COMMISSIONER OF INCOME TAX Vs. NATARAJ MOTOR SERVICE

JUDGEMENT

(1.) THIS is a reference under Section 256(1) of the Income-tax Act at the instance of the Commissioner of Income-tax. The question of law referred is:

(2.) THE question relates to the assessment year 1959-60, the relevant previous year being the year ended December 31, 1958, THE assessee was a firm consisting of two partners. THE partnership was engaged in the business of plying buses and lorries. THE firm was dissolved with effect from March 1, 1961, and the assets and liabilities were divided between the parties. . In the assessment for 1959-60 the Income-tax Officer had allowed development rebate amounting to Rs. 26,292 to the firm on three new buses purchased during the year 1958. Upon dissolution of the firm the Income-tax Officer initiated proceedings under Section 355(5) of the Income-tax Act, 1961, to withdraw the development rebate granted to the firm, and passed an order rectifying the assessment for 1959-60 by withdrawing the rebate. THE assessee preferred an appeal before the Appellate Assistant Commissioner against the order and contended that the firm is a collective name for the partners, and that when they took over the assets of the firm on dissolution, there was no transfer of the assets, as the assets already belonged to the partners, and what they took was what they owned already. THE Appellate Assistant Commissioner said that the point in issue was whether there was a transfer of the assets as contemplated by the proviso to Section 10(2)(vib) of the Income-tax Act, 1922. He held that there was a transfer of the assets to the partners by the dissolution, and distribution of the assets between the partners. THE appeal was, therefore, dismissed. THE assessee filed an appeal against the order before the Appellate Tribunal and reiterated the contention and relied on the decision of the Supreme Court in Commissioner of Income-tax v. Dewas Cine Corporation, [1968] 68 I.T.R. 240; [1968] 2 S.C.R. 173 (S.C.). where it was held that the distribution of surplus assets for the purpose of adjustment of the rights of the partners consequent on the dissolution of a firm did not amount to transfer of assets. THE Tribunal accepted the contention of the assessee, and held that there was no transfer of assets by the dissolution of the firm, and distribution of the assets between the partners.

(3.) THE question to be considered in this case lies in a narrow compass. THE question is whether the words "otherwise transferred" occurring in Section 34(3)(b) and Section 155(5) would take in distribution of the assets of a partnership between the partners on dissolution of the firm. Section 34(3)(b) provides: