D KANNIAH PILLAI Vs. COMMISSIONER OF INCOME TAX

JUDGEMENT

(1.) THE assessee is an individual. He was the proprietor of a transport service styled as Sri Meenakshiamman Motor Service. On October 1, 1961, he converted this proprietary business into a partnership firm consisting of himself and one Viravan Chettiar both having equal share. THE terms of the partnership are evidenced by a deed dated October 16, 1961. According to the terms of this document all assets and liabilities of the assessee in the transport business were taken ever by the firm at the book values and the value of the goodwill of the proprietary business was determined at Rs. 3, 75, 000.

(2.) THE capital of the partnership business was fixed at Rs. 6, 00, 000 which was to be contributed equally by the two partners. In the assessee's current account the book value of the assets and the value of goodwill were credited which along with another credit of Rs. 12, 930 amounted to Rs. 6, 12, 930. THE assessee had withdrawn from this account a sum of Rs. 3, 00, 000 by way of transfer to the capital account. He had also drawn a sum of Rs. 1, 44, 865 during the accounting year from this account. THE account at the end of the year showed a credit of Rs. 17, 060. THE other partner also contributed his capital of Rs. 3, 00, 000 For the assessment year 1962-63, corresponding to the accounting period ending March 31, 1962, the assessee submitted a return declaring a total income of Rs. 35, 768 and in a covering letter asked the Income-tax Officer to determine the profits, if any, under section 41(2) to be included in the assessment. THE Income-tax Officer worked out the profits arising on the sale of assets by the assessee to the partnership concern at Rs. 91, 160 in terms of section 41(2) and assessed it to tax in full. He also worked out the capital gain on transfer of goodwill by the as to the partnership concern at Rs. 3, 32, 500 and assessed it to tax under section 45 of the Act. THE assessee preferred an appeal and contended that there was no sale by the assessee when he converted the proprietary concern into a partnership firm and that, therefore, no profit or gain chargeable under section 41(2) or under section 45 arose to the assessee.

(3.) THE difference between the written down value of the lorries and the sum of Rs. 15, 925 which was given credit to by the firm was treated as profits made by the assessee and brought to tax under section 10(2)(vii) of the Indian Income-tax Act, 1922, corresponding to section 41(2) of the new Act. When the includability of this money as profit under section 10(2)(vii) came up for consideration this court held that when the sole proprietary concern was converted into a partnership, the assessee did not divest himself completely of his rights or interest in the lorries, though by reason of the transaction he became entitled to certain rights which were regulated by the terms of the agreement of partnership, and that there was no sale within the meaning of the Sale of Goods Act. This decision squarely applies to the facts of this case and clearly supports the argument of the learned counsel for the assessee. But the learned counsel for the revenue sought to distinguish this decision on the ground that the principle would have to be applied only to a case where the parties had not chosen to treat the transaction as sale, but if they had entered into a form of transaction of sale it would amount to a sale attracting the provisions of sections 41(2) and 45 of the Act. He also submitted that it is not uncommon for an individual partner to enter into a sale transaction with a partnership firm in which he is a partner and he being treated as a creditor for the price. It is true that in commercial parlance a partner is treated as any other third party and very often they enter into transactions of sale and purchase with the firm in which they are partners.