POPULAR ENGINEERING CO Vs. COMMISSIONER OF INCOME TAX

JUDGEMENT

(1.) THIS is a reference under Section 256(1) of the I.T. Act, 1961, by the Income-tax Appellate Tribunal, Indore, stating the case and referring the same to us for opinion on the following questions:

(2.) BRIEF facts leading to the present reference are as follows : The assessee during the account year relevant to the assessment year 1964-65 was a registered firm consisting of the three partners Milkhiram, Madanlal Anand and Bramha Dutt. The original assessment of the firm was completed on a total income of Rs. 2,08,230 on January 20, 1969. The Commissioner acting under Section 263(1) of the Act considered the assessment as prejudicial to the interest of the Revenue and set it aside, vide order dated January 15, 1971, with a direction to the ITO to make a fresh "assessment. After remand, the facts which came to the notice of the ITO were that the partners of the firm acting under Clause (2) of the partnership deed dated June 1, 1962, had entered into an agreement dated August 24, 1963, Vide Clause 6 of the said agreement, it was decided that there would be an inter-bidding for a sale of the assets of the partnership firm and the highest bidder among the partners will be the purchaser of the entire property including its assets and liabilities and the sale proceeds were to be distributed among the partners according to their respective shares as specified in the partnership deed. In pursuance of the said agreement dated August 24, 1963, there was a bidding among the partners on August 25, 1963. Shri Milkhiram made the highest bid of Rs. 2,70,000. He was declared the purchaser of the business. Later, on 6th September, 1963, a dissolution deed was drawn up stating that the firm stood dissolved w.e.f. August 1, 1963.

(3.) THE assessee as well as the Department filed appeals before the Income-tax Appellate Tribunal. THE Tribunal dismissed both the appeals. As regards the addition of Rs. 60,840 on the sale of the assets under Section 41(2) of the Act, the Tribunal held that the sale was not a realisation sale after dissolution of the partnership but it was a transfer before the dissolution. Accordingly the Tribunal held that the addition of Rs. 60,840 under Section 41(2) of the Act was proper. As regards the addition of the value of the goodwill, the Tribunal concurred with the view of the AAC that this amount could not be added as capital gain because the goodwill in the instant case had been generated by the firm itself and there was no transfer of any asset. This order was passed by the Tribunal on 18th May, 1979 (annex. H).