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PETITIONER: COMMISSIONER OF INCOME TAX, GUJARAT

       Vs.

RESPONDENT: M/S. ELECTRIC CONTROL GEAR MFG.CO.

DATE OF JUDGMENT:       08/07/1997

BENCH: S.C. AGARWAL, G.B. PATTANAIK.

ACT:

HEADNOTE:

JUDGMENT:                       J U D G M E N T                  THE 8TH DAY OF JULY, 1997 Present:                Hon’ble Mr.Justice S.C.Agrawal                Hon’ble Mr.Justice G.B.Pattanaik B.Krishana Prasad, Adv. for the appellant P.H.Parekh, Mrs.Sunita  Sharma and Ms.R.Deepamala, Advs. for the Respondent The following Judgment of the Court was delivered: S.C. AGRAWAL, J. :      This appeal  by certificate  is  directed  against  the judgment of  the Gujarat  High Court  dated August 29, 1980. The matter  relates to  the  assessment  year  1967-68.  The assessee is a partnership concern consisting of 13 partners. On March  31, 1966  it entered  into an agreement whereby it transferred the  entire assets  of  business  together  with liabilities as  a going concern to a limited company, styled M/s Electric  Control Gear  Pvt. Ltd. for a consideration of Rs. 8  lakhs. The  erstwhile partners  of the  assessee firm were allotted  the shares  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 (hereinafter referred  to as  ‘the Act’). He also brought to tax  capital   gains  of   Rs.  8   lakhs,  being   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 impugned profits were taxable under  the provisions  of Section 41 (2) of the Act. As  regards   capital   gains,   the   Appellate   Assistant Commissioner, however, held that the capital gains could not be taxed  in the  hands of  the registered  firm  under  the provisions of  section 114 of the Act. Appeals were filed by the assesses  well as  the Revenue against the said judgment of  the   Appellate  Assistant  Commissioner.  The  assessee challenged the  liability to tax under Section 41 (2) of the

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Act as  well as  the liability  to capital  gains while  the Revenue challenged  the decision  of the Appellate Assistant Commissioner about  recomputation of  profits under  Section 41(2) as  well as  non-levy of capital gains in the hands of the registered  firm under  the provisions of Section 114 of the Act.  The Income  Tax Appellate  Tribunal  remitted  the matter to  the Income  Tax Officer  for recomputation 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   Tribunal  referred   the following questions for the opinion of the High Court:      1    Whether, on  the facts  and in      the circumstances  of the case, the      Tribunal was  right in holding that      the principle  of mutuality was not      applicable?      2    Whether, on  the facts  and in      the circumstances  of the case, the      Tribunal was  right in holding that      the provisions  of Section  41  (2)      were applicable?      3    Wether, on  the facts  and  in      the circumstances  of the case, the      Tribunal was  right in holding that      the  assessee  has  earned  capital      gains,  which  was  liable  to  tax      under the  provisions of Section 45      of the Income Tax Act 1961?      4    Whether, on  the facts  and in      the circumstances  of the case, the      Tribunal was  right in holding that      the status  of the  assessee was  a      registered firm  and not that of an      association of persons?      5    Whether, on  the facts  and in      the circumstances  of the case, the      Tribunal rightly rejected the claim      of  the   assessee   that   surplus      realised  by  it  on  sale  to  the      limited company  was not chargeable      to tax, being realisation sale?      6    Whether on  the facts  and  in      the circumstances of the case , the      Tribunal was  right in holding that      Section  34  (2)  will  apply  and,      therefore,  the   assessee  in  not      entitled to depreciation?      7    Whether on  the facts  and  in      the circumstance  of the  case, the      Tribunal was  right in holding that      the registered  firm cam  be liable      to capital gains under S.114 of the      Income Tax Act, 1961?      8    Whether the Tribunal was right      in holding  that the  assessee  was      not entitled  to any  relief on the      basis of  the two  circulars relied      on by it?      Questions Nos.  1, 3  and 5  were answered  by the High Court in  affirmative, i.e.,  in favour  of the  Revenue and against the  assessee,  questions  Nos.  2,  4  and  8  were answered in  the negative,  i.e., against the Revenue and in favour of  the assessee,  question No.  6 was not pressed by the learned  counsel for  the assesses and question no 7 was

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not answered  since it  did not survive in view of answer to question No  4. The present appeal relates to questions Nos. 2, 4 and 5 which have been answered against the Revenue.      The High  Court has  placed reliance on its judgment in Artex Manufacturing  Co.  Vs  Commissioner  of  Income  Tax, Gujarat-II, [1981]  131 ITR  559. The  said judgment  of the High Court  has  been  considered  by  us  in  our  judgment pronounced  today   in  C.A.No.   2276  [NT]  of  1981,  the Commissioner of Income Tax vs. Artex Manufacturing Co,.