Tulzapurkar, J. - (1.) These appeals by special leave raise an interesting question of law whether the distribution of assets of a firm consequent on its dissolution amounts to a transfer of assets within the meaning of the expression "otherwise transferred" occurring in S. 34 (3) (b) of the Indian Income Tax Act, 1961, having regard to the definition of 'transfer' in S. 2 (47) of the Act
(2.) The facts giving rise to the question lie in a narrow compass. The appellant (M/s. Malabar Fisheries Co.) is a dissolved firm represented by one of its erstwhile partners. The firm as originally constituted on April 1, 1959 consisted of four partners and carried on six different businesses in six different names and styles, namely, (a) Malabar Fisheries Co., (b) Coastal Engineering Co., (c) Cochin Tin Factory, (d) Goodwill Industries, all at Falluruthy, (e) Combine Steel Industries at the Industrial Estate at Olavakkot and (f) Lite Metal Industries at Visakhapatnam in Andhra Pradesh. The firm was dissolved on March 31, 1963 and under the deed of dissolution executed by and between the partners, the first business concern was taken over by one of the partners, the remaining five concerns by two of the other partners and the fourth partner received a sum of Rs. 3,81082/- in lieu of his respective shares in the assets of all the businesses of the firm. It appears that during the four assessment years 1960-61 to 1963-64 the firm had installed various items of machinery in respect of which it received development rebate in its respective tax assessments under S. 33 of the Act. On dissolution of the firm on March 31, 1963, the Income-tax Officer took the view that S.34 (3) (b) of the Act applied on the ground that there was a sale or transfer of the machinery by the firm within the period mentioned in that section and accordingly acting under S. 155 (5) of the Act he withdrew the development rebate allowed to the firm for the said assessment years, the amending orders being passed against the dissolved firm. The assessee i. e., the dissolved firm through 1980 Malabar Fisheries Co., v. I. T. Commr. Kerala one of its erstwhile partners preferred appeals against the order of the Income-tax Officer withdrawing the development rebate but the Appellate Assistant Commissioner by his order dated July 24, 1964, dismissed the appeals holding that S. 155 (5) was rightly resorted to since S. 34 (3) (b) of the Act applied to the case. The matter was carried in further appeals by the dissolved firm to the Income-tax Appellate Tribunal, Cochin Bench, Ernakulam, and it was contended that the distribution of the assets of the firm consequent on its dissolution did not amount to a sale or transfer and, therefore, the transaction would not come within the purview of Section 34 (3) (b). The Tribunal by its common order dated January 6, 1970 allowed the appeals holding that the case fell within the principle laid down by this Court in the case of Commr. of Income-tax v. Dewas Cine Corporation (1968) 68 ITR 240 and that there was no question of any sale or transfer within the meaning of Section 34 (3) (b) in a transaction involving the adjustment of the rights of the partners of a dissolved firm.
(3.) At the instance of the Revenue, the Tribunal referred two questions of law to the High Court for its opinion,namely, "(1) Whether on the facts and in the circumstances of this case, the Appellate Tribunal was legally correct in holding that there was no question of sale and that it was only an adjustment of the mutual rights of the partners and that the provisions of Section 36 (3) (sic) were not applicable (2) Whether on the facts and in the circumstances of this case, there was a transfer of assets within the meaning of the words 'otherwise transferred' occurring in S. 34 (3) (b) of the Income Tax Act - The High Court answered the second question in the affirmative and against the assessee and in view of that answer, declined to answer first question as being unnecessary. The High Court took the view that this Court's decisions in Dewas Cine Corporation case (supra) and Bankey Lal Vaidya's case (1971) 79 ITR 594 to the effect that the distribution, division or allotment of assets between partners of a firm consequent on its dissolution amounts to a mutual adjustment of rights of the partners and does not amount to a sale or transfer had been rendered under the Income Tax Act, 1922 wherein the expression 'sale' of 'transfer' had not been defined whereas in the 1961 Act by which the case was governed, the expression 'transfer' had been defined by S. 2 (47) in a very wide manner so as to include not merely a sale or exchange but also 'extinguishment of any rights' in capital assets. The High Court held that a dissolution of a firm amounted to extinguishment of the rights of the firm in the assets of the partnership and accordingly was a transfer within the meaning of S.2 (47) of the Act and that, therefore, the provisions of Section 34 (3) (b) applied to the case. It is this view of the High Court that is being challenged before us in these appeals by the assessee.;