COMMISSIONER OF INCOME TAX Vs. KESHAVLAL CHANDULAL

JUDGEMENT

(1.) THIS is a reference under S. 66(1) of the IT Act, 1922, at the instance of the CIT, and arises out of the assessment for the asst. year 1960 1961 and of which the previous year is Samvat year 2015 (corresponding to the period 12th Nov., 1958, to 31st Oct., 1959). The assessee firm was constituted under a partnership deed of 29th June, 1957, and was comprised of seven partners with shares specified below:

(2.) IN the account for Samvat year 2015, which was made up by the parties thereafter, certain further expenses in the sum of Rs. 2,717 in respect of the aforesaid shops were debited and a sum of Rs. 77 was credited as the sale proceeds of certain materials sold. According to the deed of distribution, the aggregate value of the shops agreed to by the partners was shown at Rs. 89,000. This left a surplus of Rs. 4,831 in the said construction account which amount was carried to the profit and loss account for Samvat year 2015. That being the position of the accounts, in the returns filed by the firm for the asst. year 1960 61, the said amount of Rs. 4,831 was shown as the taxable income of the firm for that year.

(3.) ,831 disclosed as aforesaid in the said construction account and the profit and loss account of the firm. It was contended on behalf of the assessee firm that the distribution of the twenty eight shops amongst the partners could not be treated as a business or a commercial transaction, that is to stay, a sale yielding profit. The ITO declined to accept that contention in the view that the took, namely, that the twenty eight shops were the stock in trade of the assessee firm and the profit made in dealing with such stock in trade in whatever manner was liable to tax. Having taken that view, he took one step more and considered the question as to what should be the correct amount of profit in respect of the said transaction. He rejected the book value of the shops fixed by the assessee firm at Rs. 89,000, and estimated the real value of the shops at Rs. 1,70,000 on the basis of the sales of the twelve shops for Rs. 79,499 effected in Samvat year 2014. He computed in this manner the profits at Rs. 85,754 instead of Rs. 4,831 disclosed in the said accounts and in the returns of the firm. In an appeal before the AAC, the assessee firm took up the same contentions, and relied upon two decisions in Sir Kikabhai Premchand vs. CIT (1953) 24 ITR 506 and CIT vs. Sir Homi Mehta's Executors (1955) 28 ITR 928. The AAC took the view that the principle laid down in these two decisions was applicable to the facts of the present case, and allowed the appeal. The ITO, however, carried the matter in appeal before the Tribunal, where it was contended on behalf of the Revenue that the transfer of the twenty eight shops in the names of the partners constituted a business transaction in the same fashion as it would if the transaction was with an outsider and that the assessee firm was liable to account for the profits on such transfer of shops at the market value of the shops. It was also contended that when trading stock represented by the twenty eight shops was taken out of the business, the price which ought to have been credited to the business of the firm ought to have been the market value on that day. The Tribunal rejected these contentions and came to the conclusion that the transaction was one of a division and distribution of the assets and that the principle laid down in Sir Kikabhai's case (supra) applied, and confirmed the decision of the AAC. 4. The CIT, as we have said, has challenged this finding and on his behalf the learned Advocate General contended that the principle laid down in Sir Kikabhai's case (supra) as also in the case of Sir Homi Mehta's Executors (supra) was not applicable to the facts and circumstances of the present case. His contention was that the facts of the present case did not warrant the application of the principle laid down in those two decision inasmuch as they were entirely different from those in the said two decisions. In the present case, the facts, which admit of no dispute and on which the Tribunal proceeded to consider the case, are (1) that there was discontinuance of the business of the firm on and from 22nd Oct., 1958, when the partners agreed to distribute amongst themselves the remaining twenty eight shops and the aforesaid agreement of distribution was recorded subsequently in a formal document executed on 14th March, 1959; (2) that the twenty eight shops which were trading assets of the firm were valued at an artificial figure of Rs. 89,000, which amount did not represent the cost as in the case of Sir Kikabhai (supra) ; the distribution and transfer of these twenty eight shops effected by the deed of distribution was not, and could not be said to be, from a party to himself or substantially to the same party, as was respectively the case in CIT vs. Sir Kikabhai Prem Chand (supra) and CIT vs. Sir Homi Mehta's Executors (supra), relied on by the AAC and the Tribunal; and (4) that by fixing the book value of the shops for distribution at Rs. 89,000, the books of the assessee firm showed a surplus of Rs. 4,831 which was carried to the profit and loss account, that the assessee firm showed that amount as profits and gains of the firm during the year of account and by showing that amount in its return the firm admitted that that amount was a taxable amount. According to the learned Advocate General, by doing so the assessee firm treated the transaction in question as a sale or, at any rate, as a commercial transaction and, consequently, the principle laid down in the two decisions relied on by the Tribunal would not apply and could not be extended to the facts in this case. The contention of Mr. Kaji, on the other hand, was that the transaction in question must be a business or a commercial transaction resulting in actual profits which alone could be taxed. He argued that even if there were profits as a result of a transaction but if that transaction was neither a sale nor a business transaction, the profits would not be business profits. He, however, conceded that it is not only a sale which attracts liability to assessment, but that even if the transaction were not a sale, but a commercial transaction, the principle laid down in the aforesaid two decisions would not apply. His argument, however, was that the deed of distribution showed that the partners merely distributed the remaining business assets of the firm when they agreed upon discontinuance of the business and that the fact that the entire remaining assets were disposed of by distribution amongst them was an intrinsic evidence indicating that the transaction was not a business or a commercial transaction, much less a sale. These were the rival contentions urged before us.