Law: Income Tax Act, 1961

Section: 41(2)

(a) Income-tax------Business---Business income---Balancing charge---Profits chargeable to tax under S.41(2), Indian Income Tax Act, 1961---Sale of entire business by firm to company formed by erstwhile partners---Excess of sale price over written down value of assets---No evidence to indicate price of machinery, plant or building---Depreciation allowed to assessee-firm was not assessable under S.41(2)---Indian Income Tax Act, 1961, S.41(2). (b) Income-tax--- ----Assessment---Status of assessee---Sale of entire business by firm to company formed by erstwhile partners---Assessment to be made on body of individuals. The assessee was a partnership concern consisting of 13 partners. On March 31, 1966, it entered into an agreement whereby it transferred the entire assets of the business together with the liabilities as a going concern to a limited company, for a consideration of Rs.8 lakhs. The erstwhile partners of the assessee-firm were allotted shares in the company of the same value in their profit sharing proportion. The Income-tax Officer held that depreciation allowed to the assessee-firm amounting to Rs.3,32,863 in respect of the assets transferred by the firm to the said company, was chargeable to tax under the provisions of section 41(2) of the Income Tax Act, 1961. He also brought to tax capital gains of Rs.8 lakhs, being the purchase consideration received by the assessee and after excluding the sum of Rs.5,000 as basic exemption, included the sum of Rs.7,95,000 in the computation of the total income of the assessee under the head "Capital gains". The Appellate Assistant Commissioner held that the profits in question were taxable under the provisions of section 41(2). The Tribunal remitted the matter to the Income-tax Officer for re-computation of the aggregate amount chargeable as profits under section 41(2) and as capital gains. The Tribunal held that the correct status of the assessee should be "registered firm" and not "association of persons". The High Court held that section 41(2) was not applicable, that the assessee was not assessable as a registered firm, and that the assessee was entitled to the benefit of the two circulars relied on by it: On…

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