COMMISSIONER OF INCOME TAX, GUJARATversusMIS. ELECTRIC CONTROL GEAR MFG. CO.

A              COMMISSIONER OF INCOME TAX, GUJARAT
                                 v.
                MIS. ELECTRIC CONTROL GEAR MFG. CO.

                                   JULY 8, 1997
                           •
B               [S.C. AGRAWAL AND G.B. PATTANAIK, JJ.]

         Income Tax A::t, 1961-Sections 41, l14--Part11ership concern-Trans-
  fer of business as a going concern to a limited company-Liability to tax u/s.
  41(2) and liability to capital gains-Nothing to indicate price att1ibutable to
C assets like machinery, plant or building out of total consideration
  amoullt-Whether provisions of Section 41(2) applicable-Held, No-Status
  of assessee was that of an association of persons.

          The assessee, a partnership concern entered into an agreement
    whereby it transferred the entire assets of business together with liabilities
D   as a going concern to a limited company for a consideration of Rs. 8 lakhs.
    The Income Tax Officer held that depreciation allowed to the assessee firm
    in respect of the assets transferred by the firm to the company as
    chargeable to tax u/s. 41(2) of the Income Tax Act, 1961' and included
    capital gains after excluding the sum of Rs. 5,000 as basic exemption, in
E   the computation of the total income of the assessee under the head 'Capital
    Gains'. In appeal, the Appellate Assistant Commissioner held that the
    impugned profits were taxable under the provisions of sec. 41(2) of the Act
    but the the capital gains could not be taxed in the hands of registered firm
    u/s. 114 of the Act. The Income Tax Appellate Tribunal remitted the matter
    to the Income Tax Officer for recomputation of the aggregate amount
F   chargeable as profits u/s. 41(2) and as capital gains while holding that the
    correct status of the should be 'registered firm' and not 'association of
    person'.

           In reference, the High Court held that the Tribunal was right in
G   holding that the provisions of Sec. 41 (2) were applicable; that the status
    of the assessee was a registered firm and that of an association of persons
    and that the assessee was entitled to any relief on the basis of the two         '
    circulars relied on by it. The present appeal had been filed by the Revenue
    against the judgment of the High Court.

H          Allowing the appeal partly, this Court
                                         570
 C.I.T. GUJARAT v. ELECTRIC CONfROL GEAR MFG. CO. (S.C. AGRAWAL, J.] 571

      HELD : In the present case there is nothing to indicate the price          A
attributable to the assets like the machinery, plant or building out of the
consideration amount of Rs. 8 Lakhs. Merely because a sum of Rs. 3,32,863
had been allowed as depreciation to the assessee firm, it could not be said
that was the excess amount between the price and the written down value.
The High Court, therefore, rightly held that the provisions of Section 41 (2)    B
were not applicable. On the question of status of the assessee, the High
Court rightly held that the Tribunal was not right in holding that the
status of the assessee was a regi~tered firm and not that of an association
of persons. However, on the facts and in the circumstances the High Court
was not right in holding that the assessee was entitled to relief on the basis   C
of the two circulars relied on by it. (574-A; 573-D; 572-H; 573-A]

        C.I.T. v. Mis. Arlex Manufacturing Co., (1997) Supp. 1 S.C.R. 608,
relied on.

        Arlex Manufacturing Co. v. C.I.T., (1981) 131 ITR 559 (Guj.), distin- D
guished.

        CIVIL APPELLATE JURISDICTION : Civil Appeal No. 101 of
1982.

     From the Judgment and Order dated 29.8.80 of the Gujarat High               E
Court in [T.R. No. 281 of 1975.

        B. Krishna Prasad for the Appellant.

        P.H. Pfil.ekh, Sunita Sharma and R. Deepamala for the Respondent.
                                                                                 F
        The Judgment of the Court was delivered by

        S.C. AGRAWAL, J.: This appeal by certificate is directed against the
judgment of the Gujarat High Court dated August 29, 1980. The matter
relates to the assessment year 1967-68. The assessee is a partnership            G
concern consisting of 13 partners. On March 31, 1966 it entered into an
agreement whereby it transferred the entire assets of business together with
liabilities as a going concern to a limited company, styled M/s. Electric
Control Gear Pvt. Ltd. for a consideration of Rs. 8 lakhs. The erstwhile
partners of the assessee firm were allotted the shares of the same value in
their profit sharing proportion. The Income Tax Officer held that deprecia-      H
    572                   SUPREME COURT REPORTS [1997) SUPP.1 S.C.R.

A tion allowed to the assessee firm amounting to Rs. 3,32,863 in respect of
    the asset_s transferred by the firm to the said company was chargeable· to
    tax under the provisions of Section 41(2) of the Income Tax Act, 1961
    (hereinafter referred to as 'the Act'). He also brought to tax capital gains
    of Rs. 8.Yakhs,·being purchase consideration received by the assessee and
    after excluding the sum of Rs. 5,000 as basic exemption, included the sum
B   of Rs.7,95,000 in the computation of the total income of the assessee under
    the head 'Capital Gains'. The Appellate Assistant Commissioner held that
    the impugned profits were taxable under the provisions of Section 41(2) of
    the Act. As regards capital gains, the Appellate Assistant Commissioner,
    however, held that the capital gains could not be taxed in the hands of the
C   registered firm under the provisions of section 114 of the Act_ Appeals          ~-""'[
    were filed by the assessee as well as the Revenue against the said judgment
    of the Appellate Assistant Commissioner. The assessee challenged the
    liability to tax under Section 41(2) of the Act as well as the liability to
    capital gains while the Revenue challenged the decision of the Appellate
    Assistant Commissioner about recomputation of profits under Section
D   41(2) as well as non-levy of capital gains in the hands of the registered firm
    under the provisions of Section 114 of the Act. The Income Tax Appellate
    Tribunal remitted the matter to the Income Tax Officer for recomputation
    of the aggregate amount chargeable as profits under Section 41(2) and as
    capital gains. The Tribunal held that the correct status of the assessee
    should be 'registered firm' and not 'association of persons'. The Tribunal
E   referred the following questions for the opinion of the High Court :

             1.   Whether, on the facts and in the circumstances of the case,
                  the Tribunal was right in holding that the principle of
                  mutuality was not applicable?

F            2.   Whether, on the facts and in the circumstances of the case,
                  the Tribunal was right in holding that the provisions of Section
                  41(2) were applicable?

             3.   Whether, on the facts and in the.circumstances of the case,
                  the Tribunal was right in holding that the assessee has earned
G
                  capital gains, which was liable to tax under the provisions of
                  Section 45 of the Income Tax Act, 1961?

             4.   Whether, on the facts and in the circumstances of the case,
                  the Tribunal was right in holding that the status of the
H                 assessee was a registered firm and not that of an association
 C.I.T. GUJARATv. ELECTRIC CONTROL GEAR MFG. CO. [S.C. AGRAWAL, J.] 573

              of persons?                                                        A
         5.   Whether, on the facts and in the circumstances of the case,
              the Tribunal rightly rejected the claim of the assessee ,that
                                                                       .J.

              surplus realised by it on sale to the limited company was o.ot
                                                                           1
              chargeable to tax, being realisation sale?
                                                                                 B
         6.   Whether, on the facts and in the circumstances of the case,
              the Tribunal was right in holding that Section 34(2) will apply
              and, therefore, the assessee is not entitled to depreciation?

         7.   Whether, on the facts and in the circumstances of the· case,       C
              the Tribunal was right in holding that the registered firm can
              be liable to capital gains under S. 114 of the Income Tax Act,
              1961?

         8.   Whether, the Tribunal was right in holding that the assessee
              was not entitled to any relief on the basis of the two circulars D
              relied on by it?

      Question Nos. 1, 3 and 5 were answered by the High Court in
affirmative, i.e., in favour of the Revenue and against the assessee, question
Nos. 2, 4, and 8 were answered in the negative, i.e., against the Revenue        E
and in favour of the assessee, question No. 6 was not pressed by the learned
counsel for the assessee and question No. 7 was not answered since it did
not survive in view of answer to question No. 4. The present appeal relates
to question Nos. 2, 4 and 5 which have been answered against the Revenue.

     The High Court has placed reliance on its judgment in Arlex F
Manufacturing Co. v. Commissioner of Income Tax, Gujarat-II, (1981) 131
ITR 559. The said judgment of the High Court has been considered by us
in our judgment pronounced today in C.A. No. 2276(NT) of 1981, The
Commissioner of Income Tax v. M/s. Arlex Manufactun·ng Co .. In that case,
we have held that Section 41(2) was applicable since price attributable to       G
the Plant, machinery and dead-stock which were transferred had been
disclosed by the assessee during the course of assessment proceedings
before the Income Tax Officer and that the said price was as per the value
assessed by the valuers at the time of execution of the agreement. In the
present case there is nothing to indicate the price attributable to the assets
like the machinery, plant or building out of the consideration amount of         H
                            0
    574                  SUPREME COURT REPORTS (1997] SUPP. 1 S.C.R.
A Rs. 8 lakhs. Merely because a sum of Rs. 3,32,863 had been allowed as
    depreciation to the assessee firm, it could not be said that was the excess
    amount between the price and the written down value. Question No. 2 was,
    therefore, rightly answered against the Revenue by the High Court. On
    question No. 4 the High Court has taken the same view as was taken by it
B   while answering question No. 4 in Mis. Artex Manufacturing Co. (supra).
    The said view has been affirmed by us in our judgment in that case.
    Question No. 8 is similar to question No. 5 in Mis. Artex Manufacturing Co.
    (supra). The view of the High Court with regard to that question has been
    reversed by us in our judgment in the case and for the same reasons
    question No. 8 must be answered in the affirmative, i.e., in favour of the
C   Revenue and against the assessee.

            In result the appeal is partly allowed to the extent that the answer
    given by the High Court to question No. 8 is set aside and the said question
    is answered in the affirmative, i.e., in favour of the Revenue and against
    the ';lssessee. The answers given by the High Court to question Nos. 2 and
D   4 are affirmed. No order as to costs.

    R.A.                                                 Appeal partly allowed.