Shah, J. - (1.) The respondents - a firm which carries on the business of manufacturing, purchasing and selling cloth closed its manufacturing side of the business and transferred its machinery to a private limited company in the share capital of which the partners of the firm had the same interest as they had in the assets and profits of the partnership. In the assessment year 1959-60 the Income-tax Officer, Surat, brought to tax under Section 10 (2) (vii) proviso (ii) of the Income Tax Act, 1922, Rs. 40,743/- being the excess realised over the written down value of the machinery. But the Income-tax Appellate Tribunal held, relying upon the decisions in Commissioner of Income-tax vs. Sir Homi Mehta's Executors, 28 ITR 928; Rogers and Co. vs. Commissioner of Income-tax, 34 ITR 336; and Commissioner of Income-tax vs. Mugneeram Bangur and Co., (1963) 47 ITR 565 (Cal) that the firm "transferred the machinery only with a view to carry on the business as a company rather than as a firm", and by that transfer no profit in a business sense could be deem to have resulted to the firm.
(2.) The following question referred by the Tribunal: "Whether, on the facts and in the circumstances of the case, the sum of Rs. 40,743/- is assessable to tax by applying second proviso to Section 10 (2) (vii) of the Indian Income Tax Act, 1922 -, was answered by the High Court of Gujarat in the negative. The Commissioner of Income-tax appeals with certificate of fitness granted by the High Court.
(3.) Counsel for the Commissioner contended that the decisions in Sir Homi Mehta's Executors case, 28 ITR 928; Rogers and Company case, 34 ITR 336 and Mugneeram Bangur's and Company's case, (Cal) on which the Tribunal and the High Court relied are inconsistent with the judgments of this Court. He submitted that the assessee could not in a case falling within the 2nd proviso to Section 10 (2) (vii) of the Income Tax Act, 1922, avoid liability to be taxed in respect of the excess realized over the written down value of the machinery sold by the firm on the plea that the "substance of the transaction" which resulted in transfer of the rights of the firm to the company was of the nature of a step to readjust the business relations of the partners inter se.;