Shah, J. - (1.) The respondents are a firm constituted under a deed dated December 12, 1947. The firm originally consisted of three partners:K. N. Damodra Mudaliar, A. Krishnaswami Mudaliar and V. Thangaraja Mudaliar. K. N. Damodra Mudaliar acquired for the firm for Rs. 1,00,000/- the exploitation rights which were to ensure for four years in a cinematograph film "Apoorva Chinthameni" for the North Arcot, the South Arcot and the Chingleput Districts and for Pondicherry. For the period, December 25, 1947 to August 2, 1948 which was "the previous year" corresponding to the assessment year 1949-50 the firm filed a voluntary return declaring that Rs. 28,643/- were earned by the exploitation of the film. In the statement submitted by the firm the total receipts credited in the firm's books were Rs. 1,46,849/-, and against that amount were debited Rs. 18,206/- as expenses and Rs. 1,00,000/- as the amount disbursed for acquiring the exploitation rights. Thereby in the computation of the profits of the business, the firm debited the amount paid for acquiring the rights of exploitation of the film, but did not take credit for the value of the unexpired exploitation rights at the end of the "previous year." On August 15, 1948, a deed of dissolution of the partnership was executed, and Damodra Mudaliar sold with effect from August 6, 1948, his half interest in the assets of the partnership to Krishnaswami Mudaliar for Rs. 2,000/- and retired from the partnership. On August 27, 1948 a trial balance-sheet of the firm's books of account was prepared showing a cash balance of Rs. 190/12/4, a debit against Krishnaswami Mudaliar for Rs. 2,641/8/8 and credits in favour of Damodra Mudaliar and Thangaraja Mudaliar respectively for Rs. 1,888/2/11 and Rs. 944-2-1. Thereafter Krishnaswami Mudaliar, Thangaraja Mudaliar and V. S. Lakshmanan (an outsider) formed themselves into another partnership to exploit the film for the unexpired period. From this partnership Krishnaswami Mudaliar retired on February 22, 1949 agreeing to receive Rs. 12,000/- for his sixteenth share in the assets of the firm on the date of retirement.
(2.) In the assessment of the respondent firm for the year 1949-50 the Second Additional Income-tax Officer, Vellore declined to accept the statement of account that the firm had earned till August 2, 1948 a net profit of only Rs. 28,643/- as truly representing the profits of the firm. He observed that "no stock valuation of the picture has been taken but only the excess collection over purchase value has been returned", indicating thereby that in his view from the statement of account which omitted to include at the close of the year the value of the rights in the film for the unexpired period the profits of the firm could not properly be deduced. The Income-tax Officer estimated the value of the rights for the unexpired period of exploitation to which the firm was entitled on August 2, 1948 at Rs. 65,000/- and computed the net profits of the firm as an unregistered firm at Rs. 93,642/- and assessed Income-tax and super-tax payable by the firm on that footing.
(3.) In appeal by the firm to the Appellate Assistant Commissioner, the correctness of the estimated value of the exploitation rights of the film at Rs. 65,000/- was alone challenged and it was submitted that the sum of Rs. 4,000/- was the true value of the assets at the end of the previous year, Damodra Mudaliar the retiring partner having relinquished his rights representing half share for Rs. 2,000/- only. The Appellate Assistant Commissioner rejected the contention, holding that the valuation of the exploitation rights for the unexpired period in the deed of dissolution dated au 15, 1948 was "dictated by extra-commercial considerations', and confirmed the valuation of Rs. 65,000/- made by the Income-tax Officer. Even in appeal to the Income-tax Appellate Tribunal, Madras the respondent firm merely contended that the valuation of the exploitation right for the unexpired period was excessive. The Tribunal partially upheld the plea, and reduced the valuation to Rs. 40,000/- as on August 2, 1948, and directed modification of the assessment on that footing.;