COMMISSIONER OF INCOME-TAX, MADHYA PRADESH vs. DEWAS CINE CORPORATION

CIVIL APPEAL No. 2163/1966Supreme Court[1968] 2 S.C.R. 17308 November 1967Bench: 3 JudgesAuthor: J.C. SHAH, V. RAMASWAMI, VISHISHTHA BHARGAVA COMMISSIONER OF INCOME4 pages
AI SummaryDismissed

What were the facts?

The assessee, Dewas Cine Corporation, was a partnership formed on March 1, 1947, by S. G. Sanghi and Hari Prasad. Each partner contributed their respective cinema theatre to the partnership. For assessment years 1950-51 to 1952-53, depreciation aggregating to Rs. 44,380/- was allowed on these theatres. The partnership dissolved on September 30, 1951, with an agreement to return the theatres to their original owners. The partnership books recorded the theatres being taken over on October 1, 1951, at original price less equally divided depreciation. The Income-tax Officer treated the respondent as a registered firm for assessment year 1952-53. The Appellate Tribunal held that the return of theatres constituted a transfer and the depreciation adjustment amounted to recoupment, attracting the second proviso to Section 10(2)(vii) of the Income-tax Act, 1922. The High Court ruled in favour of the assessee.

What did the Supreme Court hold?

The Supreme Court held that the expressions 'made' and 'sold' in Section 10(2)(vii) of the Income-tax Act, 1922, are to be understood in their ordinary meaning. A 'sale' is a transfer of property for a price. The adjustment of the rights of partners in a dissolved firm, where assets are returned to their original owners in satisfaction of their claims to their share in the surplus, does not amount to a transfer for a price. While a partner may insist on the sale of partnership assets, if property is allotted in satisfaction of a partner's claim to his share in the value of the residue (determined on the footing of an actual or notional sale), the property so allotted cannot be deemed in law to have been sold to him. Therefore, the second proviso to Section 10(2)(vii) was not applicable. The High Court was correct in deciding the issue in favour of the assessee. The appeal was dismissed.

What were the issues?

1. Whether the return of the two cinema theatres to their original owners upon dissolution of the partnership constituted a 'sale' for the purpose of the second proviso to Section 10(2)(vii) of the Income-tax Act, 1922, making the recouped depreciation taxable. Assessee's contention: The return of assets to partners upon dissolution is an adjustment of rights and not a sale, as it is not a transfer for a price. The High Court's decision in favour of the assessee was based on this interpretation. Revenue's contention: The expressions 'made' and 'sold' in Section 10(2)(vii) should be interpreted in their ordinary meaning. The Revenue argued that when partnership assets are allotted to partners in satisfaction of their claims to their share in the residue, it should be deemed a notional sale of the property to the partner in consideration of the money value of his share. The Revenue relied on Lindley on Partnership and the Supreme Court decision in Addanki Narayanappa and another v. Bhaskara Krishnappa and others.

Which sections of the Income-tax Act were involved?

Section 10(2)(vii)

AI-generated summary — verify with the full judgment below

A COMMISSIONER OF INCOME-TAX, MADHYA PRADESH B c D E F G H v. DEWAS CINE CORPORATION November 8, 1967 {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 u1hether sale for purpose oj s. 10(2) (vii), 2nd proviso. 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 be returned to their original o\vners.

Jn the books of account main· tained by the partnership, the assets

The order continues below.

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