Commissioner of Income-Tax, Madhya
Pradesh Vs. Dewas Cine Corporation [1967] INSC 254 (8 November 1967)
08/11/1967 SHAH, J.C.
SHAH, J.C.
RAMASWAMI, V.
BHARGAVA, VISHISHTHA
CITATION: 1968 AIR 676 1968 SCR (2) 173
CITATOR INFO :
R 1971 SC2270 (5) E 1973 SC1357 (9) F 1980 SC
176 (3,9) RF 1986 SC 368 (12)
ACT:
Indian Income-tax Act, 1922, s. 10(2) (vii)
2nd proviso--Two persons entering into partnership, each contributing a cinema
theatre dissolution of partnership theaters returned to respective owners at
original price -Depreciation equally divided between partners--Return of
theatres whether sale for purpose of s. 10(2)(vii), 2nd proviso.
HEADNOTE:
S and H formed a partnership to carry on
business in partnership as exhibitors of cinematograph films with effect from March 1, 1947. Each partner who was an owner of a cinematograph theatre brought his
theatre into the books of the partnership as an asset of the partnership. For
the assessment years 1950-51 to 1952-53 the Income-tax Officer allowed depreciation
aggregating to Rs. 44,380/- in respect of the two theaters. The partnership was
dissolved on September 30, 1951, and on dissolution it was agreed between the
partners that the theaters should be returned to their original owners. In the
books of account maintained by the partnership, the assets were shown as taken
over on October 1, 1951, at the original price less the depreciation
allowed-the depreciation being equally divided between the two partners. In
proceedings for assessment for the year 1952-53 the respondent was treated as a
registered firm.
The Appellate Tribunal held that by restoring
the two theaters to the two original owners "there was a transfer by the
firm and the entries adjusting the depreciation and writing off the assets at
the original value amounted to total recoupment of the entire depreciation by
the partnership. and on that account" proviso 2 to s. lO(2)(vii) of the
Income-tax Act, 1922, applied. The High Court. in reference, held in favour of
the assesses. The Revenue appealed, contending, that on the transfer of the
theaters from the partnership to the original owners there was a sale.
HELD:The expressions "side" and
"sold" are not. defined in the Income-tax Act: Those expressions are
used in s.
10(2)(vii) in their ordinary meaning.
"Sale" according to its ordinary meaning is a transfer of property
for a price.
and adjustment of the rights of the partners
in a dissolved firm is not a transfer, nor is it for a price. [176A-B] A
partner may, it is true, in an action for dissolution insist that the assets of
the partnership be. realised by sale of its assets, but where in satisfaction
of the claim of the partner to his share in the value of the residue determined
on the footing of an actual or notional sale property is allotted, the property
so allotted to him cannot be deemed in law to be sold to him. 1176E] Addanki
Naravanappa and Anr. V. Bhaskara Krishnappa and Ors. [1966] 3 S.C.R. 400,
referred to.
CIVIL APPELLATE JURISDICTION : Civil Appeal
No. 2163 of 1966.
Appeal from the judgment and order dated
April 15, 1964 of the Madhya Pradesh High Court in Misc. Civil Case No. 22 of
1963.
174 Niren De, Solicitor-General, S.K. Aiyar,
R.N. Sachthey and S.P. Nayar, for the appellant.
Naunit Lal and B.P. Singh, for the
respondent.
The Judgment of the Court was delivered by
Shah, J. S.G. Sanghi and Hari Prasad entered into an agreement to carry on
business in partnership as exhibitors of cinematograph films in the name and
style of "Dewas Cine Corporation" with effect from March 1, 1947.
Each partner who was an owner of a cinematograph theatre brought his theatre
into the books of the partnership as an asset of the partnership. For the
assessment years 1950-51 to 1952-53 the Income-tax Officer allowed depreciation
aggregating to Rs. 44,380/- in respect of the two theatres. The partnership was
dissolved on September 30, 1951, and on dissolution it was agreed between the
partners, that the theatres should be returned to their original owners. In the
books of account maintained by the partnership, the assets were shown as taken
over on October 1, 1951 at the original price less the depreciation allowed the
depreciation being equally divided between the two partners.
In proceedings for assessment for the year
1952-53 the respondent was treated as a registered firm. The Appellate Tribunal
held that by restoring the two theatres to the two original owners "there
was a transfer by the firm and the entries adjusting the depreciation and
writing off the assets at the original value amounted to total recoupment of
the entire depreciation by the partnership and on that account" proviso 2
to s. 10(2)(vii) of the Income-tax Act, 1922, applied. The High Court of Madhya
Pradesh answered the following question referred to it by the Tribunal the negative:
"Whether on the facts and in the
circumstances of the case, the amount of Rs. 44,380/- was rightly included in
the total income of the assessee in the year 1952-53 under the second proviso
to s. 10(2) (vii) of the Income-tax Act ?" The Commissioner of Income-tax
has appealed to this Court with certificate granted by the High Court.
Section 10(2) of the Income-tax Act permits
certain allowances to be debited in the computation of profits or gains of the
business, profession or vocation carried on by the assessee in the year of
account; one such allowance is prescribed by cl. (vii), the material part of
which is:
"in respect of any such building,
machinery or plant which has been sold or discarded or demolished or des- 175
troyed, the amount by which the written down value thereof exceeds the amount
for which the building, machinery or plant, as the case may be, is actually
sold or its scrap value:
Provided that Provided further that where the
amount for which any such building, machinery or plant is sold, whether during
the continuance of the business or after the, cessation thereof, exceeds the
written down value, so much of the excess as does not exceed the difference
between the original cost and the written down value shall be deemed to. be
profits of the previous year in which the sale took place :" In respect of
each of the theatres depreciation was allowed by the taxing authorities in
proceedings for assessment.
The Income- tax Appellate Tribunal was of the
view that since the theatres were returned to the partners in settling the
accounts of the partners on dissolution, the theatres were in law sold to the
partners. The High Court disagreed with that view.
Under the Partnership Act, 1932, property
which is brought into the partnership by the partners when it is formed or
which may be acquired in the course of the business becomes the property of the
partnership and a partner is, subject to any special agreement between the
partners, entitled upon dissolution to a share in the money representing the
value of the property. When the two partners brought in the theatres of their
respective ownership into the partnership, the theatres must be deemed to have
become the property of the partnership. Under s. 46 of the Partnership Act,
1932, on the dissolution of-the firm every partner or his representative is
entitled, as against all the other partners or their representatives, to have
the property of the firm applied in payment of the debts and liabilities of the
firm, and to have the surplus distributed among the partners or their
representatives according to their rights. Section 48 of the Partnership Act
provides for the mode of settlement of accounts between the partners.
It prescribes the sequence in which the
various outgoing are to be applied and. the residue remaining is to be divided
between the partners. The distribution of surplus is for the purpose of
adjustment of the rights of the partners in the assets of the partnership; it
does not amount to transfer of assets.
On dissolution of the partnership, each
theatre must be deemed to be returned to the original owner, in satisfaction
partially or wholly of his claim to a share in the residue of the assets after
discharging the debts and other obligations. But thereby the theaters were not
in law sold by the partnership to the individual 176 partners in consideration
of their respective share in the residue. The expressions "sale" and
"sold" are not defined in the Income-tax Act;-those expressions are
used in s. 10(2)(vii) in their ordinary meaning. "Sale", according to
its ordinary meaning is a transfer of property for a price, and adjustment of
the rights of the partners in a dissolved firm is not a transfer, nor it is for
a price.
The Solicitor-General appearing for the
Revenue submitted that each partner is entitled to have the assets of the
partnership sold for discharging the debts and obligations of the partnership,
and for the. purpose of dividing the residue among the partners if property is
allotted to the partners in satisfaction of their claims, the transaction must
be deemed in law to take the form of a notional sale of the property to the
partner in consideration of the money value of his share. Counsel relied upon
the statement of the law in Lindley on Partnership, 12th Edn., at p. 568:
"........in the absence of a special
agreement to the contrary, the right of each partner on a dissolution is to
have the partnership property converted into money by a sale, even although a
sale may not be necessary for the payment of debts.", and also upon the
decision of this Court in Addanki Narayanappa and another v. Bhaskara
Krishnappa and others(1). A partner may, it is true, in an action for
dissolution insist that the assets of the partnership be realised by sale of
its assets, but where in satisfaction of the claim of the partner to his share
in the value of the residue determined on the footing of an actual or notional
sale property is allotted, the property so allotted to him cannot be deemed in
law to be sold to him.
The High Court was, therefore, in our
judgment, right in deciding the question referred in favour of the assessee.
The appeal fails and is dismissed with costs.
G.C.
Appeal dismissed.
(1) [1966] 3 S.C.R. 400.
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