ABDUL REHMAN HAJI MIYA Vs. V P MINOCHA ITO

JUDGEMENT

(1.) THE petitioner in this case was, prior to its dissolution on August 31, 1963, a partnership firm registered under the provisions of the Indian Partnership Act. Though the firm has been dissolved with effect from August 31, 1963, as the subject -matter of the writ petition is pending, the said firm is deemed to continue in connection with that subject -matter. All the partners of the petitioner -firm are citizens of India having their domicile in India. The business of the petitioner -firm was to manufacture hosiery goods and sell the same. In the financial years 1959 -60 and 1960 -61, corresponding to the assessment years 1960 -61 and 1961 -62, the petitioner -firm had purchased some new machinery for purpose of its business. The Income -tax Officer, while assessing the petitioner -firm for those assessment years, had allowed development rebate to the extent of Rs. 4,006 for assessment year 1960 -61 and Rs. 7,382 for assessment year 1961 -62. This was done under the provisions of section 10(2)(vib) of the Indian Income -tax Act, 1922 (hereinafter referred to as 'the Act of 1922').

(2.) BY a deed of dissolution executed by the partners of the petitioner -firm on August 31, 1963, the petitioner -firm was dissolved and under the terms of the deed of dissolution, the partners distributed amongst themselves the machinery which had been purchased by the firm in assessment years 1960 -61 and 1961 -62. These items of machinery, along with several other items of machinery, were thus distributed amongst the partners on dissolution. Respondent No. 1, who is the Income -tax Officer in charge of the case of the petitioner -firm, assessed the petitioner -firm for assessment year 1964 -65 after the petitioner -firm was dissolved. During the course of the assessment proceedings for that year, respondent No 1 held that the petitioner had otherwise transferred' the machinery acquired by it in assessment years 1960 -61 and 1961 -62 before the expiry of the statutory period of eight years prescribed under section 34(3)(b) of the Income -tax Act, 1961 (hereinafter referred to as 'the Act of 1961'). Respondent No. 1, thereupon, passed orders under section 155(5) of the Act of 1961 withdrawing the development rebate granted to the petitioner -firm in the assessment years 1960 -61 and 1961 -62. These orders were passed by respondent No. 1 on November 8, 1965. The petitioner -firm contends that even though the machinery was distributed amongst the partners on the dissolution of the firm, as stated above, the first respondent has wrongly treated the machinery which had been the subject -matter of development rebate as 'otherwise transferred'.

(3.) IT must be borne in mind that the partnership firm was dissolved with effect from August 31, 1963, and apart from working out the legal consequences on dissolution, nothing else has been done by the partners of the firm indicating that the plant or machinery in respect of which the development rebate has been allowed in the past has been transferred. As to what is the effect of dissolution of the firm has been analysed by the Supreme Court in Commissioner of Income -tax v. Dewas Cine Corporation : [1968]68ITR240(SC) . In that particular case before the Supreme Court, S. G. Sanghi and Hari Prasad, each of whom owned a cinema theatre, formed a partnership to carry on business in partnership as exhibitors of cinematograph films, bringing the theatres into the books of the partnership as its assets. For the assessment years 1950 -51 to 1952 -53 the Income -tax Officer allowed depreciation aggregating to Rs. 44,380 in the assessment of the partnership in respect of the two theatres. On the dissolution of the partnership on September 30, 1951, it was agreed between Sanghi and Hari Prasad that the theatres should be returned to their original owners. In the books of account of the partnership the assets were shown as taken over at the original price less the depreciation allowed, the depreciation being equally divided between Sanghi and Hari Prasad. The Tribunal held the by restoring the theatres to the original owners there was a transfer by the partnership and the entries adjusting the depreciation and writing off the assets of the original value amounted to total recoupment of the entire depreciation by the partnership and on that account the second proviso to section 10(2)(vii) of the 1922 Act applied. On these facts the Supreme Court held that, on the dissolution of the partnership, each theatre had to be deemed to be returned to the original owner in satisfaction partially or wholly of his claim to a share in the residue of the assets after discharging the debts and other obligations. But, thereby, the theatres were not in law sold by the partnership to the individual partners in consideration of their respective shares in the residue, and, therefore, the amount of Rs. 44,380 could not be included in the total income of the partnership under the second proviso to section 10(2)(vii).