Commissioner Of Income-Tax, Madhya Pradesh v. Dewas Cine Corporation
Supreme Court
[1968] 2 S.C.R. 173 08 Nov 1967 In favour of: Assessee
Forum / Bench
Supreme Court
Parties
Commissioner Of Income-Tax, Madhya Pradesh v. Dewas Cine Corporation
Date of order
08 Nov 1967
Assessment year(s)
1952-53
Outcome
Dismissed
Case analysis
In CIT v. Dewas Cine Corporation the Supreme Court held that the return of assets to partners on dissolution of a firm is not a 'sale', so the balancing charge on depreciation (Section 10(2)(vii), 2nd proviso, of the 1922 Act; now Section 41(2)) did not apply.
Legal topics
Partnership dissolutionDepreciationBalancing chargeMeaning of "sale"Section 41(2)
01
Facts of the case
Two persons, each owning a cinema theatre, formed a partnership from 1 March 1947 to exhibit films and each brought his theatre in as a partnership asset. Depreciation totalling ₹44,380 was allowed on the two theatres for assessment years 1950-51 to 1952-53. On dissolution of the firm on 30 September 1951 the theatres were returned to their original owners at their original price less the depreciation allowed, the depreciation being divided equally between the partners. The Tribunal held that this return of the theatres was a 'transfer by sale' attracting the second proviso to Section 10(2)(vii) of the 1922 Act (a balancing charge recouping the depreciation). The High Court decided in the assessee's favour, and the Revenue appealed.
02
Issue for determination
- Whether the return of the theatres to their original owners on the dissolution of the partnership amounted to a 'sale' for the purposes of the second proviso to Section 10(2)(vii) of the Indian Income-tax Act, 1922, so as to attract a balancing charge on the depreciation earlier allowed.
03
Arguments of the parties
The Revenue argued that on dissolution the theatres were transferred from the partnership to the original owners for a price (the written-down value), which constituted a sale attracting the balancing charge. The assessee argued that an adjustment of partners' rights on dissolution is neither a transfer nor a sale.
04
Held & the Court's reasoning
The Court held that the words 'sold' and 'sale' are not defined in the Act and must be given their ordinary meaning. A 'sale' in its ordinary sense is a transfer of property for a price. The adjustment of the rights of partners in a dissolved firm is not a transfer, nor is it for a price. Where, in satisfaction of a partner's claim to his share in the value of the residue, property is allotted to him, that property cannot in law be deemed to have been sold to him. The Court relied on Addanki Narayanappa v. Bhaskara Krishnappa.
§
Ratio — the key legal principle
The distribution or return of assets to partners on the dissolution of a firm is not a 'sale' or transfer for a price; consequently the balancing-charge provision recouping depreciation (second proviso to Section 10(2)(vii) of the 1922 Act) is not attracted.
05
Final decision
The appeal was dismissed. The return of the theatres was not a sale and no balancing charge could be imposed. Decided in favour of the assessee.
!
Subsequent legal developments
The case was decided under the Indian Income-tax Act, 1922; the balancing charge is now found in Section 41(2) (read with depreciation under Section 32) of the Income-tax Act, 1961. The principle that a distribution of assets on dissolution is not a transfer for a price informed later law; note that Section 45(4) of the 1961 Act now separately deals with the taxation of capital gains on the distribution of capital assets on dissolution or reconstitution of a firm.
Provisions involved: Section 10(2)(vii), 2nd proviso, of the 1922 Act (now Sections 32 & 41(2))
Provisions considered
Act applied by the Court
Indian Income-tax Act, 1922
Cases referred to in this judgment
Cases that have cited this judgment
Automatically compiled from later judgments in the EaseValue database that refer to this case.
Original judgment (source document)
The analysis above is EaseValue's editorial summary. Below is the court's original order, reproduced from the public record as a source document — the OCR text is cleaned for readability but may retain scanning artifacts; rely on the official source for the authentic version.
▸ Show the full original order (source text)
A COMMISSIONER OF INCOME-TAX, MADHYA PRADESH v.
DEWAS CINE CORPORATION
November 8, 1967
B {J. C. SHAH, V. RAMASWAMI AND V. BHARGAVA, JJ.}
lnclian lncorne-tax Act, 19221 s. 10(2) (vii) 2nd proviso-Tl•'o persons entering into partnership, each contributing a cinema theatre-on. dissolu-tion of ."artnership theatres returned to respectii-·e owners at original price -Depreciation equally dil'ided between partners-Return of theatres u[1]hether sale for purpose oj s. 10(2) (vii), 2nd proviso.
c S and H formed a partnership to carry on business in partnership_ as exhibitors of cinematograph films with effect from March 1, 1947. Each partner who was an owner of a cinematograph theatre brought bis 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 Sept·omber 30, 1951, and on dissolutio•n it was agreed betweeri the partners that the theatres should D be returned to their original o\vners. Jn the books of account main· tained by the partnership, the assets were shown as taken over on· October 1, 1951, at the original price less the depreciation allowed-the lk~preciation being equally divided between the two partners. In proceedings for assessment for the year 1952-53 the- respondent was treated as a registered firm. The Appellate Tribunal held that bv res-toring the two theatres to the two original owners "there was a transfer E by the firm and the 1~ntries 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 a¢count" proviso 2 to s. 10(2) (vii) of the Income-tax Act. 1922. applied. The High Court. in reference, held in favour of the assessee. The Revenue appealed, contending. that on th~ transfer of the theatres from the partnership to the original owners there was a sale.
HELD : The expr·~ssions "!iiide" and ''sold" are not defined in the J,ncome-tax Act : Those expressions ar·:! used in s. 10(2) (vii) in their ordinary meaning. ''Sale" according to its ordinary meaning is a transfer of property for a price. and adjustment of the rights of the partners ln a dissolved firm is not a transfer. nor is it for a price. [l 76A-B]
A partner may, it is true, in an action for dissolution insist that th·~ assets of the partnership be realised by sale of its assets, but \Vhere in satis(ac:tion of the claim of the partner to his share in the value of the G residUe det-ermined on the footing of an actual or notional sale property is allotted, the pro)J'orty so allotted to him cannot be deemed in Jaw to he sold to him. fl 76El
Addanki Naravanappa and Anr. \r. Bhaskara Krislinappa and Ors. [1966] 3 S.C.R. 400, referred to.
C!V!L APPELLATE JURISDICTION : Civil Appeal No. 2163 of 1966.
Appeal from the judgment and order date<l April 15, 1964 of the Madhya Pradesh High Court in Misc. Civil Case No. 22 of 1963.
(1968] 2 S.C.R.
Niren De, Solicitor-Genera/, S. K. Aiyar, R. N. Sachthey and S. P. Nayar, for the appellant.
Naunit Lal and B. P. Singh,· for the respondent.
The Judgment of the Court was delivered by
1968_2_173_176_MAL
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