Case: Commissioner Of Income-Tax, Madhya Pradesh Vs. Dewas Cine Corporation

1. S. G. Sanghi and Hari Prasad entered into an agreement to carry on business in partnership as exhibitors of cinematograph films in the name and style of "Dewas Cine Corporation" with effect from March 1, 1947. Each partner who was an owner of a cinematograph theatre brought his theatre into the books of the partnership as an asset of the partnership. For the assessment years 1950-51 to 1952-53 the Income-tax Officer allowed depreciation aggregating to Rs. 44,380 in respect of the two theatres. The partnership was dissolved on September 30, 1951, and on dissolution it was agreed between the partners, that the theatres should be returned to their original owners. In the books of account maintained by the partnership, the assets were shown as taken over on October 1, 1951 at the original price less the depreciation allowed-the depreciation being equally divided between the two partners.2. In proceedings for assessment for the year 1952-53 the respondent was treated as a registered firm. The Appellate Tribunal held that by restoring the two theatres to the two original owners "there was a transfer by the firm and the entries adjusting the depreciation and writing off the assets at the original value amounted to total recoupment of the entire depreciation by the partnership and on that account" proviso 2 to Section 10 (2) (vii) of the Income-tax Act, 1922, applied. The High Court of Madhya Pradesh answered the following question referred to it by the Tribunal in the negativeon the facts and in the circumstances of the case, the amount of Rs. 44,380 was rightly included in the total income of the assessee in the year 1952-53 under the second proviso to Sec. 10 (2) (vii) of the Income-taxCommissioner of Income-tax has appealed to this Court with certificate granted by the High Court.

Reasoning: 5. On dissolution of the partnership, each theatre must be deemed to be returned to the original owners, 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 share in the residue. The expressions "sale" and "sold" are not defined in the Income-tax Act: those expressions are used in Section 10 (2) (vii) in their ordinary meaning."Sale" according to its ordinary meaning is aproperty for a price, and adjustment of the rights of the partners in a dissolved firm is not a transfer, nor it is for adistribution of surplus is for the purpose of adjustment of the rights of the partners in the assets of the partnership, it does not amount topartner may, it is true, in an action for dissolution insist that the assets of the partnership be realised by sale of its assets, but where in satisfaction of the claim of the partner to his share in the value of the residue determined on the footing of an actual or notional sale property is allotted, the Property so allotted to him cannot be deemed in law to be sold to him.7. The High Court was, therefore, in our judgment, right in deciding the quest tion referred in favour of the