been sold or discarded so as to attract the provisions of Section 34(2)(ii).
7. On the other hand, the provisions of Section 38 of the Act are attracted to the facts of this case. That section provides that where an asset is not exclusively used for the purpose of the business, the deduction under Section 32 shall be restricted to a fair proportionate part thereof having regard to the user of such asset for the purpose of the business. That section may apply to an asset being used not only for more purposes than one but also to an asset being used for the purposes of the business only for part of the year as in the present case. Since the asset has not been exclusively used throughout the previous year for the purpose of the business it seems to be reasonable in the light of Section 38 to restrict the claim of depreciation to the period for which the asset was used in the business of the assessee.
That is exactly what the assessee has claimed, for, the deduction for depreciation has been restricted to the period for which the buses were used in the business of the assessee-firm. We, therefore, see no reason why that claim should not have been allowed by the ITO. Hence, we confirm the order of the Commissioner (Appeals) granting that claim.
The appeal is dismissed.