Law: Income Tax Act, 1961

Section: 41,256

Income tax---Profits chargeable to tax Firm Dissolution Some vehicles given to retiring partners in liquidation of sum which they were to get from firm Difference between written down value of vehicles and amount which partners were to get from firm cannot be taxed. Where the assessee firm on retirement of some partners gave them vehicles in liquidation of certain sum which the retiring partners were to get from the assessee firm, the difference between the amount which the retiring partners were to get from the firm and the written .down value of the vehicles could not be taxed as profits under section 41 (2), Indian Income-tax Act, 1961. Case law discussed. It is not correct to say that upon dissolution the rights of the firm in its assets are extinguished or transferred to the partners. The distribution, division or allotment of assets to the partners upon dissolution is a mutual adjustment of their rights and not a transfer. The same principle must apply when one or more partners retire and there is no complete dissolution of the firm. The rights of a retiring partner are to be worked out on the same footing as if the firm stands dissolved. The retirement of a partner so far as he is concerned is dissolution of the firm. He may even insist to receive his appropriate share of the assets including the good will by an order of sale, The court will, however, be reluctant to order a sale except in exceptional circumstances and will direct a payment based upon the value of the retiring partner's share at the date of retirement ; when a partner retires, there is a mutual adjustment of rights between him and the remaining partners and there is no question of sale or transfer by the firm in favour of the retiring partner even if some asset is allocated to the retir¬ing partner in satisfaction of the value of his share which be ought to receive. This is so because, the partnership property is not held by the firm which is not a legal entity. 1983 T L R 480; 1983 M P L J 200; (1983) 140 I T R 398 (Madh Pra) ; 1982 T L R N O C 69 (Guj) ; 129 I T R 688 ; 1980 T L R 109 ; 120 I T R 49 ;AIR 1980 S.C. 176 ; 1981 T L R 691 ; 91 I T R 393 ; 1971 T L R 1547 : 79 1 T R 594 ; A…

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