AHMEDABAD B BENCH VASANT WVG. v. INCOME TAX OFFICER FACTORY October 24, 1986 JUDGMENT 20 ITD 161 Vasantha Mills Limited. vs Income-Tax Officer. Bench: ITAT AHMEDABAD ORDER Per Shri K. T. Thakore, Accountant Member --- This appeal which is filed by assessee relates to assessment year 1978-79. only ground raised in this appeal is that authorities below were not justified in bringing to tax sum of Rs. 1,03,708 being profit under section 41(2) of Income-tax Act, 1961 ('the Act'), on transfer of machineries by assessee-firm to partner Kantilal Ishwarlal (HUF). facts lie in narrow compass. Shri Kantilal Ishwarlal is partner in assessee-firm representing interest of his HUF and is having 40 per cent share therein. Certain machineries held by firm were taken over by said partner Kantilal at book value of Rs. 1,13,083. necessary adjustments were made in account of Shri Kantilal Ishwarlal and his capital account stood debited by said amount. claim of assessee-firm was that said machinery was taken over by said partner at book value and said transaction has not resulted in any sale or exchange. difference between written down value of said machinery and book value was not exigible to tax under provisions of section 41(2). This contention stood rejected by ITO on ground that this was not case of dissolution or retirement or reconstitution of firm. While firm continued to carry on same business said partner also continued to remain as partner in said firm. Thus, there was transfer of machinery by firm in favour of partner for consideration which was debited in books. transaction was covered by definition of expression 'sale' laid down in section 32(1). He, therefore, brought to tax sum of Rs. 1,03,708 as profit under section 41(2). 2. Being aggrieved assessee carried matter in appeal before Commissioner (Appeals) who relying on decision in case of CIT v. Bharani Pictures [1981] 129 ITR 244 (Mad.) upheld decision of ITO. 3. Being aggrieved, assessee has come up in appeal before us. Shri Divetia submitted that certain machineries belonging to firm were taken over by partner and transaction was completed by making entries in books by debiting partner's account with firm's book and corresponding adjustments were made in machinery account in firm. said transaction did not amount to transfer in view of observations in case of Sunil Siddharthbhai v. CIT [1985] 156 ITR 509 (SC) at page 519. In any case assuming for sake of arguments that said transaction was covered by expression 'transfer' it was not sale. In other words, according to Shri Divetia expression 'transfer' was wider in scope than expression 'sale'. He next submitted that section 41(2) created artificial or notional liability and, therefore, provisions of said section must be construed very strictly. According to Shri Divetia difference between actual cost, written down value and sale proceed could be brought to tax under section 41(2) when any plant or machinery or building is 'sold, discarded, demolished or destroyed'. This is admittedly not case where machinery was either demolished, discarded or destroyed. Now expression 'sold' has been assigned same meaning as set out in Explanation 2 to section 32(1) which reads as follows: " 'Sold' includes transfer by way of exchange or compulsory acquisition under any law for time being in force but does not include transfer, in scheme of amalgamation, of any asset by amalgamating company to amalgamated company where amalgamated company is Indian company;" above transaction which has taken place between firm and partner cannot be treated as sale because there cannot be sale by firm to partner. This is so because what belongs to firm belongs to partner. firm though entity under Act does not hold any property de hors partners and as such there can be no sale between firm and partner. decision in Bharani Pictures' case Shri Divetia submitted, had no application because in that case reliance was placed on decision of Hon'ble Supreme Court in case of CIT v. A. W. Figgies & Co. [1953] 24 ITR 405. principle laid down in that decision has been examined by Hon'ble Gujarat High Court in case of CIT v. Madhukant M. Mehta [1981] 132 ITR 159 and their Lordships have followed later decision of Supreme Court in case of Malabar Fisheries Co. v. CIT [1979] 120 ITR 49 in preference to A.W. Figgies & Co.'s case. Therefore, said decision in Bharani Pictures' case need not be followed in instant case. Shri Divetia then relied on commentary of learned Authors Chaturvedi & Pithisaria, Vol. II, page 1554 and submitted that expression 'transfer' used in section 2(47) of Act has no relevance in context of section 41(2). learned departmental representative on other hand pointed out that authorities below have come to correct conclusion that impugned amount was exigible to tax under section 41(2). expression 'sold' is inclusive definition. Therefore, natural meaning of sale has to be applied. This is neither case of dissolution nor of retirement of partner, nor is case where individual has converted his business into partnership nor case of reconstitution of firm. transaction has taken place when firm is continuing its business and partner also is continuing as partner of firm. said partner Kantilal undertook to purchase machinery of firm for price which was paid for by adjustment in account of said partner. Thus, necessary ingredients of sale, viz., transfer of property and payment of price were present in instant case. decision in Bharani Pictures' case squarely would apply to facts of case and authorities below have rightly brought impugned amount to tax under section 41(2). 4. We have carefully considered rival submissions. controversy before us raises vexed question, viz., whether during subsistence of partnership when partner takes over asset belonging to firm, difference between written down value and actual cost could be brought to tax under provisions of section 41(2)? Section 41(2) applies only where any building, machinery, plant, etc., is sold, discarded, demolished or destroyed. In instant case one of firm at partners Kantilal took over certain machineries belonging to firm at original cost. Explanation to section 41(2) defines expression 'sold' to have same meaning as in sub-section (1) of section 32. 'Sold' is defined in section 32(1) to include asset by way of exchange or compulsory acquisition under any law for time being in force but does not include transfer in scheme of amalgamation, etc., section 2(47) defines 'transfer' in relation to capital asset to include sale, exchange or relinquishment of asset or extinguishment of any rights therein or compulsory acquisition thereof under any law. 5. Hon'ble Supreme Court has consistently hold that when there is distribution of assets of firm amongst partners on dissolution, there is no sale, exchange, transfer or extinguishment of firm's rights in partnership assets but merely mutual adjustment of rights between partners in assets which till then were jointly owned by them. Reference in this connection may be made to CIT v. Dewas Cine Corpn. [1968] 68 ITR 240 (SC), CIT v. Bankey Lal Vaidya [1971] 79 ITR 594 (SC) and Malabar Fisheries Co.'s case. In Malabar Fisheries Co.'s case which related to section 34(3)(b) of Act Supreme Court took into account extended meaning of word 'transfer' contained in section 2(47), which was not in Indian Income-tax Act, 1922. basis for decision of Supreme Court in these cases, as explained in Malabar Fisheries Co.'s case, is that partnership firm has no legal existence apart from partners constituting it and when one talks of firm's property or firm's assets, all that is meant is property or assets in which all partners have joint and common interest. Therefore, it is not correct to said that upon dissolution rights of firm in its assets are extinguished or transferred to partners. As earlier stated, according to Supreme Court, distribution, division or allotment of assets to partners upon dissolution is mutual adjustment of their rights and not transfer. same principle is applied in case of retiring partner. In other words, rights of retiring partner are determined or worked out on same footing as if firm stood dissolved. In other words so far as retirement of partner is concerned qua said partner there is dissolution of firm. Thus, when partner retires there is mutual adjustment of rights between him and remaining partners and there is no question of sale or transfer by firm in favour of retiring partner even if some asset is allocated to retiring partner in satisfaction of value of his share which he ought to have received. This is so because partnership property is not held by firm which is not legal entity. This view is directly supported by decision of Hon'ble Gujarat High Court in Velo Industries v. Collector, Bhavnagar [1971] 80 ITR 291 (FB), CIT v. Mohanbhai Pamabhai [1973] 91 ITR 393 and CIT v. Dilip Engg. Works [1981] 129 ITR 688. 6. It would, thus, be evident that position in regard to distribution of assets in case of dissolution and retirement of partner from firm is quite clear. But in instant case, position is that during continuation of firm partner Shri Kantilal who also continued as partner of firm has taken over asset of firm. If this were case of dissolution of firm or retirement of partner issue could not have presented any difficulty. 7. In Sunil Siddharthbhai's case at page 157 following, extract is recorded from decision of Hon'ble Supreme Court in Addanki Narayanappa v. Bhaskara Krishnappa AIR 1966 SC 1300: " . . . Whatever may be character of property which is brought in by partners when partnership is formed or which may be acquired in course of business of partnership it becomes property of firm and what partner is entitled to is his share of profits, if any, accruing to partnership from realisation of this property, and upon dissolution of partnership to share in money representing value of property. No doubt, since firm has no legal existence, partnership property will vest in all partners and in that sense every partner has interest in property of partnership. During subsistence of partnership, however, no partner can deal with any portion of property as his own. Nor can be assign his interest in specific item of partnership property to anyone. His right is to obtain such profits, if any, as fall to his share from time to time and upon dissolution of firm to share in assets of firm which remain after satisfying liabilities set out in clause (a) and sub-clauses (i), (ii) and (iii) of clause (b) of section 48. . . ." position elaborated later in same judgment as follows: "....The whole concept of partnership is to embark upon joint venture and for that purpose to bring in as capital money or even property including immovable property. Once that is done whatever is brought in would cease to be exclusive property of person who brought it in. It would be trading asset of partnership in which all partners would have interest in proportion to their share in joint venture of business of partnership. person who brought it in would, therefore, not be able to claim or exercise any exclusive right over any property which he has brought in, much less over any other partnership property. He would not be able to exercise his right even to extent of his share in business of partnership, As already stated his right during subsistence of partnership is to get his share of profits from time to time as may be agreed upon among partners and after dissolution of partnership or with his retirement from partnership of value of his share in net partnership assets as on date of dissolution or retirement after deduction of liabilities and prior charges. . . ." In Bharani Pictures' case after considering above decision as well as other decisions of Hon'ble Supreme Court it was held that firm was owner of asset and as result of release and by reason of consideration which has been adjusted in accounts of firm partner had paid price and all ingredients of sale were present in transaction. ITO was right in holding that there was sale by firm and section 41(2) was attracted. Shri Divetia has made forceful attempt to distinguish this decision by pointing out as stated earlier that this decision had laid emphasis on decision in A. W. Figgies Co.'s case and rule laid down in that case has been explained by Hon'ble Gujarat High Court in Madhukant M. Mehta's case and decision in case of Malabar Fisheries has been preferred as against decision in A. W. Figgies Co.'s case. As corollary decision in Bharani Pictures' case should not be applied. It is true that there is reference to Figgies' case in above judgment. But their Lordships of Madras High Court have relied on decision in case of Chief Controlling Revenue Authority v. Chidambaram AIR 1970 Mad. 5 (FB) in which it has been held as follows: ". . . that partner can sell his property to partnership firm which includes himself as member and question whether there was such sale would depend upon intention and nature of document. Conversely, firm can sell property to partner, and whether there was such sale would have to be gathered from document and surrounding circumstances. . . ." We may add that to like effect is decision of Madhya Pradesh High Court in Popular Engg. Co. v. CIT [1983] 140 ITR 398 in which it is stated as follows: " If assets of firm before dissolution are sold by partners of firm to one of them, capital gain under section 45 will be chargeable as profits. same principle will apply to profits (balancing charge) received or accrued under section 41(2). " We may add by way of clarification that above decision has been distinguished by same High Court in case of Addl. CIT v. Agarwal Timber & Bans Co. [1983] 144 ITR 46. latter case related to retirement of partners. Now, applying above test to facts of case, only material on which reliance is placed is entry made in accounts of firm. entries are in Gujarati but translation thereof as is given to us is set out below: Machinery Account Rs. Credit Adjustment being value of installed machineries at book value given to Kantilal Ishwarlal on division by mutual consent of partners out of Machineries on books, by debiting his account 1,13,083 Copy of Accounts Kantilal Ishwarlal: Partner Credit Debit Adjustment in value of installed machi- neries given to you, as your share at book value on division, by mutual consent of partners 1,13,083 Though word used in original Gujarati reads as distribution or division it must be pointed out that this is not case of distribution of assets in course of dissolution or in case of retirement as stated by us earlier. But case where one of continuing partners has taken over asset of continuing firm. In this connection, we may point out that expression 'sale' is not defined in Act and, therefore, as observed in case of Malabar Fisheries Co.'s case said expression has to be given ordinary meaning. In that case it is stated thus: " That 'sale' according to its ordinary meaning meant transfer of property for price. " Therefore in light of peculiar facts which obtained in instant case we have to consider as to whether or not that twin ingredients are satisfied or not. In light of above discussion it is clear that there is transfer of property by firm in favour of one of its partners. This is so because firm is continuing one so also partner. Again by adjustment in account of partner consideration or price is paid by partner Kantilal to firm. In our opinion, therefore, as twin ingredients are satisfied transaction in question must be held to be sale attracting provisions of section 41(2). 8. controversy can be examined from slightly different angle. assessee-firm has been allowed depreciation on machinery in question. Now claim for depreciation is admissible when two conditions are satisfied viz., (1) plant, machinery, etc., must be owned by assessee. (2) Must be used for purpose of business. It is because firm owned this machinery that depreciation has been allowed on value of machinery. Now balancing charge represents excess of written down value over actual cost. Such difference is deemed to be profits of previous year in which sale takes place. difference, i.e., balancing charge is nothing but excess depreciation mistakenly granted to assessee [see CIT v. Express News Papers Ltd. [1964] 53 ITR 250 (SC) at page 254]. Thus, when depreciation is allowed to firm on footing that asset is owned by firm fiction laid down in section 41(2) would operate and apply with equal force in case of taking over of asset of firm by partner of course condition, inter alia, is that there must be 'sale' or asset must be 'sold'. We have already pointed out earlier that on facts of case ingredients of sale are present in transaction and, therefore, in light of above discussion we uphold decision of authorities below and dismiss this appeal. *** VASANT WVG. FACTORY v. INCOME TAX OFFICER