Law:

Section:

JUDGMENT Masud, J.-The point to be decided in this reference, under section 66(2) of the Indian Income-tax Act, 1922, is whether a sum of Rs. 4,00,000 should be included in the total income of the assessee. The Income-tax Officer included the said sum, but the Appellate Assistant Commissioner and the Appellate Tribunal excluded the said amount and decided against the revenue. The facts may be briefly stated as follows : There was a joint venture run by Messrs. Bhagwanraj Patel & Co. and Messrs. Premier Suppliers Co. Ltd. for purchase and sale of machinery from the disposal department of Assam and each one of them was to receive half share in the joint venture. On the 22nd October, 1949, Messrs. Premier Suppliers Co. Ltd. sold their interest in the venture to the assessee-company and Messrs. Bhagwanraj Patel & Co. sold their interest to Patel Engineering Co., as a result whereof the assessee-company and Messrs. Patel Engineering Co. became interested in the said venture. The stock of the machinery, remaining unsold, was thereafter divided between the assessee-company and Patel Engineering Co. The assessee-company received machinery valued at Rs. 2,06,372 in its share. In the assessee-company's account books for 1949-50, the value of the machinery was written up by Rs. 4,00,000, an equivalent sum having been credited to a reserve capital account. During this accounting period, the assessee and Patel Engineering Co. formed a partnership firm known as "Hind Patel Co". in which each had an 8 annas share and the assessee transferred this stock of machinery, at the book value of Rs. 6,06,372, to the new firm. Similarly, Messrs. Patel Engineering Co. also transferred their share of machinery, which they had received on the dissolution of joint venture, to the new firm, after similarly appreciating the value of the machinery. The machinery thus valued at Rs. 6,06,372 by each of the partners remained the investment of each one of them in their partnership firm, Messrs. Hind Patel Co. On 1st April, 1950, counter-debit and credit entries were made in the assessee's and the firm's books, respectively. The firm credited the capital account of the assessee with Rs.…

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