COMMISSIONER OF INCOME TAX Vs. PALANIAPPA ENTERPRISES

JUDGEMENT

(1.) THE following question has been referred to this court for its opinion at the instance of the Revenue :

(2.) THE assessee-firm is the owner of the property known as "Kanammai Building", 122, Mount Road, Madras. THE value of the building shown in the balance-sheet of the firm as on March 31, 1972, is Rs. 26,13,441. THE building has been let out to various business concerns for rent and rents as also service charges are collected from them. Till the assessment year 1972-73, the income from the building was assessed as income of the firm. For the assessment year 1973-74, the assessee-firm did not admit either the rental income or the service charges received from the property. THE assessee explained the omission on the ground that the building has been transferred by the firm to its partners by virtue of an agreement and that the partners are directly in receipt of the income and the service charges from the portions of the property transferred to them and that the firm is not in actual receipt of any income either as rent or as service charges. Thus the assessee's case before the ITO was that the firm was no longer the owner of the property, that therefore, the income therefrom cannot be assessed in its hands and that, in fact, the property has been treated as belonging to a co-ownership and the share income therefrom has been returned by the partners in their individual returns. THE ITO did not accept the assessee's stand on the ground that the transfer of the property was not made by means of a document in writing duly registered as required under the provisions of the Transfer of Property Act and that an immovable property owned by the firm cannot be transferred to its partners by a mere a mere agreement to divide the property or by mere book entry. In support of that view, the ITO relied on the decision of the Allahabad High Court in Ram Narain and Brothers v. CIT (1969) 73 ITR 423. Thus the entire income from the building in the year 1973-74 was assessed in the hands of the firm.

(3.) IN CIT v. Abdul Khader Motor and Lorry Service (1978) 112 ITR 360 (Mad), a Division Bench of this court had to consider the question as to whether there was a sale of buses along with the route permits by one firm to another so as to attract s. 41(2) of the I.T. Act, 1961. IN that case the assessee-firm constituted under a deed of partnership dated September 28, 1950, consisted of two partners. The firm was carrying on the business of motor transport, plying buses and lorries. The vehicles together with their route permits stood in the name of Abdullah, one of the partners. Because of certain 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 motor vehicles. Therefore, the old firm was reconstituted into a new firm with four partners on October 1, 1942, under the name and style of Messrs. Abdul Khader Motor Service. The buses together with the route permits were transferred to the new firm by the assessee-firm as also its liabilities. For the year 1963-64, two separate returns were filed by the assessee-firm as well as the new firm. The ITO took the view that the transfer of the buses with the route permits from the assessee-firm to the new firm amounted to a sale so as to attract s. 41(2) of the Act. When the matter went before the Tribunal, the Tribunal held that there was no sale of buses by the assessee-firm to the partnership of four persons and, therefore, there could be no assessment under s. 41(2) and also no levy of tax as capital gains. The matter was taken on this court and this court agreed with the view taken by the Tribunal that the transfer of the buses cannot be taken to be a sale as contemplated by s. 41(2). The court, following the decision of this court in CIT v. Janab N. Hyath Batcha Sahib [1969] 72 ITR 528, held that when a person handed over his property to a firm of partners consisting of himself and others, there is no transfer of property so as to constitute a sale. But the principle of that decision will not apply to the facts of this case. That was a case where the partner brought in certain properties to the firm in addition to the capital contributed by him and such a transaction of bringing his property to the firm of which he is a partner has consistently been held to be not a transfer at all, for normally, a transfer will arise only if an asset is transferred for consideration for money or money's worth.