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Commissioner Of Income-Tax, Tamil Nadu Iv v. Abdul Cader Motor Service.
Factual and Procedural Background
The case involves a firm of four partners carrying on a transport bus business, including the bus MDR 3569. Disputes arose between the partners, leading Chellappa Chettiar to file a suit for dissolution and rendition of accounts. A compromise decree was passed on 12th August 1966, whereby Chellappa Chettiar was to be paid Rs. 85,000 and costs, and if bus MDR 3569 along with its route permit was transferred to him, the decree would stand fully satisfied. The Income Tax Officer (ITO) assessed income for the year 1968–69, including Rs. 32,823 as depreciation previously allowed on the bus, relying on section 41(2) of the Income-tax Act, 1961. The ITO also levied a penalty under section 271(1)(a) for late filing of the return. The Appellate Assistant Commissioner (AAC) held that section 41(2) did not apply as there was no sale of the bus, but reduced the penalty. The Department appealed, challenging the non-application of section 41(2) and the penalty reduction. The Tribunal upheld the AAC's findings. The present references under section 256(1) of the Income-tax Act raise two questions concerning the sale of the bus and the penalty reduction.
Legal Issues Presented
- Whether, on the facts and circumstances of the case, there was a sale of the bus MDR 3569 by the assessee to Chellappa Chettiar during the relevant previous year?
- Whether the Tribunal was correct in reducing the penalty levied on the assessee under section 271(1)(a) of the Income-tax Act, 1961, for the assessment year 1968–69, consequent to its finding that Rs. 32,823 being the depreciation allowed for the bus in earlier years could not be brought to tax under section 41(2)?
Arguments of the Parties
Commissioner's Arguments
- Contended that since the Tribunal found no dissolution, the transaction amounted to a sale of the bus to Chellappa Chettiar, attracting tax liability under section 41(2).
- Argued that the compromise decree did not effect dissolution of the firm, and thus the provisions of section 41(2) applied.
- Relied on decisions of the Bombay High Court (CIT v. Tribhuvandas G. Patel and CIT v. H.R. Aslot) which held that assignment of a partner's interest on leaving the firm amounted to a sale.
Assessee's Arguments
- Asserted that there was no sale of the bus but a dissolution or retirement leading to adjustment of rights among partners, so section 41(2) did not apply.
- Relied on the Supreme Court decision in Commissioner Of Income Tax, Madhya Pradesh v. Dewas Cine Corporation, which held that assets returned to partners on dissolution are not sold.
- Argued that the compromise decree did not constitute a sale but a settlement of claims, and the payment to Chellappa Chettiar was satisfaction of the decree, not a sale price.
- Distinguished the Bombay High Court decisions on the ground that there was no assignment or conveyance of partner interest in the present case.
- Supported by the Gujarat High Court Full Bench decision in Velo Industries v. Collector, which held that retirement of a partner and receipt of his share of assets is not a sale.
Table of Precedents Cited
| Precedent | Rule or Principle Cited For | Application by the Court |
|---|---|---|
| Commissioner Of Income Tax, Madhya Pradesh v. Dewas Cine Corporation, [1968] 68 ITR 240 (SC) | On dissolution of partnership, assets returned to partners are not sold; adjustment of rights does not constitute sale under tax law. | The Court applied this principle to hold that the bus was not sold but delivered in satisfaction of a partner's claim, thus section 41(2) did not apply. |
| Velo Industries v. Collector, [1971] 80 ITR 291 (Guj) (Full Bench) | Retirement of a partner and receipt of share in partnership assets is not a sale for purposes of stamp duty or tax. | The Court agreed with this view to support the conclusion that the transaction was not a sale but adjustment of rights on retirement. |
| CIT v. Tribhuvandas G. Patel, [1978] 115 ITR 95 (Bom) | Assignment of a partner's interest on leaving the firm amounts to a sale under capital gains provisions. | The Court distinguished this precedent as not applicable since there was no assignment or conveyance of interest in the present case. |
| CIT v. H.R. Aslot, [1978] 115 ITR 255 (Bom) | Followed Tribhuvandas G. Patel, holding assignment of partner interest as sale. | Distinguished similarly as not applicable to the facts of the present case. |
Court's Reasoning and Analysis
The Court examined the nature of the transaction under the compromise decree, which provided for payment to Chellappa Chettiar and delivery of the bus to satisfy his claim. It analyzed the definitions of "sale" under section 41(2) of the Income-tax Act and related provisions, including the explanation that "sold" includes transfer by exchange. The Court relied heavily on the Supreme Court's decision in Dewas Cine Corporation, which held that on dissolution, assets returned to partners are not sold but represent adjustment of rights. It noted that there was no formal dissolution or retirement as per the Indian Partnership Act, but effectively Chellappa Chettiar retired under the decree. The Court also considered the Gujarat High Court decision in Velo Industries, which similarly held that retirement and receipt of a partner's share is not a sale. The Court distinguished the Bombay High Court decisions cited by the revenue as involving assignment of partner interests, which was not present here. Hence, the Court concluded that the transaction was not a sale attracting section 41(2), but an adjustment of rights under the compromise, and the penalty reduction was justified.
Holding and Implications
The Court held as follows:
- The first question: There was no sale of the bus MDR 3569 by the assessee to Chellappa Chettiar during the relevant previous year; accordingly, section 41(2) of the Income-tax Act does not apply.
- The second question: The Tribunal was correct in reducing the penalty under section 271(1)(a) consequent to the deletion of the sum brought to tax under section 41(2).
The assessee is entitled to costs. No new precedent was set; the decision confirms that adjustment of rights among partners on retirement or dissolution, without formal sale or assignment, does not attract tax under section 41(2).
Sethuraman, J.:— These two references have been made under s. 256(1) of the I.T Act and they raise the following questions;
“1. Whether, on the facts and circumstances of the case, there was a sale of the bus MDR 3569 by the assessee to Chellappa Chettiar during the relevant previous year?
2. Whether the Tribunal was right in reducing the penalty levied on the assessee under section 271(1)(a) of the Income-tax Act, 1961, for the assessment year 1968–69, consequent to its finding that Rs. 32,823 being the depreciation that had been allowed for the bus MDR 3569 in the earlier years could not be brought to tax for this assessment year under section 41(2) of the said Act?”
2. The assessee is a firm of four partners, viz., Chellappa Chettiar, R. Abdulla Rowther, Mohamed Abdul Cader and Ahmed Ibrahim, The firm came into existence under a partnership deed dated 10th October, 1962. Partner No. 1, viz., Chellappa Chettiar, was entitled to a half share and the other three partners together had a half share. Their respective shares were defined in the partnership deed. The partners carried on the business of running transport buses during the relevant previous year ending on 31st March, 1968. Four buses were run by the firm, of which MDR 3569 was one. That bus was run on the route from Karaikudi to Devakottai. There were disputes between the partners and Chellappa Chettiar instituted O.S No. 73 of 1964 on the file of the Subordinate Judge of Devakottai for dissolution of the partnership and rendition of accounts. There was a compromise in the said suit and a compromise decree was passed on 12 th August, 1966. To the compromise decree, the memorandum of compromise executed by the parties is also appended. Under the compromise, Chellappa Chettiar was to be paid a sum of Rs. 85,000 and costs of the suit. The decree further provided that if bus No. MDR 3569 was transferred to him along with the route permit, Chellappa Chettiar would enter full satisfaction of the decree the assessee filed the return for the assessment year 1968–69 on 30th March, 1969; disclosing an income of Rs. 50,598. By his order dated 8th October, 1969, the ITO determined the total income at Rs. 1,12,790 and, in doing so, he brought to tax a sum of Rs. 32,823. being the depreciation that had been allowed for the bus, MDR 3569, in the earlier years. In support of the assessment of Rs. 32,823, the ITO relied on s. 41(2) of the I.T Act, and he rejected the contention of the assessee that there was a dissolution of the partnership firm and distribution of the assets on such dissolution so that there was no sale of the aforesaid bus with the consequence that the provisions of s. 41(2) did not apply. The ITO initiated penalty proceedings for the belated submission of the return and he levied Rs. 12,309 as penalty under s. 271(1)(a), as he was satisfied that the assessee had no reasonable cause for filing the return on 30th March, 1969, while it should have been submitted on 30th September, 1968. The assessee filed appeals against the assessment and penalty orders before the AAC who held that the provisions of s. 41(2) could not be applied as there Was no sale of the bus, MDR 3569, when it was delivered to Chellappa Chettiar in pursuance of the compromise. While agreeing with the ITO as regards the leviability of penalty, the AAC reduced it, consequent on the deletion of the sum of Rs. 32,823. The department filed an appeal challenging the finding of the AAC that there was no sale and that the provisions of s. 41(2) did not apply. It challenged also the reduction of the penalty. The Tribunal held, agreeing with the AAC, that there was no sale involved in the transaction of delivery of the bus to Chellappa Chettiar in full quit of his claim on his retirement from the firm, and that the penalty was properly reduced by the AAC having regard to the reduction in the quantum of tax. It is, against this order of the Tribunal that the two questions set out already have been referred. The reference in the penalty matter is only consequential and does not raise any other issue.
3. Learned counsel for the Commissioner contended that, in view of the finding of the Tribunal that there was no dissolution, this was a clear case where there was a sale of the particular bus to Chellappa Chettiar and that the firm was therefore, liable to tax under s. 41(2).
4. Section 41(2) runs as follows:
“(2) Where any building, machinery, plant or furniture which is owned by the assessee and which was or has been used for the purposes of business or profession is sold, discarded, demolished or destroyed and the moneys payable in respect of such building, machinery, plant or furniture, as the case may be, together with the amount of scrap value, if any, exceed the written down value, so much of the excess as does not exceed the difference between the actual cost and the written down value shall be chargeable to income-tax as income of the business or profession of the previous year in which the moneys payable for the building, machinery, plant or furniture became due: ………………….”
5. There is a proviso to this section and it is not necessary to refer to it. There is an Explanation to s. 41(4) running as follows:
“The expression ‘moneys payable’ and the expression ‘sold’ in subsections (2) and (3) shall have the same meanings as in sub-section (1) of section 32.”
6. In section 32, the word “sold” is given the following meaning:
“‘sold’ includes a transfer by way of exchange or a compulsory acquisition under any law for the time being in force…………”
7. It is unnecessary to refer to the rest of the provisions. In essence, the question here is whether there was a sale or exchange so as to attract liability under s. 41(2).
8. The Supreme Court in Commissioner Of Income Tax, Madhya Pradesh v. Dewas Cine Corporation, [1968] 68 ITR 240 dealt with the corresponding provision of prov. (ii) to s. 10(2)(vii) of the Indian I.T Act, 1922. In that case, two persons' owning cinema theatres formed a partnership to carry on the business of exhibition of cinematograph films and they brought the theatres owned by each one of them in the books of the partnership as its assets. The ITO had allowed depreciation on the theatres. On the dissolution of the partnership on 30th September, 1951, it was agreed between the two partners that the theatres should be returned to their respective original owners. In the books of the partnership, the assets were shown as taken over at the original price after deduction of the depreciation allowed. The question was, whether there was a sale within the meaning of s. 10(2)(vii), prov. (ii). 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 of his claim to a share in the residue of the assets after discharging the debts and other obligations and that thereby the theatres were not in law sold by the firm to the individual partners in consideration of their respective shares in the residue. It was also pointed out that “sale”, according to its ordinary meaning, is a transfer of property for a price, and that adjustment of the rights of the partners in a dissolved firm by allotment of its assets is not a transfer nor was it for a price.
9. Learned counsel for the revenue submitted that this decision would not apply, because this is not a case of dissolution. The compromise decree does not specifically state as to what is to happen to the firm as such. The suit was between Chellappa Chettiar and the other three partners. The firm as such was not and could not be a party to the suit because of the nature of the relief claimed, viz., dissolution. The relevant clauses in the compromise decree are:
“1. That the defendants do pay to the plaintiff the sum of Rs. 85,000 with interest thereon at 6 per cent, per annum from this date till date of payment and do also pay his costs of this suit, Rs. 6,392.75.
2. That the 1st defendant do deliver to the plaintiff on or before 12-8-1966 bus MDR 3569 plying between Karaikudi and Manakudi (via) Thondi absolutely and with full rights with all its spare parts and tools and do take all steps to transfer the route permit for the said bus to the plaintiff who may run the bus immediately and appropriate to himself all the income derived from it.”
10. In the case of dissolution, there should have been a preliminary decree and then a final decree as contemplated by the Code of Civil Procedure read with s. 44 of the Indian Partnership Act. There could be no partial dissolution; either the firm is dissolved or it is not. We shall thus proceed on the basis that there was no dissolution.
11. This cannot be strictly called a case of retirement of a partner. Under s. 32 of the Indian Partnership Act, a partner may retire with the consent of all the other partners or in accordance with an express agreement by the partners, or where the partnership is at will, by giving notice in writing to all the other partners of his intention to retire. Chellappa Chettiar actually filed a suit for dissolution. He did not give any notice for retirement. There was no agreement for his retirement. None of the clauses of s. 32 of the Indian Partnership Act would apply here. It would thus be a curious case of there being neither dissolution nor retirement.
12. There was actually retirement of the partner, Chellappa Chettiar, under the decree, though not in the manner contemplated by s. 32 of the Indian Partnership Act. Even if there is no dissolution, in the case of retirement also the Gujarat High Court has taken the view, following the decision of the Supreme Court in Commissioner Of Income Tax, Madhya Pradesh v. Dewas Cine Corporation, [1968] 68 ITR 240, that there was no sale, in Velo Industries v. Collector, Bhavnagar, [1971] 80 ITR 291 [FB]. That was a case which arose under the Bombay Stamp Act, 1958, on a reference by the Chief Controlling Revenue Authority. It was held that when a partner retired from the partnership and the amount of his share in the net partnership assets, after deducting liabilities and prior charges on the footing of a notional sale of the partnership assets was given to him, what he received was his share in the partnership, and not any price for sale of his interest in the partnership, and that there is in such a transaction no element of sale within the meaning of art. 25, cl. (b) of Sch. I to the Bombay Stamp Act. We would respectfully agree with this view of the Full Bench of the Gujarat High Court.
13. Learned counsel for the Commissioner contended that there are decisions of the Bombay High Court which have taken a contrary view. He brought to our notice the decisions in CIT v. Tribhuvandas G. Patel, [1978] 115 ITR 95 (Bom) and CIT v. H.R Aslot, [1978] 115 ITR 255 (Bom). In the latter case, the earlier decision was followed. Both the decisions dealt with the provisions relating to capital gains and in both those cases, it was pointed out that there was an assignment of the interest of a partner who went out of the firm. They were thus decisions on different facts. There is no assignment or exchange of the interest of a partner in the present case, nor is there any conveyance of any interest of any partner. These decisions cannot apply to a case of mere retirement. If the present case is taken to be a case of dissolution, Dewas Cine Corporation's case, [1968] 68 ITR 240 (SC) would apply. If it is treated as a case of retirement, then also there is no sale, and there was only an adjustment in relation to the assets of the outgoing partner based on the rights he had in the firm, as held in Velo Industries' case, [1971] 80 ITR 291 (Guj) [FB]. We have already extracted cls. 1 and 2 of the compromise decree. Clause 1 contemplates a sum of Rs. 85,000 being paid to Chellappa Chettiar and cl. 2 provides that in case the bus was delivered in the manner contemplated by it, then the decree in favour of Chellappa Chettiar would stand satisfied to that extent. The terms of the compromise do not show that there was a sale of any particular item of the assets of the partnership and we do not, therefore, find that the provisions of s. 41(2) of the I.T Act have any scope for application. The satisfaction of a decree debt cannot be taken as payment of a sale price for taking over the bus. It is only an adjustment of the rights of Chellappa;
14. As pointed out already, the reference in the penalty proceedings does not call for any separate treatment or discussion as it does not raise other points. The result is that the first question is answered in the negative and in favour of the assessee and the second question is answered in the affirmative. The assessee will be entitled to his costs. Counsel's fee Rs. 500, one set.
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