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TMI Blog1979 (9) TMI 1X X X X Extracts X X X X X X X X Extracts X X X X ..... lluruthy, (e) Combine Steel Industries at the Industrial Estate at Olavakkot and (f) Lite Metal Industries at Visakhapatnam in Andhra Pradesh. The firm was dissolved on March 31, 1963, and under the deed of dissolution executed by and between the partners, the first business concern was taken over by one of the partners, the remaining five concerns by two of the other partners and the fourth partner received a sum of Rs. 3,81,082 in lieu of his respective shares in the assets of all the busineses of the firm. It appears that during the four assessment years 1960-61 to 1963-64, the firm had installed various items of machinery in respect of which it received development rebate in its respective tax assessments under s. 33 of the Act. On dissolution of the firm on March 31, 1963, the ITO took the view that s. 34(3)(b) of the Act applied on the ground that there was a sale or transfer of the machinery by the firm within the period mentioned in that section and accordingly acting under s. 155(5) of the Act he withdrew the development rebate allowed to the firm for the said assessment years, the amending orders being passed against the dissolved firm. The assessee, i.e., the dissolved f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... se was governed, the expression " transfer had been defined by s.2(47) in a very wide manner so as to include not merely a sale or exchange but also " extinguishment of any rights " in capital assets. The High Court held that a dissolution of a firm amounted to extinguishment of the rights of the firm in the assets of the partnership and accordingly was a transfer within the meaning of s. 2(47) of the Act and that, therefore, the provisions of s. 34(3)(b) applied to the case. It is this view of the High Court that is being challenged before us in these appeals by the assessee. Counsel for the assessee contended that the High Court has clearly erred in taking the view that the dissolution of a firm amounts to extinguishment of the rights of the firm in the assets of the partnership. He pointed out that in the two decisions referred to above this court has clearly enunciated what happens in law upon the dissolution of a firm, namely, that the distribution, division or allotment of assets between the partners on dissolution of the firm is merely an adjustment of rights inter se between them and that no sale or transfer is involved in such distribution, division or allotment. Accordin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the partnership and in that sense there is a transfer of assets within the definition under s. 2(47) of the Act. Since in these appeals the question raised relates to the withdrawal of development rebate under s. 34(3)(b) read with s. 155(5) of the 1961 Act in the light of the definition of the expression " transfer " given under s. 2(47) of the Act, it will be desirable to note what these provisions are. Section 34(3)(b), in so far as is material, reads : " 34. Conditions for depreciation allowance and development rebate.-- ................................. 3(b) If any ship, machinery or plant is sold or otherwise transferred by the assessee to any person at any time before the expiry of eight years from the end of the previous year in which it was acquired or installed, any allowance made under section 33 or under the corresponding provisions of the Indian Income-tax Act, 1922 (XI of 1922), in respect of that ship, machinery or plant shall be deemed to have been wrongly made for the purposes of this Act, and the provisions of sub-section (5) of section 155 shall apply accordingly. " Section 155(5) is a procedural provision enabling the ITO in a case falling under s.34(3)( ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd proviso to s. 10(2)(vii) of the 1922 Act. In that case two individuals, each of whom owned a cinema theatre, formed a partnership to carry on business of exhibition of cinematograph films, bringing the theatres into the books of the firm as its assets. For the assessment years 1950-51 to 1952-53, the ITO allowed depreciation aggregating to Rs. 44,380 in the assessment of the firm in respect of the two theatres. On the dissolution of the firm on September 30, 1951, the theatres were returned to their original owners. In the books of the firm the assets were shown as taken over at the original price less the depreciation allowed, the depreciation being equally divided between the two erstwhile partners. The Tribunal took the view that by restoring the theatres to the original owners there was a transfer by the partnership and the entries adjusting 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 the balancing charge arise under the second proviso to s. 10(2)(vii) of the Act. This court held that on the dissolution of the partnership, each theatre had to be deemed to be retur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... capable of physical division, it was agreed that the assets be taken over by D and the respondent-assessee be paid his share of the value of the assets in money and accordingly he was paid Rs. 1,25,000. The question was whether the sum of Rs. 65,000, being part of the amount received by the respondent-assessee could be brought to tax as capital gains under s. 12B(1) of the Act ? This court held that the arrangement between the partners of the firm amounted to a distribution of the assets of the firm on dissolution, that there was no sale or exchange of the respondent's share in the capital assets to D, nor did he transfer his share in the capital assets and, therefore, the sum of Rs. 65,000 could not be taxed as capital gains. The court observed that the rights of the parties were adjusted by handing over to one of the partners the entire assets and to the other partner the money value of his share and such a transaction was neither a sale nor exchange nor transfer of assets of the firm. It cannot, however, be disputed that both these decisions were rendered under the 1922 Act which did not define expressions like " sale " or transfer " and the question is whether any differen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the old firm are regarded as continuing in favour of or against the new firm as if no changes had occurred. The partners are the agents and sureties of the firm; its agent for the transaction of its business; its sureties for the liquidation of its liabilities so far as the assets of the firm are insufficient to meet them. The liabilities of the firm are regarded as the liabilities of the partners only in case they cannot be met by the firm and discharged out of its assets. But this is not the legal notion of a firm. The firm is not recognised by English lawyers as distinct from the members composing it. In taking partnership accounts and in administering partnership assets, courts have to some extent adopted the mercantile view, and actions may now, speaking generally, be brought by or against partners in the name of their firm; but, speaking generally, the firm as such has no legal recognition. The law, ignoring the firm, looks to the partners composing it; any change amongst them destroys the identity of the firm; what is called the property of the firm is their property, and what are called the debts and liabilities of the firm are their debts and their liabilities. In point o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... been paid and discharged. This it is, and this only, which on the death of a partner passes to his representatives, or to a legatee of his share; ............... and which on his bankruptcy passes to his trustee. " The position as regards the nature of a firm and its property in Indian law under the Indian Partnership Act, 1932, is almost the same as in English law. Here also a partnership firm is not a distinct legal entity and the partnership property in law belongs to all the partners constituting the firm. In Bhagwanji Morarji Goculdas v. Alembic Chemical Works Co. Ltd., AIR 1948 PC 100; 18 Comp Cas 205, the Privy Council in para. 10 of the judgment observed thus (see also [1948] 18 Comp Cas 209) : " Before the Board it was argued that under the Indian Partnership Act, 1932, a firm is recognised as an entity apart from the persons constituting it, and that the entity continues so long as the firm exists and continues to carry on its business. It is true that the Indian Partnership Act goes further than the English Partnership Act, 1890, in recognising that a firm may possess a personality distinct from the persons constituting it, the law in India in that respect being more i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . If that be the position, it is difficult to accept the contention that upon dissolution the firm's rights in the partnership assets are extinguished. The firm as such has no separate rights of its own in the partnership assets but it is the partners who own jointly or in common the assets of the partnership and, therefore, the consequence of the distribution, division or allotment of assets to the partners which flows upon dissolution after discharge of liabilities is nothing but a mutual adjustment of rights between the partners and there is no question of any extinguishment of the firm's rights in the partnership assets amounting to a transfer of assets within the meaning of s. 2(47) of the Act. In our view, therefore, there is no transfer of assets involved even in the sense of any extinguishment of the firm's rights in the partnership assets when distribution takes place upon dissolution. Counsel for the revenue referred us to a decision of the Karnataka High Court in Addl. CIT v. M. A. J. Vasanaik [1979] 116 ITR 110 (Kar), where that court has taken the view that when individual assets are brought into a partnership firm so as to constitute the partnership prope ..... X X X X Extracts X X X X X X X X Extracts X X X X
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