COMMISSIONER OF INCOME TAX Vs. DILIP ENGINEERING WORKS

JUDGEMENT

(1.) THE Commissioner of Income -tax, Gujarat -V, Ahmedabad, got two questions of law referred to us under s. 256(1) of the I.T. Act, 1961, by the Income -tax Appellate Tribunal, Ahmedabad Bench 'B'. The referred questions are as under :

(2.) THE facts leading to this reference are as under. The assessee is a partnership firm styled as M/s. Dilip Engineering Works. It operated in Udyognagar, Rajkot. It originally consisted of four partners : (1) Mansukhlal Odhavji; (2) Popatlal Kunverji; (3) Mohanlal Chakubhai, and (4) Dhirajlal Popatlal. The concerned assessment year is 1968 -69 covering accounts of the S. Y. 2023. On July 7, 1967, which fell in the material accounting year, two of the aforesaid partners, viz., Popatlal and Dhirajlal, retired from the partnership firm under a deed dated September 7, 1967, and under the terms of the retirement, the partners were given machinery and land at the values mentioned therein. The value of the machinery taken by Popatlal and debited to his account was Rs. 26,689 and value of the land taken by Dhirajlal and debited to his account amounted to Rs. 9,804. Besides, tools worth Rs. 1,163 were also given to the retiring partners. The ITO considered that as a result of the retirement of the two partners from the firm, there was only a change in the constitution of the firm and not any dissolution thereof and that as the firm had continued, allotment of the machinery to the retiring partners at the stated value amounted to a sale which attracted the provisions of s. 41(2) of the Act since the machinery in question had been allowed depreciation in the past. He, therefore, brought to charge the total sum of Rs. 14,924 in this connection. The assessee -firm carried the matter in appeal. The AAC accepted the contention of the assessee that there was no transfer of any asset in favour of the retiring partners which could be brought to tax under s. 41(2) of the Act. The AAC, in arriving at the aforesaid conclusion, relied heavily on a decision of this court in Velo Industries v. Collector, Bhavnagar : [1971]80ITR291(Guj) . He, accordingly, delected the addition of Rs. 14,924 to the income of the assessee -firm as made by the ITO.

(3.) IN order to appreciate the controversy posed for our consideration in the present proceedings, it is necessary to have a look at the relevant statutory provisions which applied during the assessment year in question. Section 41(2) reads as under :