A SUBBIAH NADAR Vs. COMMISSIONER OF INCOME TAX

JUDGEMENT

(1.) 1.V. RAMASWAMI J.The assessee was plying four lorries up to March 31, 1961. On and from April 1, 1961, a partnership firm consisting of the assessee, his two sons and his divided brother, one Kanniappan, was formed and this partnership firm took over the four lorries. In the return filed by the assessee for the assessment year 1962-63, he claimed his status as an individual and made a claim that he did not make any profit in the transaction by which the partnership firm took over the lorries. In the accounts of both the assessee and the partnership firm, the value of the lorries was shown at the original book value. At the time of assessment, however, the assessee filed an affidavit stating that due to mistake and ignorance, the value standing in the account of the lorries in his individual books was transferred as purchase price to the books of the firm and in doing so the actual market value of the lorries was not taken into account resulting in presenting a wrong picture of the assets. Treating that transaction as a sale by the assessee to the partnership firm, the Income-tax Officer considered that neither the cost price nor the written down value could be taken into account for determining the profits made under section 41(2) of the Income-tax Act and that it will have to be computed only with reference to the market value as on April 1, 1961, when the firm took over the assets. He, accordingly, valued the market value of the four lorries at Rs. 45, 000 and determined the profits chargeable to tax under section 41(2) at Rs. 29, 185 In the appeal filed by the assessee against this assessment, the Appellate Assistant Commissioner was of the view that the Income-tax Officer went wrong in computing the profits on the basis of the difference between the estimated market value and the written down value and it should have been assessed on the difference between the cost price and the written down value. Accordingly, after issuing a notice to the assessee he redetermined the profits chargeable to tax on the basis of the difference between Rs.61, 000, the cost price, and the written down value of Rs. 15, 815The assessee preferred a further appeal to the Tribunal. Before the Tribunal, the assessee raised two additional grounds on which he contended that the lorries did not belong to the assessee exclusively but belonged to the joint family of himself and his sons and that these assets continued to belong to the joint family even after they were taken up by the partnership. He also contended that the new par tnership took up the transport business as a going concern and, therefore, no question of computation of profit could arise under section 41(2).

(2.) THE Tribunal permitted the assessee to raise these two additional grounds. THE Tribunal, therefore, directed the Appellate Assistant Commissioner to receive evidence on the question whether the lorries belonged to the assessee or to the joint family of himself and his sons and submit a finding. THE Appellate Assistant Commissioner in his report gave a finding that the lorries belonged to the joint family of the assessee and his sons. THE Tribunal was of the view that when the partnership was formed and the lorries were taken over by the partnership the lorries which were once the of the joint family became the assets of the partnership and since the ownership accordingly was transferred from the joint family to the different entity which is the partnership, section 41(2) was attracted. THE Tribunal did not agree with the assessee that the transfer to the partnership firm was as a going concern or amounted to a reorganisation of the business and held that since the lorries had been separately valued and the consideration for each item shown separately, the difference in the sale price and the written down value had to be treated as profit within the meaning of section 41(2). In the result, the Tribunal dismissed the appealAt the instance of the assessee, the following three questions have been referred "1. Did the formation of the partnership between the assessee's sons as representing the joint family of the assessee and A. Kanniappan and the taking over of the business carried on by the partners, amount to a sale of the assets previously held by the family to the firm attracting section 41(2) of the Act ?. 2. Whether the transaction is a slump transaction and is not liable to be treated as a sale of assets ?.3. Whether, on the facts and in the circumstances of the case, the order passed by the Tribunal that the assessee is liable to be taxed under section 41(2) of the Act on Rs. 45, 185 or any part thereof is lawful ?" *THE learned counsel for the assessee contended that when the partnership took over the lorries, there was no transfer from the joint family to the partnership or from an individual member of the joint family to the partnership. Since the partnership is not a legal entity and the members constituting the joint family were also members of the partnership with a third party, the lorries still continued to be owned by the joint family as such though the partnership also could be considered as an owner and that, therefore, section 41(2) is not attracted.