Our firm dissolved and the machinery went to the partners. The officer says that is a transfer and wants to withdraw the development rebate. Is he right?
No. The Supreme Court held that the distribution of assets among partners on the dissolution of a firm is not a transfer, even on the extended definition in section 2(47), so section 34(3)(b) was not attracted and the development rebate could not be withdrawn under section 155(5). A firm is not a distinct legal entity and has no rights of its own in the partnership assets, so there is nothing belonging to the firm to be extinguished on dissolution. Independently, the distribution is not made by the dissolved firm to any person, so the second condition of section 34(3)(b) fails too. The appeals were allowed.
Decided by the Supreme Court (Supreme Court of India; V.D. Tulzapurkar, P.N. Bhagwati and R.S. Pathak JJ; judgment delivered by Tulzapurkar J) on 1979-09-19, reported as 1980 AIR 176; 1980 SCR (1) 696; 1979 (4) SCC 766; (1979) 120 ITR 49; 1980 TAX. L. R. 109. It bears on section 34(3)(b), section 2(47), section 155(5) of the Income Tax Act 1961, in Capital Gains and Deductions & Disallowances matters.
This is the authority that stops the department turning the wide words of section 2(47), and in particular "extinguishment of any rights therein", into a transfer wherever a firm ends. It carries forward Dewas Cine Corporation and Bankey Lal Vaidya from the 1922 Act into the 1961 Act by attacking the premise: there is no firm-level right in the assets capable of being extinguished, because the assets belong jointly to the partners throughout. The second ground is just as useful, and often overlooked: dissolution necessarily precedes distribution, so whatever happens afterwards is not done by the assessee firm. Anyone facing a claw-back of an allowance on dissolution starts here.
Binding on every court and authority in India.
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The appellant was a dissolved firm, represented by one of its erstwhile partners. As constituted on 1 April 1959 it had four partners and carried on six businesses under six different names in Kerala and Andhra Pradesh. It was dissolved on 31 March 1963. Under the deed of dissolution one partner took over the first concern, two others took the remaining five, and the fourth partner received Rs. 3,81,082 in lieu of his shares in the assets. During assessment years 1960-61 to 1963-64 the firm had installed machinery on which it had been allowed development rebate under section 33. On dissolution the Income-tax Officer took the view that there had been a sale or transfer of the machinery within the period in section 34(3)(b), and acting under section 155(5) passed amending orders on the dissolved firm withdrawing the rebate. The Appellate Assistant Commissioner upheld him. The Tribunal allowed the firm's appeals following Dewas Cine Corporation. The Kerala High Court answered the reference against the assessee, and the firm appealed by special leave.
The appeals were allowed with costs and the Tribunal's view was upheld. Section 34(3)(b) was not applicable. The Court held that a partnership firm under the Indian Partnership Act, 1932 is not a distinct legal entity apart from its partners and has no separate rights of its own in the partnership assets; what is called the firm's property is property in which all the partners have a joint or common interest. It follows that on dissolution there is no extinguishment of any right of the firm in the assets, and so no transfer within section 2(47). The Court gave a second and independent reason: section 34(3)(b) requires the sale or transfer to be by the assessee to a person, and since dissolution necessarily precedes the making up of accounts, discharge of debts and distribution, the distribution is not done by the dissolved firm at all.
The Court began with the three conditions in section 34(3)(b) and noted that section 2(47) gives "transfer" an artificially extended meaning taking in relinquishment and extinguishment of rights. It then examined the two 1922 Act decisions the Tribunal had relied on. Dewas Cine Corporation held that returning the theatres to their original owners on dissolution was an adjustment of the partners' rights and not a sale, so no balancing charge arose against the firm. Bankey Lal Vaidya held that paying a partner the money value of his share on dissolution was neither sale nor exchange nor transfer. Both were decided when "sale" and "transfer" were undefined, so the Court went on to test the Revenue's argument that the 1961 definition changed the position. That argument assumed the firm had rights in the assets which could be extinguished. Drawing on Lindley on Partnership, the Privy Council in Bhagwanji Morarji Goculdas and this Court's decision in Addanki Narayanappa, the Court held that a firm has no legal existence separate from the partners; the partners are interested in the whole of the partnership property, and a partner's share is his proportion of the assets after realisation and payment of debts. The premise of the Revenue's argument therefore failed. The Court declined to express any opinion on the Karnataka High Court's contrary view in M.A.J. Vasanaik, which dealt with the converse case of assets brought into a firm.
The firm as such has no separate rights of its own in the partnership assets but it is the partners who own jointly in common the assets of the partnership.
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Handle my notice → Ask a CA on WhatsAppNo. The Supreme Court held that the distribution of assets among partners on the dissolution of a firm is not a transfer, even on the extended definition in section 2(47), so section 34(3)(b) was not attracted and the development rebate could not be withdrawn under section 155(5). A firm is not a distinct legal entity and has no rights of its own in the partnership assets, so there is nothing belonging to the firm to be extinguished on dissolution. Independently, the distribution is not made by the dissolved firm to any person, so the second condition of section 34(3)(b) fails too. The appeals were allowed. This was decided by the Supreme Court (Supreme Court of India; V.D. Tulzapurkar, P.N. Bhagwati and R.S. Pathak JJ; judgment delivered by Tulzapurkar J) and bears on section 34(3)(b), section 2(47), section 155(5) of the Income Tax Act 1961. It is reported as 1980 AIR 176; 1980 SCR (1) 696; 1979 (4) SCC 766; (1979) 120 ITR 49; 1980 TAX. L. R. 109. This is the authority that stops the department turning the wide words of section 2(47), and in particular "extinguishment of any rights therein", into a transfer wherever a firm ends. It carries forward Dewas Cine Corporation and Bankey Lal Vaidya from the 1922 Act into the 1961 Act by attacking the premise: there is no firm-level right in the assets capable of being extinguished, because the assets belong jointly to the partners throughout. The second ground is just as useful, and often overlooked: dissolution necessarily precedes distribution, so whatever happens afterwards is not done by the assessee firm. Anyone facing a claw-back of an allowance on dissolution starts here. If it applies to you, the first step is this: Set out the sequence in the dissolution deed: dissolution, then accounts, then discharge of liabilities, then distribution, and argue the distribution is not an act of the firm.
The appellant was a dissolved firm, represented by one of its erstwhile partners. As constituted on 1 April 1959 it had four partners and carried on six businesses under six different names in Kerala and Andhra Pradesh. It was dissolved on 31 March 1963. Under the deed of dissolution one partner took over the first concern, two others took the remaining five, and the fourth partner received Rs. 3,81,082 in lieu of his shares in the assets. During assessment years 1960-61 to 1963-64 the firm had installed machinery on which it had been allowed development rebate under section 33. On dissolution the Income-tax Officer took the view that there had been a sale or transfer of the machinery within the period in section 34(3)(b), and acting under section 155(5) passed amending orders on the dissolved firm withdrawing the rebate. The Appellate Assistant Commissioner upheld him. The Tribunal allowed the firm's appeals following Dewas Cine Corporation. The Kerala High Court answered the reference against the assessee, and the firm appealed by special leave. The matter was decided on 1979-09-19 by the Supreme Court (Supreme Court of India; V.D. Tulzapurkar, P.N. Bhagwati and R.S. Pathak JJ; judgment delivered by Tulzapurkar J). On those facts the Supreme Court held as follows. The appeals were allowed with costs and the Tribunal's view was upheld. Section 34(3)(b) was not applicable. The Court held that a partnership firm under the Indian Partnership Act, 1932 is not a distinct legal entity apart from its partners and has no separate rights of its own in the partnership assets; what is called the firm's property is property in which all the partners have a joint or common interest. It follows that on dissolution there is no extinguishment of any right of the firm in the assets, and so no transfer within section 2(47). The Court gave a second and independent reason: section 34(3)(b) requires the sale or transfer to be by the assessee to a person, and since dissolution necessarily precedes the making up of accounts, discharge of debts and distribution, the distribution is not done by the dissolved firm at all.
The Court began with the three conditions in section 34(3)(b) and noted that section 2(47) gives "transfer" an artificially extended meaning taking in relinquishment and extinguishment of rights. It then examined the two 1922 Act decisions the Tribunal had relied on. Dewas Cine Corporation held that returning the theatres to their original owners on dissolution was an adjustment of the partners' rights and not a sale, so no balancing charge arose against the firm. Bankey Lal Vaidya held that paying a partner the money value of his share on dissolution was neither sale nor exchange nor transfer. Both were decided when "sale" and "transfer" were undefined, so the Court went on to test the Revenue's argument that the 1961 definition changed the position. That argument assumed the firm had rights in the assets which could be extinguished. Drawing on Lindley on Partnership, the Privy Council in Bhagwanji Morarji Goculdas and this Court's decision in Addanki Narayanappa, the Court held that a firm has no legal existence separate from the partners; the partners are interested in the whole of the partnership property, and a partner's share is his proportion of the assets after realisation and payment of debts. The premise of the Revenue's argument therefore failed. The Court declined to express any opinion on the Karnataka High Court's contrary view in M.A.J. Vasanaik, which dealt with the converse case of assets brought into a firm. In the words reproduced by the source cited on this page: "The firm as such has no separate rights of its own in the partnership assets but it is the partners who own jointly in common the assets of the partnership."
It was decided by the Supreme Court on 1979-09-19 and is reported as 1980 AIR 176; 1980 SCR (1) 696; 1979 (4) SCC 766; (1979) 120 ITR 49; 1980 TAX. L. R. 109. Binding on every court and authority in India. A Supreme Court decision binds every assessing officer, every Commissioner (Appeals), every bench of the Income Tax Appellate Tribunal and every High Court in India. An officer who declines to follow it is acting contrary to law, and that refusal is itself a ground of appeal. On section 34(3)(b), section 2(47), section 155(5), the practical question is whether the facts of your own notice match the facts of this case closely enough for the same rule to apply.
It helps the taxpayer. The appeals were allowed with costs and the Tribunal's view was upheld. Section 34(3)(b) was not applicable. The Court held that a partnership firm under the Indian Partnership Act, 1932 is not a distinct legal entity apart from its partners and has no separate rights of its own in the partnership assets; what is called the firm's property is property in which all the partners have a joint or common interest. It follows that on dissolution there is no extinguishment of any right of the firm in the assets, and so no transfer within section 2(47). The Court gave a second and independent reason: section 34(3)(b) requires the sale or transfer to be by the assessee to a person, and since dissolution necessarily precedes the making up of accounts, discharge of debts and distribution, the distribution is not done by the dissolved firm at all. It arises in Capital Gains and Deductions & Disallowances matters, on section 34(3)(b), section 2(47), section 155(5) of the Income Tax Act 1961, and was decided by Supreme Court of India; V.D. Tulzapurkar, P.N. Bhagwati and R.S. Pathak JJ; judgment delivered by Tulzapurkar J. Before relying on it, read the source linked on this page and check whether it has since been distinguished, overruled or overtaken by an amendment to the Income Tax Act. In practice the steps that follow from it are these. Meet the section 2(47) argument head on by showing the firm held no separate right in the asset that could be extinguished. Check the time limits in the section the officer is using, and whether the asset in question was even covered by the allowance. Do not assume the converse case is covered: the Court expressly left open whether bringing an individual asset into a firm is a transfer.
Validity check could not be completed. Not checked against later law. The harvested page's citator strip shows a later Supreme Court decision referring to it (1986 SC 368), but I had no source beyond the judgment itself and so cannot say what later amendments dealing with distribution of assets on dissolution have done to the practical effect of this holding. No source could be cited for that finding. Checking whether an authority still stands matters as much as knowing what it held: a decision may be overruled on one point and survive on another, or the provision it interprets may have been amended since. Read the source and the editor's note on this page before relying on it in a reply to an Assessing Officer or in an appeal.
The batch line listed sections 45, 45(4), 47 and 47(ii); the judgment deals with none of them. It is confined to the withdrawal of development rebate under section 34(3)(b) read with section 155(5) and to the meaning of transfer in section 2(47). Whether the later insertion of a charge on distribution of capital assets on dissolution changes the outcome is outside what this judgment can tell you. This library shows the verification state of every entry openly. This entry has not yet been read in full by a chartered accountant. The summary reflects the sources listed on this page. Read the source before you rely on it in a reply to an Assessing Officer or in an appeal before the Commissioner (Appeals) or the Income Tax Appellate Tribunal.
The appeals were allowed with costs and the Tribunal's view was upheld. Section 34(3)(b) was not applicable. The Court held that a partnership firm under the Indian Partnership Act, 1932 is not a distinct legal entity apart from its partners and has no separate rights of its own in the partnership assets; what is called the firm's property is property in which all the partners have a joint or common interest. It follows that on dissolution there is no extinguishment of any right of the firm in the assets, and so no transfer within section 2(47). The Court gave a second and independent reason: section 34(3)(b) requires the sale or transfer to be by the assessee to a person, and since dissolution necessarily precedes the making up of accounts, discharge of debts and distribution, the distribution is not done by the dissolved firm at all.
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