Law:

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Section 41(2) of the Income-tax Act, 1961 - Balancing charge - Assessment year 1980-81 - Upon dissolution of firm, certain assets of firm were allotted to assessee (partner of firm) on which depreciation was claimed by firm, prior to its dissolution - Out of those assets assessee sold some assets - Whether sale of properties of a dissolved firm would not attract tax on amount of depreciation enjoyed by said firm prior to its dissolution, and it could not be brought to tax in hands of partner - Held, yes Circulars and notification - Circular No. 762, dated 18-2-1998 FACTS The assessee was a partner of a firm, which was dissolved by a dissolution deed dated 26-12-1978 with effect from 15-12-1978. Upon said dissolution, certain assets of the erstwhile firm were allotted to the assessee on which depreciation was claimed by the firm prior to its dissolution. Out of those assets, assessee sold some machines at Rs. 7,03,107 and invested the sale proceeds in specified/assets under section 54E and claimed exemption from payment of tax on long-term capital gains amounting to Rs. 3,79,170, being the difference of sale price less cost price. The Assessing Officer while completing the assessment, taxed him on a sum of Rs. 2,13,705, being the difference of cost price less written down value, treating it as profits earned by the assessee under section 41(2). On appeal, the Commissioner (Appeals) confirmed the impugned order. On further appeal, the Tribunal also upheld the same. On reference : HELD Section 41 (unamended) enacts adjustment provisions whereby the revenue takes back what it has already allowed if certain conditions come to pass and the assessee recoups something for which an allowance had already been made and deducted from his business income. Each of the six sub-sections of section 41 enumerate a particular circumstance and provide that if such circumstance comes to a pass, certain income would be made taxable as deemed income. The section further fixes the year in which the recoupment, etc., is to be taxed. The year, generally, is that in which the recoupment amount becomes payable or the alternative benefit, etc., comes to be obtained. The provisions of…

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