S. C. Agrawal, J. - (1.) This appeal by certificate granted by the Gujarat High Court under Section 261 of the Income-tax Act, 1961 (hereinafter referred to as the 1961 Act) involves the question whether the surplus as a result of difference between the written down value and the sale consideration for the Plant, machinery and dead stock transferred by the assessee is taxable under Section 41(2) of the 1961 Act, The appeal relates to assessment year 1967-68.
(2.) The assessee is a partnership firm which was carrying on the business of manufacturing artsilk cloth. A private limited company by the name of Artex Manufacturing Company Private Ltd. (hereinafter referred to as the company) was formed with a view to take over the business of the assessee as a running concern. On March 31, 1966, the assessee and the company entered into an agreement whereunder the assessee agreed to sell to the company the business hitherto carried on by the assessee as a whole going concern. The consideration for the said sale was Rs. 11,50,400/- which was paid and satisfied by allotment of 11,504 fully paid up equity shares of Rs. 100/- each according to original shares of partners of the assessee. In pursuance of the said agreement, the assesee ceased to carry on the business with effect from April 1, 1966 and the said business stood transferred to the company. In respect of the assessment year 1967-68, the assessee filed its return showing nil income. On January 9, 1970, a revised return was filed showing nil income with a note that since the partnership firm was converted into a private limited company as a going concern there was no income chargeable to tax either under Section 41(2) or under Section 45 of the 1961 Act, During the course of the assessment proceedings before the Income-tax Officer, for the purpose of determinaton of purchase consideration, the assets were shown at Rs. 41,73,973/-, out of which the machinery and dead-stock, as revalued by M/s. Hargovandas Girdharlal, was Rs. 15,87,296/-. The liabilities were shown at Rs. 30,23,573/- and the balance amount of Rs. 11,50,400/- was shown as the purchase consideration. The Written Down Value of Plant, machinery and dead-stock as per assessees books, was Rs. 4,36,896/-. The difference between Rs. 15,87,296/-, the value of Plant, machinery and dead-stock as revalued, and Rs. 4,36,896/-, the written down value of Plant, machinery and dead-stock as per assessees books, came to Rupees 11,50,400/-. Relying upon the decision of this Court in Commr. of Income-tax, Gujarat II v. B. M. Kharwar, (1969) 72 ITR 603 , the Income-tax Officer held that tax was payable under Section 41(2) on the surplus amount, i.e., difference between the written down value of Plant, machinery and dead-stock as per assessees books and the value of the same as revalued by M/s. Hargovandas Girdharlal. The Income-tax Officer held that the written down value of Plant, machinery and dead-stock as per Income-tax records was Rs. 3,32,276/- and after deducting the same from the amount of Rs. 15,87,296/- for which Plant, machinery and dead-stock were transferred to the company, the Income-tax Officer held that tax was payable under Sec- tion 41(2) on the income of Rs. 12,56,020/-. The Appellate Asstt. Commissioner, on appeal, has held that the surplus was assessable under the head Capital Gains and not under the haad Business. As regards the status of the assessee it was held that the assessee must be taxed in the status of Association of Persons and not in the status of a Registered Firm. The assessee as well as the Revenue filed appeals against the said decision of the Appellate Asstt. Commissioner before the Income-tax Appellate Tribunal (hereinafter referred to as the Tribunal). The Tribunal framed the following questions for considera-tion: (i) Whether the surplus is taxable at all (ii) If the surplus is found to be taxable, whether it should be taxed under Section 41(2) or under the head Capital Gains (iii) Whether the surplus is assessable in the status of Association of Persons or Registered Firm
(3.) On the first question the contention urged on behalf of the assessee was that the principle of mutuality was applicable and consequently the surplus was not liable to tax. The said contention was rejected by the Tribunal on the basis of the decision of this Court in Pandit Lakshmikant Jha v. Commr. of Income-tax, (1970) 75 ITR 790. On the second question regarding applicability of Section 41(2), the Tribunal held that the language of Section 41(2) was wider than the language of Section 10(2)(vii) of the Indian Income-tax Act, 1922 (hereinafter referred to as the 1922 Act) and, therefore, the surplus was taxable under Section 41(2) of the 1961 Act, As regards the third question, the Tribunal held that the surplus was taxable as business profit under Section 41(2) and that the assessee was assessable in the status of a registered firm. At the instance of the assessee, the Tribunal referred the following questions for the opinion of the High Court: 1. Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the principle of mutuality will not apply and, therefore, the assessee was liable to be taxed 2. Whether, on the facts and in the circumstances of the case, Section 41(2) was applicable 3. Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the surplus was not capital gains, but was business income 4. Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the status of the assessee was a registered firm and not that of an association of persons 5. Whether the Tribunal was right in holding that the assessee was not entitled to any relief on the basis of the two circulars relied on by it 6. Whether the transfer of a going concern is liable to tax under section 45 of the Income-tax Act, or under Section 41(2), or is it realisation sale, which is not liable to tax - ;