MALABAR FISHERIES CO., CALICUT versus COMMISSIONER OF INCOME TAX, KERALA

Citation: [1980] 1 S.C.R. 696 · Decided: 19-09-1979 · Supreme Court of India · Bench: P.N. BHAGWATI · Disposal: Appeal(s) allowed

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Judgment (excerpt)

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696 
MALABAR FISHERIES qo., CALICUT 
v. 
COMMISSIONER OF INCOME TAX, KERALA 
September 19, 1979 
[P. N. BHAGWATI, V. D. TULZAPURKAR AND R. S. PATHAK, JJ.] 
Firnz 
dissolred-Assets 
distributed 
among 
partner~Distribution-lf 
amounts to transfer of assets within the mecining of expression "otlierlvise 
transferred" in S. 34(3) (b) Income Tax Act 1961. 
Words and PhraSes-'Trarufer'-Meaning of-Distribution of assets c1nong 
partners-U7hether amounts to transfer-Income Tax Act 1961, S. 2(4i). 
The appellant, a dissolved firm as originally constituted on April 1, 
1959, 
consisted of four partners: and carried on different business in different names 
and styles. The firm was dissolved on March 31, 1963 and under the deed of 
dissolution executed by and between the partners, the first business concern was 
taken over by one of the partners, the remaining concerns by two of the other 
partners and the fourth partner received, a sum of money in lieu of his respec-
tive shares in the assets of all the businesses of the firm. 
During the four 
assessment years 1960-61 to 1963-64 the firm had installed various items of 
machinery in respect of which it received development rebate in its respective 
tax assessments under s. 33 of the Acr. 
On dissolution of the firm on March 31, 1963, the Income-tax Officer took 
the view that s. 34(3)(b) of the Aot applied on the ground that there was a 
sale or transfer of the machinery by the firm within the period mentioned in 
that section and accordingly acting under s. 155(5) of the Act he withdrew the 
development rebate allowed to the firm for the said 
assessment 
years, 
the 
amending orders being passed against the dissolved firm. 
The appeals preferred by the dissolved firm through one of its erstwhile 
partners, were dismissed by the Appellate Assistant Commissioner who held 
F ·thats. 155(5) was rightly resorted to since s. 34(3)(b) of the Act applied to 
the case. 
G 
n 
The Income-tax Appellate Tribunal allowed the appeals by the dissolved 
firm holding that there was no question of any sale or transfer within the 
meaning of s. 34(3)(b) in a transaction involving the adjustment of the rights 
of the partners of a dissolved firm, but at the instance of the Revenue (Respon-
dent) referred two questions of law to the iHigh Court viz. (a) whether there 
was only an adjustment of the mutual rights of the partners and the provisions 
of s. 34(3) were not applicable and (b) whether there was a transfer of assets 
within the meaning of the words 'otherwise transferred' occurring ins. 34(3) (b) 
of the Act .. 
The High Court .answered the second question in the affirmative and against 
the assessee holding that a dissolution of-a firm amounted to extinguishment 
of the rights of the firm in the assets of the partnership and accordingly was a 
transfer within the meaning of s. 2(47) of the Act and that, therefore the 
provisions ,of s. 34(3)(b) applied to the case. 
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MALABAR FISHERIES V. C.I.T. 
697 
Allowing the appeals to this Court, 
l-JELD : 1. There is no transfer of assets involved even in the sense of any 
.... ·xtinguishn1cnt of the firm's rights in the partnership assets when distribution 
takes place upon dissolution. [709 F] 
2. Section 34(3) (b) of the Act is not applicable to the case and the view 
of the Tribunal is upheld. 
[710 El 
3. 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· partner 
ship and, therefore, the consequence of the distribution, division or allotment of 
assets to the partners which flows upon dissolution after discharge of liabilities 
1.is nothing but a mutual adjustment of rights between the partners and there is 
no question of any extinguishment of the firm's rights in the partnership 2.ssets 
:a.mounting to a transfer of assets within the meaning of s. 2(47) of the Act. 
[709 EJ 
4. On a plain reading of s. 34(3)(b) it will appear clear that before that 
provision can be invoked or applied three conditions are required to be satisfied : 
'(a) that the· ship, machinery or plant must have been sold 
or otherwise 
transferred, (b) that such a sale or transfer must be by the assessee and 
(c) 
, that the same must be before the expiry of eight years from the end of the 
previous year in whicbJ it was acquired or installed. It is only when these three 
conditions are satisfied that any allowance made under s. 3 3 shall be deemed

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