COMMISSIONER OF INCOME TAX Vs. ALAGAPPA COTTON MILLS

JUDGEMENT

(1.) THE assessee in these cases is a firm carrying on business of spinning, manufacturing and of dealing in cotton and other fabrics. THE firm was originally constituted by a partnership deed dated August 31, 1955, with three partners, namely, Shri Alagappa Chettiar and his sons, Shri Annamalai Chettiar and Shri Ramanathan Chettiar. Shri Annamalai Chettiar retired on April 12, 1961, and the firm was reconstituted by a deed dated April 13, 1961, by which Shri Alagappa Chettiar, Shri Ramanathan Chettiar and his wife, Smt. Meyammai Achi, became partners. Shri Alagappa Chettiar died on November 22, 1961, and Shri Ramanathan Chettiar as the Karta of HUF and Smt. Meyammai Achi thereafter carried on the business of partnership with 10 annas and 6 annas shares, respectively. Later, there was a partition of the family properties of Shri Ramanathan Chettiar on September 30, 1964, in which Alagappa Cotton Mills with its buildings and machinery were exclusively allotted to the share of Shri Ramanathan Chettiar. THE value of the land, buildings, machinery and goodwill as per books on that day was Rs. 14,61,72. At the time of the partition, the said mill assets were revalued at Rs. 33,50,000. As a result of revaluation of the assets at the time of partition, each of the three minor sons of Shri Ramanathan Chettiar beceme entitled to Rs. 4,00,000 representing the value of his share in the mill assests as revalued. Since, Shri Ramanathan Chettiar was exclusively allotted the mill assets, he Rs. 4,00,000 each in the personal accounts of his three minor sons in the books of the firm which was liable to be paid with interest at 9% per annum to equalise the shares.

(2.) AFTER the family partition on September 30, 1964, Shri Ramanathan Chettiar continued to be a partner in the firm in his individual capacity and not as the "karta" of the HUF with his wife, Smt. Meyammai Achi, as the other partner. At that stage, one Shri J. K. K. Natarajan advanced a sum of Rs. 1,50,000 on July 27, 1964, at 12% per annum and a further sum of Rs. 2,00,000 on August 13, 1964, at 9% per annum to the partnership firm for the purpose of carrying on its business. As per an agreement dated October 10, 1964, the said Shri J. K. K. Natarajan and his brother, Shri J. K. K. Munirajan, became partners along with Shri Ramanathan Chettiar and his wife, all of them having equal shares, and a new partnership deed was executed on October 19, 1964, which was to take effect from October 1, 1964. Clause 6 of the said partnership deed provided that the newly admitted partners examined the trial balance of Algappa Cotton Mills on September 30, 1964, and it was agreed that the same will be the basis for finalisation of the account of partnership business. The trial balance of the mill as on September 30, 1964, was also appended to the partnership deed dated October 19, 1964. By October 19, 1964, the total amount of loan advanced by Shri J. K. K. Natarajan and his brother Shri J. K. K. Munirajan amounted to Rs. 9,77,400. Some misunderstanding, however, arose between Shri Ramanathan Chettiar and his wife on the one hand and the other two partners on the other. The amount due as per the books of account as on October 31, 1964, to Shri Ramanathan Chettiar, his wife and his three sons were as under :

(3.) ON points Nos. 1,2 and 4 above the AAC had submitted a remand report stating that the partition was true genuine and the revaluation of mill assets represented the correct market value at the time of partition and the continuing partners obtained represented the correct market value at the time of partition and the continuing partners obtained release from the retiring partners by paying the enhanced value of the mill assets. ON points Nos. 3 and 5, the AAC had found in his remand report that there was only a change in the constitution of the firm, and that, therefore, the appellant is not entitled to claim depreciation of on the basis of revaluation of the mill assets notwithstanding the fact that the continuing partners are third parties.