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Commissioner of Income-tax Vs. V.M. Thangavel Chettiar - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtChennai High Court
Decided On
Case NumberTax Case No. 473 of 1970 (Reference No. 134 of 1970)
Judge
Reported in[1977]107ITR556(Mad)
ActsIncome Tax Act, 1922 - Sections 10(2)
AppellantCommissioner of Income-tax
RespondentV.M. Thangavel Chettiar
Appellant AdvocateJ. Jayaraman, Adv.
Respondent AdvocateK. Srinivasan, Adv.
Cases Referred(Mad) and A. Subbiah Nadar v. Commissioner of Income
Excerpt:
- - 28,622 allowed to the assessee in the earlier years on building, plant and machinery and added this sum to the assessee's income for the assessment year 1961-62, relying on the provisions of the proviso to section 10(2)(vii) of the indian income-tax act, 1922. the assessee appealed to the appellate assistant commissioner and failed......been brought to our notice by thedepartment nor any sale deed executed regarding the terms of the sale. thepartnership document dated june 25, 1960, also does not refer to any sale.the learned departmental representative is also unable to pinpoint what isthe amount of the price for which the assets, i.e., the building, the cinema,machinery, the lorry, the car and the sundry machinery, were transferredby the assessee to the partnership. it is stated only in a general way thatthe capital of the assessee determined at rs. 30,000 and divided equallybetween the five partners of the firm would include the sale price of theassets in question transferred by the assessee to the firm. the propositionso put in general terms by the learned departmental representative doesnot bring out the correct.....
Judgment:

Ismail, J.

1. The Income-tax Appellate Tribunal, Madras Bench, under Section 256 of the Income-tax Act, 1961, has referred the following question of law to this court for its opinion:

'Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the sum of Rs. 28,622 is not includible in the total income under the provisions of the second proviso to Section 10(2)(vii) of the Indian Income-tax Act, 1922 ?' The short facts which give rise to the above question are as follows :

2. The assessee as an individual was running four proprietary businesses of plying lorries, running an oil mill, running a rice mill and running a cinema house. The total capital of the assessee invested in these businesses amounted to Rs. 30,000 represented by several assets. The assessee admitted his two major sons as partners in these businesses giving them 25% share each and admitted his two minor sons to the benefits of the partnership with 12% share in profits each. The assessee retained to himself the balance of 25% share in the profits and losses of the partnership business. The firm was styled as M/s. Dhanapal Oil and Rice Mill. The partnership was created in terms of the partnership deed dated June 25, 1960, taking effect from April 12, 1960. The assessee's total capital amounting to Rs. 30,000 was thereupon divided between his four sons and himself at Rs. 6,000 each and such capital of Rs. 6,000 was introduced into the books of the partnership in the name of each of the five parties. The assets of the business thrown into the partnership included certain buildings and plant and machinery such as cinema, machinery, lorry, car and sundry machinery on which depreciation was allowed in the amount of Rs. 28,622 to the assessee as the proprietor of these businesses in his earlier assessment years 1950-51 to 1959-60. On the above facts, the Income-tax Officer took back the depreciation of Rs. 28,622 allowed to the assessee in the earlier years on building, plant and machinery and added this sum to the assessee's income for the assessment year 1961-62, relying on the provisions of the proviso to Section 10(2)(vii) of the Indian Income-tax Act, 1922. The assessee appealed to the Appellate Assistant Commissioner and failed. On second appeal preferred by the assessee, the Appellate Tribunal reversed the decision of the Income-tax Officer as affirmed by the Appellate Assistant Commissioner and it is the correctness of that decision which is sought to be challenged in the form of the question extracted above.

3. Section 10(2)(vii) of the Indian Income-tax Act, 1922, so far as material for the purposes of this case is as follows :

'(2) Such profits or gains shall be computed after making the following allowances, namely :--

(vii) in respect of any such building, machinery or plant which has been sold or discarded or demolished or destroyed, the amount by which the written down value thereof exceeds the amount for which the building, machinery or plant, as the case may be, is actually sold or its scrap value :

Provided that such amount is actually written off in the books of the assessee :

Provided further that where the amount for which any such building, machinery or plant is sold, whether during the continuance 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.'

From the language of the section itself two things are clear that the statutory provision applies only if there had been a sale of the building, machinery and plant or its scrap value. The very idea of sale involves that the sale must be for a particular price. As far as the present case is concerned, all that has happened is that the assets which were the assets of the proprietary concern had been converted into assets of the partnership concern of which the original assessee had become a partner. The question for consideration is whether such a conversion or utilisation of the plant and machinery would constitute 'sale' within the scope of the section extracted above.

4. In N. Hyath Batcha Sahib v. Commissioner of Income-tax : [1969]72ITR528(Mad) , which is a decision of this court dealing with an identical point, this court held that the conversion of the assets of an individual into that of a partnership firm of which he becomes a partner does not involve a sale so as to attract the applicability of the second proviso to Section 10(2)(vii) of the Indian Income-tax Act, 1922. This has been followed by this court in two other decisions in Kanniah Pillai v. Commissioner of Income-tax : [1976]104ITR520(Mad) and A. Subbiah Nadar v. Commissioner of Income-tax [1976] 104 ITR 564. Once it is held that there is no sale, there is no question, of invoking the second proviso to section 10(2)(vii) of the Act.

5. Apart from the above, the second requirement which is involved in the conception of 'sale' is also absent in the present case. The Tribunal in paragraph 6 of its order pointed out :

'We may add that proviso (ii) to Section 10(2)(vii) of the IndianIncome-tax Act, 1922, comes into the picture where a building, machineryor plant is sold and a sale implies transfer for a price. In the present case,neither any agreement for sale has been brought to our notice by thedepartment nor any sale deed executed regarding the terms of the sale. Thepartnership document dated June 25, 1960, also does not refer to any sale.The learned departmental representative is also unable to pinpoint what isthe amount of the price for which the assets, i.e., the building, the cinema,machinery, the lorry, the car and the sundry machinery, were transferredby the assessee to the partnership. It is stated only in a general way thatthe capital of the assessee determined at Rs. 30,000 and divided equallybetween the five partners of the firm would include the sale price of theassets in question transferred by the assessee to the firm. The propositionso put in general terms by the learned departmental representative doesnot bring out the correct position. As stated earlier, the correct legalposition is that when a person hands over his property to a firm of partnersconsisting of himself and others, there is no transfer of property so as toconstitute a sale and in this view of the matter, the assessee is entitled tosucceed.'

6. We are in entire agreement with the above observation with regard to the conception of sale involving the fixing and payment of a price thereof and such an element is totally absent factually in the present case. Under these circumstances, we answer the question in the affirmative and against the department. The assessee is entitled to his costs of this reference from the Commissioner of Income-tax and the counsel fee is fixed at Rs. 500.


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