Law:

Section:

Section 41(2) of the Income-tax Act, 1961 - Balancing charge - Assessment year 1965-66 - Whether when a person hands over a business assets to a partnership firm, of which he is a partner, he cannot be said to have sold same to partnership firm as firm is not a legal entity apart from partners who constitute it - Held, yes - Whether, therefore, section 41(2) can not be invoked in such a case - Held, yes FACTS The assessee was running X-Ray clinic. Depreciation was allowed to him on the X-Ray machine until written down value became nil. In the assessment years in question, he took in his son as a partner and continued to carry on the business in the same name and style. The assessee valued the X-Ray machine at Rs. 20 thousand and in the books of account of the firm a credit was given to him of said amount in his capital account. In other words, he handed over the X-Ray machine to the firm after valuing it at Rs. 20 thousand. The ITO invoking section 41(2) brought to tax said amount. Revision petition filed there against was dismissed. On writ petition HELD The transaction involved in the instant case amounted to neither sale nor exchange. When a person hands over a business asset to a partnership firm, of which he is a partner, he cannot be said to have sold the same to the partnership firm for the simple reason that the firm is not a legal entity apart from the partners who constitute it. He himself being a partner in the firm, it cannot be said that the assessee sold the X-Ray machine to himself. The same would be true about an exchange. For a transaction of exchange to take place, there must be two parties. Here there was no second party. Thus, there being neither sale nor exchange, section 41(2) could not be applicable. The order passed by the ITO and confirmed by the Commissioner could not, therefore, be sustained. Note: Decision in favour of assessee. CASE REFERRED TO CIT v. Hind construction Ltd. [1972] 83 ITR 211 (SC). JUDGMENT This is a petition under article 226 of the Constitution. In the previous year, relevant to the assessment year 1954-55, the petitioner purchased an X-Ray machine for Rs. 32,000. He started an X-Ray clinic in the name of M.S.…

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