Sabyasachi Mukharji, J. - (1.) In this reference under Section 256(1) of the I.T. Act, 1961, the Tribunal has referred to this court, for the assessment year 1968-69, the following question : " Whether, on the facts and in the circumstances of the case, and on a correct interpretation of Sections 48, 49 and 50 of the Income-tax Act, 1961, the Tribunal was justified in holding that the cost of acquisition by the firm would be the cost of acquisition of the asset to the assessee and the written down value of the asset on the date of dissolution of the old firm cannot be taken as the cost of acquisition to the assessee for computing capital gains and the depreciation allowed in the case of the old firm cannot be taken as depreciation obtained by the assessee ? "
(2.) The assessment year, as we have mentioned before, was 1968-69 for which the accounting period was ending 30th September, 1967, for share in the firm and 31st March, 1968, for other incomes. There was a firm constituted under the partnership deed dated 3rd March, 1961, by name, M/s. G.S. Atwal & Co. (Asansol) with eight partners of whom the assessee was one. There were certain disputes between the partners in the year 1967, particularly with the 8th partner, Sri Piara Singh Atwal. He served a notice dated 18th September, 1967, for the dissolution of the firm. In view of that, the firm was dissolved by a dissolution deed dated 23rd December, 1967, with effect from 23rd September, 1967. Under the dissolution deed a sum of Rs. 90,000, besides a car, was paid towards the share of the 8th partner, Sri Piara Singh Atwal, in full settlement in the distribution of the assets of the firm. The remaining assets of the firm belonged to the remaining 7 partners. After the dissolution of the firm, the remaining 7 partners agreed to carry on the business under a partnership deed dated 1st February, 1968, in the same name of the firm, that is, M/s. G.S. Atwal & Co. (Asansol). Under this partnership deed, all the assets of the old firm, except the plant and machinery, became the assets of the new firm. Clause (5) of this deed reads as follows : " That all the assets except all plant and machinery received by the first to seventh parties hereto on the dissolution of the old partnership shall become the property and assets of the firm and all the debts, liabilities having fallen to the shares of the said parties shall become the debts and liabilities of the firm."
(3.) The assessee was having a share of 13 per cent. in this firm. The seven partners, under the deed dated 1st February, 1968, agreed to convey the said plant and machinery to one M/s. G.S. Atwal & Co. (Engineers) Pvt. Ltd. as absolute owners in lieu of its allotting shares to the 7 partners. The said limited company was incorporated on 2nd January, 1967. The total value of the plant and machinery was determined at Rs. 35,78,000. The company allotted the shares on 8th August, 1968, to the seven partners to the extent of their shares in the value of the plant and machinery transferred to it. The total value of shares allotted to the assessee amounted to Rs. 4,65,000. It was urged before the ITO that the cost of acquisition of the plant and machinery should be taken at the cost of acquisition by the firm from which the partners got the assets on the dissolution of the firm. It was also urged that the assets were acquired by M/s. G.S. Atwal & Co. (Asansol) at a cost far exceeding the consideration received from M/s. G.S. Atwal & Co. (Engineers) Pvt. Ltd. and thus the transaction resulted in a capital loss and not gain. The ITO did not accept this contention. He was of the view that Section 49 was subject to the provisions of Section 50 of the I.T. Act, 1961, even though the assessee as a partner of the firm might not have directly, according to the ITO, obtained depreciation as a partner. He was, thus, of the view that the firm had no separate legal existence apart from its partners and so the depreciation obtained by the firm should be deemed to have been obtained by the partners as well and as such the written down value of those assets could be taken as the cost of acquisition. He further held that as the agreement for sale of the plant and machinery to the limited company was entered into on 1st February, 1968, the sale should be deemed to have been entered into and effected on 1st February, 1968, the previous year for all income other than share of profit from the firm was the year ended 31st March, 1968, and so the income from capital gain had to be considered in this year. He was further of the opinion that the assessee had not furnished the cost of acquisition of the assets in the hands of the partners. He found that the written down value of those assets as on 30th September, 1967, amounted to Rs. 7,45,850. On the basis of the assessee's share of 13 per cent, in the firm, he determined the cost of acquisition by the assessee at Rs. 96,961. As the value of shares allotted to the assessee by the limited company amounted to Rs. 4,65,000, he determined the difference of Rs. 3,68,039 as income from capital gains from the sale of long-term capital assets.;