COMMISSIONER OF INCOME TAX, GUJARAT versus MIS. ELECTRIC CONTROL GEAR MFG. CO.

Citation: [1997] SUPP. 1 S.C.R. 570 · Decided: 08-07-1997 · Supreme Court of India · Bench: S.C. AGRAWAL · Disposal: Case Partly allowed
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Judgment (excerpt)

A 
COMMISSIONER OF INCOME TAX, GUJARAT 
v. 
MIS. ELECTRIC CONTROL GEAR MFG. CO. 
JULY 8, 1997 
• 
B 
[S.C. AGRAWAL AND G.B. PATTANAIK, JJ.] 
Income Tax A::t, 1961-Sections 41, l14--Part11ership concern-Trans-
fer of business as a going concern to a limited company-Liability to tax u/s. 
41(2) and liability to capital gains-Nothing to indicate price att1ibutable to 
C assets like machinery, plant or building out of total consideration 
amoullt-Whether provisions of Section 41(2) applicable-Held, No-Status 
of assessee was that of an association of persons. 
The assessee, a partnership concern entered into an agreement 
whereby it transferred the entire assets of business together with liabilities 
D as a going concern to a limited company for a consideration of Rs. 8 lakhs. 
The Income Tax Officer held that depreciation allowed to the assessee firm 
in respect of the assets transferred by the firm to the company as 
chargeable to tax u/s. 41(2) of the Income Tax Act, 1961' and included 
capital gains after excluding the sum of Rs. 5,000 as basic exemption, in 
E the computation of the total income of the assessee under the head 'Capital 
Gains'. In appeal, the Appellate Assistant Commissioner held that the 
impugned profits were taxable under the provisions of sec. 41(2) of the Act 
but the the capital gains could not be taxed in the hands of registered firm 
u/s. 114 of the Act. The Income Tax Appellate Tribunal remitted the matter 
to the Income Tax Officer for recomputation of the aggregate amount 
F chargeable as profits u/s. 41(2) and as capital gains while holding that the 
correct status of the should be 'registered firm' and not 'association of 
person'. 
In reference, the High Court held that the Tribunal was right in 
G holding that the provisions of Sec. 41 (2) were applicable; that the status 
of the assessee was a registered firm and that of an association of persons 
and that the assessee was entitled to any relief on the basis of the two 
circulars relied on by it. The present appeal had been filed by the Revenue 
against the judgment of the High Court. 
H 
Allowing the appeal partly, this Court 
570 
' 
C.I.T. GUJARAT v. ELECTRIC CONfROL GEAR MFG. CO. (S.C. AGRA WAL, J.] 571 
HELD : In the present case there is nothing to indicate the price A 
attributable to the assets like the machinery, plant or building out of the 
consideration amount of Rs. 8 Lakhs. Merely because a sum of Rs. 3,32,863 
had been allowed as depreciation to the assessee firm, it could not be said 
that was the excess amount between the price and the written down value. 
The High Court, therefore, rightly held that the provisions of Section 41 (2) B 
were not applicable. On the question of status of the assessee, the High 
Court rightly held that the Tribunal was not right in holding that the 
status of the assessee was a regi~tered firm and not that of an association 
of persons. However, on the facts and in the circumstances the High Court 
was not right in holding that the assessee was entitled to relief on the basis C 
of the two circulars relied on by it. (574-A; 573-D; 572-H; 573-A] 
C.I.T. v. Mis. Arlex Manufacturing Co., (1997) Supp. 1 S.C.R. 608, 
relied on. 
Arlex Manufacturing Co. v. C.I.T., (1981) 131 ITR 559 (Guj.), distin- D 
guished. 
CIVIL APPELLATE JURISDICTION : Civil Appeal No. 101 of 
1982. 
From the Judgment and Order dated 29.8.80 of the Gujarat High E 
Court in [T.R. No. 281 of 1975. 
B. Krishna Prasad for the Appellant. 
P.H. Pfil.ekh, Sunita Sharma and R. Deepamala for the Respondent. F 
The Judgment of the Court was delivered by 
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 G 
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 deprecia- H 
572 
SUPREME COURT REPORTS [1997) SUPP.1 S.C.R. 
A tion allowed to the assessee firm amounting to Rs. 3,32,863 in respect of 
the asset_s transferred by the firm to the said company was chargeable· to 
tax under the provision
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