SETHURAMAN J. - In this reference under section 256(1) of the Income-tax Act, 1961, the following question of law has been referred :
'Whether, on the facts and circumstances of the case, the Appellate Tribunal was right in law in holding that there can be no assessment of any excess under the provisions of section 41(2) and of capital gains ?'
The assessee is a firm consisting of two partners, namely, Abdullah Rowther, the father, and Mohamed Abdul Khader, the son. The firm was constituted under a partnership deed dated September 28, 1950. The firm was carrying on the business of motor transport, plying buses and lorries. The vehicle together with their route permits stood in the name of Abdullah Rowther, the father. The total cost of the buses in the accounts of the firm as on March 31, 1962, was Rs. 2,17,821. The liabilities of the firm as on that date came to Rs. 4,21,337. Because of financial difficulties, the firm felt that it was advantageous to enter into a partnership with two other persons to carry on the business of plying the motor buses. A new firm has come into existence with four partners on October 1, 1962, under the name and style of Messrs. Abdul Khader Motor Service. The new firm consisted of these two persons and two others, namely, Chellappa Chettiar of Kandanur and Mohamed Ibrahim of Puduvayal. The buses together with the route permits were transferred to the new firm at the value of Rs. 3,51,000. The liabilities of the assessee-firm, to the extent of Rs. 2,80,150 were also transferred to the new firm. Two separate returns of income were filed by these firms for the assessment year 1963-64.
The Income-tax Officer came to the conclusion that the transaction resulted in a sale of the buses and the routes by the assessee-firm in terms of section 41(2) of the Income-tax Act, 1961, and that this transaction resulted also in liability to capital gains. He fixed the consideration for the sale, based on Rs. 3,51,000, the value at which the assets were transferred, and allocated out of this value a sum of Rs. 1,51,000 as the sale price of buses and Rs. 2,00,000 as the sale price of the route rights. He deducted the written down value of the buses as on April 1, 1962, amounting to Rs. 96,309 and assessed the balance of Rs. 54,691 as the profit under section 41(2) of the Income-tax Act, 1961, and assessed the sum of Rs. 2,00,000 as capital gains. In coming to this conclusion the Income-tax Officer took into account the fact that there were two different firms which existed side by side even after the transaction, that the firms maintained separate accounts and that the assessee-firm continued to ply lorries even after the new firm came into existence.
On appeal, the Appellate Assistant Commissioner dismissed the appeal holding that the partnership consisting of four partners could not be identified with the partnership consisting of two persons and that, therefore, they were two different entities. Relying on the decision of the Supreme Court in the case of Commissioner of Income-tax v. B. M. Kharwar : 72ITR603(SC) , he held that the transaction was a transfer of certain assets by an assessable entity to another assessable entity for consideration and that the transfer was for a stated price in moneys worth so that the transaction was a sale.
On further appeal, the Appellate Tribunal allowed the assessees appeal holding that there was no transfer or sale of buses by the assessee to the partnership of four persons and that, therefore, there could be no assessment under section 41(2) and also no levy of tax on any capital gains. It is these conclusion of the Tribunal that are challenged in the present tax case.
There is no dispute about the fact that the two persons who constituted the assessee-firm were also partners in the new firm. There can be no dispute about the legal position that the firms are not separate or independent legal entities. This principles has been set out in a decision of this court in Commissioner of Income-tax v. Janab N. Hyath Batcha Sahib : 72ITR528(Mad) . The assessee in that case was an individual carrying on business in forest contracts and he converted the same into a partnership with another. In addition to the capital contributed by each partner, the capital account of the assessee was credited with a further sum of Rs. 15,000 being the agreed value of three lorries owned by the assessee and which he handed over to the firm. As the written down value of the lorries in the books of the assessee was only Rs. 2,558, the Income-tax Officer trated the difference of Rs. 12,442 as profit of the assessee under section 10(2)(vii) of the Indian Income-tax Act, 1922, which corresponds to section 41(2) of the Income-tax Act, 1961. The Tribunal held that there was no sale of the lorries and that there was no profits made by the assessee. The matter came on reference to this court and it was held that when a person handed over his property to a firm of partners consisting of himself and others there was no transfer of property so as to consitute a sale of goods. This judgment has also been followed in D. Kanniah Pillai v. Commissioner of Income-tax : 104ITR520(Mad) , a decision to which one of us was a party. In view of these decisions it would follow that the assessment under section 41(2) of the Income-tax Act, 1961, with reference to the sum of Rs. 54,691 cannot stand.
We have now to consider the question whether the sum of Rs. 2,00,000 treated as capital gains is assessable to tax under the provisions of section 45 of the Income-tax Act, 1961. This point also is concluded by the decision in D. Kanniah Pillai v. Commissioner of Income-tax : 104ITR520(Mad) , already referred to, even though there is no independent discussion of the applicability of section 45 of the Act to a transfer like the one before us. In view of this, the learned counsel for the revenue submitted that the provisions of section 45 read with section 2(47) would not stand on the same footing as section 41(2) and that the matter has, therefore, to be considered separately. Section 45 provides :
'Any profits or gains arising from the transfer of a capital asset effected in the previous year shall, save as otherwise provided in sections 53, 54 and 54B be chargeable to income-tax under the head capital gains, and shall be deemed to be income of the previous year in which the transfer took place.'
Section 2(47) defines 'transfer' occurring in the above provision as follows :
'Transfer', in relation to a capital asset, includes the sale, exchange or relinquishment of the asset or the extinguishment of any rights therein or the compulsory acquisition thereof under any law.'
There is no dispute that the word 'sale' in the definition of the word 'transfer' would not take in the present case because of the decisions already referred to. There is also no dispute that this is not a transaction of 'exchange' contemplated in section 2(47). The learned counsel sought to rest her contention on, first, the expression 'relinquishment of the asset'. The relinquishment contemplated by this provision would have to be a complete divestiture of the interest of the assessee in the said assets. In the present case, it cannot be stated that the assessee-firm of two partners retained no interest in the buses and the route rights that were taken over by the new firm. Therefore, it is not a case of 'relinquishment of the asset'. The only aspect that now remains for consideration is whether the present transaction can be brought within the scope of the expression 'extinguishment of any rights therein'. The learned counsel was not in a position to spell out any particular right which was extinguished in the assets in the present case which were taken over by the new firm.
So, in view of the above, we answer the question referred to us in the affirmative and against the revenue. The assessee will be entitled to its costs. Counsels fee Rs. 500.