Commissioner of Income Tax, Madhya Pradesh v. Dewas Cine Corporation

Commissioner of Income Tax, Madhya Pradesh v. Dewas Cine Corporation

1968 SCR (2) 173

[distribution of assets-sale or not?, section 46]

Facts

A partnership firm dealing with cinematographic films got dissolved. Individual Cinematograph theatres were treated as the assets of the partnership. Partners of the firm handed over this asset along with its depreciation cost (44,380) to the original owner and obtained the original value of the asset in Rupee from them. The Income Tax Officer treated this transaction as sale and assessed it for the [purpose of tax.

Issues

1. Whether on the facts and in the circumstances of the case, the amount Rs. 44,380 was rightly included in the total income of the assessee
2. Whether, after the dissolution of a partnership firm, the assets, after setting of the debts and fulfilling all obligations, if retained by partners amounts to sale?

Judgement

Appellate Tribunal: The transaction amounts to transfer of property and hence is taxable.

High Court (MP): decreed against the Income Tax Officer.

Supreme Court

Contention (Appellant (Tax Auth.))

1. The nature of transaction, in dividing the residue assets of the partnership firm, is that of sale of property to the partner in consideration of money value of his share.

Held (J. C. SHAH, J. V. RAMASWAMI & J. V. BHARGAV)

1. The transaction does not amount to transfer of property to the partner because it is for the purpose of adjustment of the rights of the partner in the firm.
2. The share of the partner in a firm cannot be consideration for their share in the residue.
3. To establish the transaction to be sale, there should be (1) transfer of property and (2) money as a consideration for such transfer. Present case does not fulfil these conditions; hence the amount (44380) is not taxable.

Law Points

Sec. 46.Right of partners to have business wound up after dissolution

On the dissolution of a 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.