Law:

Section:

JUDGMENT Chatterjee, J.-This is a reference under section 66(1) of the Indian Income-tax Act, 1922. The assessee is a firm. Till the end of February, 1947, the firm consisted of four partners. Under a deed of partnership' dated February 28, 1947, Messrs. Gillanders Arbuthnot & Co. Ltd. was admitted into the partnership. This company was floated in 1935; but it did little business. The said limited company purchased from the then partners of the assessee-firm certain specified shares and securities of the assessee-firm for a sum of Rs. 75,00,000; on payment of a further sum of Rs. 14,90,000 the said limited company was admitted as a partner of the firm, the shares of the company in the goodwill and in the profits of the firm being 99%. The partners of the firm and the shareholders of the company were the same. The aforesaid sum was agreed to be satisfied by allotment of 64,900 ordinary shares of Rs. 100 each, to the then partners and a further allotment of 25,000 redeemable, cumulative and preferential shares of Rs. 100 each to the said the then partners, vendors. The firm was originally assessed with respect to its income for the year 1947-48 on August 28, 1948. About one year before the said order, the deed of partnership admitting the limited company as a partner was registered with the income-tax department on August 8, 1947. The original assessment proceeding was with respect to the year ending on March 31, 1947. No assessment was made with regard to capital gain, if any, made by the assessee-firm by the said sale to the limited company. Hereafter, the phrase "the limited company" would mean "Gillanders Arbuthnot & Co. Ltd"., and the phrase "assessee-firm" would mean the assessee-firm, Messrs. Gillanders Arbuthnot & Co. Subsequently, a notice under section 34(1)(a) was issued on May 2, 1949, to re-open the said assessment for the year 1947-48, as capital gain to the firm by the sale aforesaid escaped taxation. Before the Income-tax Officer the assessee-firm appeared through its representatives. The assessee-firm also filed a return showing the same income as it was assessed originally and further submitted that the assessee-firm by the said…

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