Commissioner of Income Tax vs Sree Kaliswari Colour Match Works

Ismail, J.—The Income Tax Appellate Tribunal, Madras Bench, u/s 256(1) of the Income Tax Act, 1961 (hereinafter referred to as ""the

Act""), at the instance of the Commissioner of Income Tax, Madras-I, has referred the following question for the opinion of this court:

Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in law in holding that the passing of the order u/s

155(5) of the Income Tax Act, 1961, withdrawing the development rebate on polygraph off-set machine for the assessment year 1962-63, was

not justified ?

The facts that are necessary for understanding the context in which the question has been raised as gatherable from the agreed statement of the

case are as follows :

A. Shanmugha Nadar, A. Nataraja Nadar and A.M.A. Arunachala Nadar were carrying on business in partnership at Sivakasi under the name

and style of Sri Kaliswari Colour Match Works dealing in three items of business, namely, (a) safety matches, (b) fire-works, and (c) printing and

lithography. Even the Income Tax Officer who passed the order u/s 155(5) held that the three persons were representing their respective Hindu

undivided families consisting of themselves and their sons in the said firm and the Tribunal also in its order proceeded only on that basis. In the

assessment year 1962-63, a polygraph off-set machine was installed in the litho press. The firm was allowed development rebate on its cost. There

was a partition in the families of Shanmugha Nadar and Arunachala Nadar and it was decided to admit the divided sons into the partnership. Due

to excise regulations, the parties did not want to effect any change in the constitution of ""Sri Kaliswari Colour Match Works"" notwithstanding the

partition in the families of two of them. Therefore, they decided that the business hitherto carried on should be split up into two units, namely, (a)

manufacture of matches and colour matches and (b) manufacture of fire-works, printing and lithography. The manufacture of matches and colour

matches was continued to be carried on under the name and style of ""Kaliswari Colour Match Works"", with the three partners, Shanmugha Nadar,

Nataraja Nadar and Arunachala Nadar. A partnership deed dated April 1, 1962, was also executed for the purpose and a copy of the said

partnership deed has been annexed to the statement of the case. For manufacturing fire-works, printing and lithography, another partnership under

the name and style of Raja Litho Works was constituted by a deed dated April 1, 1962, consisting of the three original partners and the four

divided sons of partner No. 1 and one divided son of partner No. 3. A copy of this partnership deed is also annexed to the statement of the case.

Thus, the litho printing press business which was originally carried on by the three partners under the name and style of ""Sri Kaliswari Colour

Match Works"" came to be carried on by the reconstituted partnership of eight partners under the name and style of ""Raja Litho Works"".

According to the income tax Officer, this involved transfer of the business from one partnership unit to another partnership unit and he accordingly

passed an order u/s 155(5) of the Act withdrawing the development rebate granted to the original firm ""Sri Kaliswari Colour Match Works"".

On appeal, the Appellate Assistant Commissioner upheld the order passed by the Income Tax Officer u/s 155(5). On further appeal to the

Tribunal, it was contended by the assessee that, in order to enable the sons of the partners to enter into the partnership business, the original

partnership was reconstituted by admitting the four divided sons and one divided son of the original partners, Shanmugha Nadar and Arunachala

Nadar respectively, and thus it constituted a readjustment made by the three original partners in order to enable them to carry on the business with

their sons as partners and there was no transfer of assets or machinery by the assessee to another person so as to justify the passing of the order

u/s 155(5) of the Income Tax Act, 1961.

However, it was contended on behalf of the revenue (i) that the litho printing business originally carried on by ""Sri Kaliswari Colour Match

Works"" is now being run by ""Raja Litho Works"", which is altogether a different unit of assessment and there is, therefore, a transfer of assets within

the meaning of Section 155(5), by one unit to another unit, and (ii) that in view of the definition of ""person"" u/s 2(31), it is clear that the original

assessee has transferred the machinery in the litho press to ""another person"" and the withdrawal of the development rebate in these circumstances

is justified.

After considering the rival contentions put forward by the parties, the Tribunal held, (i) that the word ""transfer"", occurring as it is in juxtaposition

with the word ""sale"" in Section 155(5), it has to be construed in a strict sense of property passing from one to another, and since the reconstituted

firm is not a distinct separate legal entity from that of the original partnership, there is no passing of the property from one to another legal entity,

and (ii) that a partnership of the three partners has been transformed into a partnership of eight partners as a result of reconstitution and admission

of the sons of the original partners and no transfer is involved in this process and the order of withdrawal could not be supported. In view of this

conclusion of the Tribunal, it allowed the appeal preferred by the assessee. It is the correctness of this conclusion of the Tribunal that is challenged

in the form of the question referred to this court extracted already.

There are three decisions of this court dealing with the question as to what constitutes sale or transfer as contemplated by the second proviso to

Section 10(2)(vii) of the Indian Income Tax Act, 1922, and Sections 41(2) and 45 of the Act. The first decision is Commissioner of Income Tax

Vs. Janab N. Hyath Batcha Sahib, . In that case, the assessee, who was individually carrying on business in forest contracts, converted the same

into a partnership with another. In addition to the capital contributed by each partner, the capital account of the assessee was credited with a

further sum of Rs. 15,000 being the agreed value of three lorries owned by the assessee and which he handed over to the firm. As the written

down value of these lorries in the books of the assessee was only Rs. 2,558, the Income Tax Officer treated the difference of Rs. 12,442 as profit

of the assessee u/s 10(2)(vii) of the Indian Income Tax Act, 1922. Though the Appellate Assistant Commissioner declined to interfere, the Tribunal

held that there was no sale of the lorries and hence there was no profit made by the assessee. On a reference made to this court at the instance of

the Commissioner, this court held that the conclusion of the Tribunal was right. Section 10(2)(vii) of the Indian Income Tax Act, 1922, used the

expression ""any such building, machinery or plant is sold"". This court in the said decision held that when the assessee took in another person for the

purpose of constituting a partnership along with them and made the lorries owned by him as the assets of such partnership, he did not sell the said

lorries to the firm of which he himself was a partner. This court, for this conclusion, relied on several decisions, and on the general principle that a

partnership or a firm is not an independent legal entity, this court observed as follows (pages 531, 532) :

No doubt, a partnership is treated as an entity for certain purposes, as for instance by the Income Tax Act for purposes of assessment of firms of

partnership or the CPC for purposes of procedural matters or the law merchant. But barring the exceptional cases of limited recognition of a firm

of partnership as an entity, the normal position in law of a firm is that it is not a legal entity, unlike an incorporated company. A firm is but a

convenient and compendious name given to a contractual relationship in which two or more persons combine their efforts and conjointly apply the

same to a commercial or business activity with a view to make profit. Section 4 of the Indian Partnership Act makes this explicit and says that a

''partnership'' is the relation between persons who have agreed to share the profits of a business carried on by all or any of them acting for all. This

relationship does not appear to cloud or destroy the identity of the partners whose rights and liabilities vis-a-vis each other are governed by the

terms of the partnership and the provisions of the Indian Partnership Act. The members of a firm, from a certain point of view, therefore, remain as

co-owners in a limited sense and subject to the terms of the contract of partnership and the principles of law governing such relationship. When,

therefore, A makes over his property to a firm consisting of A and B, it will be a nice question--whether the transaction involves a transfer of the

property. By such a transfer A clearly does not divest himself completely of his rights or interest in the property, though it is true B, by reason of

the transaction, becomes entitled to certain rights which are regulated by the terms of the agreement of partnership, as well as the provisions of the

Indian Partnership Act......Once we regard a firm as not a legal entity, we fail to recognise any half way house. It should follow, therefore, that

when A, as an individual, hands over his property to A and B constituting a firm of partnership, there is no transfer of property involved.

This decision was followed by another Bench of this court to which one of us was a party in D. Kanniah Pillai Vs. Commissioner of Income

Tax, , In that case also, the assessee who was an individual and was carrying on transport business, converted the proprietary business into a

partnership firm consisting of himself and another person. The question that came to be considered was whether by conversion of the proprietary

business into a partnership concern, any transfer of the assets of the business was involved by the assessee to the said partnership firm. The

question arose in the context of the applicability of Section 41(2) of the Act corresponding to Section 10(2)(vii) of the 1922 Act and also Section

45 of the Act dealing with assessment to capital gains. This court, following the decision of this court already referred to, namely, Commissioner of

Income Tax Vs. Janab N. Hyath Batcha Sahib, , held that there was no sale or transfer from the assessee to the partnership of which he was a

partner. Both these decisions were followed by us in COMMISSIONER OF Income Tax, MADRAS-I Vs. ABDUL KHADER MOTOR AND

LORRY SERVICE., (Appendix)]. That also dealt with the case of the applicability of Sections 41(2) and 45 of the Income Tax Act, 1961. In the

un-reported case [since reported in COMMISSIONER OF Income Tax, MADRAS-I Vs. ABDUL KHADER MOTOR AND LORRY

SERVICE., , the business was originally carried on by a firm of two partners, but subsequently it was carried on by a firm of four partners of

whom the original two partners continued to be the partners. That was also a case in which the original firm of two partners continued to exist

separately in carrying on the business of plying lorries only. However, the case was argued before us on the basis that the two reported judgments

of this court to which we have already drawn attention applied. It is under those circumstances, following those decisions, we held that the

provisions of Section 41(2) were not attracted to the said case. With reference to Section 45 of the Act, a new argument was advanced before us

based upon the definition of the term ""transfer"" occurring in Section 2, Sub-section (47), of the Act. Section 2(47) defines ""transfer "" as follows :

''Transfer'', in relation to a capital asset, includes the sale, exchange or relinquishment of the asset or the extinguishment of any rights therein or the

compulsory acquisition thereof under any law."" The invocation of the transaction of sale was excluded by the earlier two decisions of this court to

which we have drawn attention. Admittedly, there was no exchange involved. Consequently, reliance was plated only on the other two limbs of the

definition, namely, ""relinquishment of the asset"" or ""extinguishment of any rights therein"". Dealing with such an argument, we observed (see infra

page 362):

There is no dispute that the word ''sale'' in the definition of the word ''transfer'' would not take in the present case because of the decisions already

referred to. There is also no dispute that this is not a transaction of ''exchange'' contemplated in Section 2(47). The learned counsel sought to rest

her contention on, first, the expression ''relinquishment of the asset''. The relinquishment contemplated by this provision would have to be a

complete divestiture of the interest of the assessee in the said assets. In the present case, it cannot be stated that the assessee-firm of two partners

retained no interest in the buses and the route rights that were taken over by the new firm. Therefore, it is not a case of ''relinquishment of the

asset''. The only aspect that now remains for consideration is whether the present transaction can be brought within the scope of the expression

''extinguishment of any rights therein''. The learned counsel was not in a position to spell out any particular right which was extinguished in the assets

in the present case which were taken over by the new firm.

The decisions of this court in Commissioner of Income Tax Vs. Janab N. Hyath Batcha Sahib, and D. Kanniah Pillai Vs. Commissioner of

Income Tax, were followed by another Bench of this court to which one of us was a party with reference to a slightly different situation. In the said

decision in A. Subbiah Nadar Vs. Commissioner of Income Tax, the assessee along with his two sons constituting a Hindu undivided family owned

certain lorries which were transferred to a partnership firm consisting of the assessee, his two sons and the assessee''s divided brother. The Income

Tax Officer brought to tax the difference between the market value of the lorries and their written down value as being chargeable u/s 41(2) of the

Income Tax Act. The Appellate Assistant Commissioner in the appeal directed that the amount chargeable to tax would be the difference between

the cost price and the written down value. In the further appeal, the Tribunal held that by the transfer of the lorries to the partnership, the ownership

was transferred from the joint family to a different entity and hence Section 41(2) was attracted. The matter was taken up to this court by way of

reference u/s 256(1) of the Income Tax Act, 1961. This court applied the principle laid down by the two decisions already referred to and held

that there was no transfer when the joint family consisting of the assessee and his two sons along with the assessee''s divided brother as a firm took

over the lorries. On behalf of the revenue, the two decisions already referred to were sought to be distinguished on the ground that they were all

cases of individual persons converting their assets into partnership property, and not cases of properties of the Hindu undivided families becoming

the properties of a partnership. The case advanced on behalf of the revenue was that since the Hindu undivided family as such could not be a

partner of a firm, the principle laid down by the two cases referred to already could not be applied to such a case. Dealing with such a contention,

this court observed--see [1976] ) 4 ITR 564:

In this case, it is not necessary to consider in general whether the property of a Hindu undivided family could become the property of a

partnership firm without a transfer. In this case, the Hindu undivided family consisted of the father and two sons and all the three were partners in

the new partnership along with a third party. Therefore, what was originally held by them as a Hindu undivided family is now held by them as

partners in a partnership firm. In this respect there is no difference between an individual and a Hindu undivided family. As in the case of an

individual, when he converts his individual property to that of a partnership, a Hindu undivided family also when the property of the Hindu

undivided family becomes the property of the partnership ceases to hold the property. In the first case, the individual ceases to hold the property as

his individual property and in the other case, the Hindu undivided family ceases to hold the property as Hindu undivided family property, but the

members of the Hindu undivided family hold the property as partners. We are of the view that the ratio or the principle applicable to the case of a

proprietary concern being converted into a partnership must also apply to the instant case.

It is in view of the above decisions, the learned counsel for the revenue contended before us that the position with regard to Section 155(5) of

the Act will stand on a different position, and it was so held by two decisions, one of the Karnataka High Court and the other of the Patna High

Court.'' Before we refer to these two decisions, we shall refer to the statutory provisions themselves. It is Section 33 of the Act which deals with

development rebate"". Section 34 of the Act deals with the conditions for claiming the said development rebate. One such condition is contained in

Sub-section (3)(b) of Section 34.

That provision states :

If any ship, machinery or plant is sold or otherwise transferred by the assessee to any person at any time before the expiry of eight years from the

end of the previous year in which it was acquired or installed, any allowance made u/s 33 or under the corresponding provisions of the Indian

Income Tax Act, 1922 (XI of 1922), in respect of that ship, machinery or plant shall be deemed to have been wrongly made for the purposes of

this Act, and the provisions of Sub-section (5) of Section 155 shall apply accordingly.

There is a proviso to this clause and for the purpose of this reference, it is unnecessary to refer to the said proviso. Section 155 of the Act

deals with the amendments that can be made by the authorities functioning under the Act to an order already passed. Section 155, Sub-section (5),

of the Act gives effect to what is already provided for in Section 34(3)(b). Section 155(5) states :

""Where an allowance by way of development rebate has been made wholly or partly to an assessee in respect of a ship, machinery or plant

installed after the 31st day of December, 1957, in any assessment year u/s 33, or under the corresponding provisions of the Indian Income Tax

Act, 1922 (XI of 1922), and subsequently-

(i) at any time before the expiry of eight years from the end of the previous year in which the ship was acquired or the machinery or plant was

installed, the ship, machinery or plant is sold or otherwise transferred by the assessee to any person other than the Government, a local authority, a

corporation established by a Central, State or Provincial Act or a Government company as defined in Section 617 of the Companies Act, 1956 (1

of 1956), or in connection with any amalgamation or succession referred to in Sub-section (3) or Sub-section (4) of Section 33 ; or......

the development rebate originally allowed shall be deemed to have been wrongly allowed, and the Income Tax Officer may, notwithstanding

anything contained in this Act, recompute the total income of the assessee for the relevant previous year and make the necessary amendment; and

the provisions Section 154 shall, so far as may be, apply thereto, the period of four years specified in Sub-section (7) of that section being

reckoned from the end of the previous year in which the sale or transfer took place or the money was so utilised.

Having regard to these statutory provisions, the question for consideration in the present case is whether the machinery in respect of which

development rebate was allowed was sold or otherwise transferred by the firm of three partners to or in favour of the reconstituted firm of eight

partners. It was not the case of the revenue itself that the machinery was sold because a sale involves an offer and acceptance and also payment of

the price. In this case, there was no question of any payment of price by the reconstituted firm of eight partners to the original firm of three partners

and, therefore, the concept of sale is excluded. Consequently, the only other question that remains for consideration is whether there has been a

transfer otherwise of the asset in question when the reconstituted firm of eight partners took over the business in question and started carrying on

the business. The learned counsel for the revenue contended that under the Income Tax Act, a firm is a separate assessable unit and the definition

of the word ""person"" in Sub-section (31) of Section 2 of the Act refers to a firm as a person and, therefore, when the assessee, namely, the original

firm of three partners transferred the business to be carried on by the reconstituted firm of eight partners, it transferred the asset to another

assessable unit, namely, the reconstituted firm of eight partners and consequently the statutory provisions referred to above are attracted. It is in

support of this contention only the decisions of the Karnataka High Court and the Patna High Court were relied on.

The decision of the Karnataka High Court relied on is in A.S. Krishna Setty and Sons Vs. Additional Commissioner of Income Tax, Mysore, .

In that case, the facts as stated by the High Court were that the asses see was a firm carrying on business at Arsikere. During the assessment year

1965-66, it was carrying on the business as mundy merchants and it also owned a cinema theatre, a rotary oil mill and a coir factory. Development

rebate had been claimed by the assessee during the assessment year 1965-56, in respect of plant and machinery used in the oil mills and coir

factory u/s 33 of the Act, and the same had been allowed by the assessing authority. The firm consisted of seven partners. Two minors had also

been admitted to the benefits of the partnership. On March 31, 1965, the partners of the firm entered into an arrangement whereby the coir factory

was transferred exclusively in favour of four of them, by name, K Ananthanagaraj, K.A. Chandrakantb, K.A. Satheeshkumar and K.A. Manohar.

Similarly, the rotary oil mills belonging to the firm was transferred by all the partners in favour of three of them, namely, A.S. Narayana Setty, K.

Ramachandra Shetty and K. Ananthakrishna Setty. By virtue of the above agreement, each group of partners became exclusive owner of the items

of property which it took over under the arrangement referred to above. Thereafter, the partners who took over the items of properties under the

arrangement referred to above, entered into separate deeds of partnership among themselves and some new persons in respect of those items of

business. But the assessee firm continued to carry on the business of Rathna Talkies, etc. On coming to know that the agreement dated March 31,

1965, and the deeds of partnership referred to above had come into existence, the Income Tax Officer took action u/s 155(5) of the Act to rectify

the order of assessment relating to the assessment year 1965-66, in view of the provisions of Section 34(3)(b) of the Act, as he was of the opinion

that the machinery and plant in respect of which development rebate had been allowed, had been transferred by the assessee within the stipulated

time. It is the correctness of this action of the Income Tax Officer which ultimately came to the High Court. The High Court held that, having regard

to the facts of the case, the action of the Income Tax Officer in proceeding u/s 155(5) of the Act was proper. After referring to the facts as

mentioned above, the High Court observed--see A.S. Krishna Setty and Sons Vs. Additional Commissioner of Income Tax, Mysore, :

From the observations of the Supreme Court extracted (referring to the judgment of the Supreme Court in Addanki Narayanappa and Another

Vs. Bhaskara Krishtappa and Others, , it is clear that the individual partners of a firm have no exclusive interest in the assets belonging to the firm.

They can become exclusive owners of any of the assets belonging to the firm only by all the partners acting on behalf of the firm conveying or

transferring their interest to such individual partners. In that event, it is clear that there is an extinguishment of the rights of the firm in the assets in

question on the one hand and acquisition of interest in them by such individual partners. In law, such a transaction does amount to a transfer. The

expression '' transfer of property '' has been defined in Section 5 of the Transfer of Property Act. It means, an act by which a living person conveys

property, in the present or in future to one or more other living persons, or to himself, and one or more other living persons. In the instant case, all

the partners of the firm who were entitled to transfer the machinery and plant on behalf of the firm have entered into an agreement giving up their

interest in those items in favour of some of them. The partners in whose favour the items of property in question are transferred, have been enjoying

the same to the exclusion of other partners after March 31, 1965. That they have been doing so can be gathered from the new partnership deeds

entered into on May 1, 1965, which are enclosed to the statement of the case. It is not also the case of the assessee that the other partners

(partners other than transferee-partners) have been exercising any kind of right, title or interest in or over the machinery and plant. In the

circumstances, we are of the view that the Income Tax authorities were right in holding that there was a transfer of machinery and plant by the

assessee-firm in favour of some of its partners.

We are of the opinion that the above decision is not of any assistance to decide the present case. In that case, it will be seen from the facts

narrated above that the original business was split into three businesses, one of them was taken over by four of the original seven partners and the

other was taken over by the other three of the original seven partners and the third, namely, Ratna Talkies, etc., was continued by the original

seven partners. In addition to the above, the judgment proceeds on the basis that these ""taking over"" were effected by means of express transfer or

conveyance. As a matter of fact, it could be seen that the distintegration of the original business into three was effected on March 31, 1965, and

the new partnerships were brought into existence only by deeds dated May 1, 1965. It was under those circumstances, the court held that there

was actually a transfer of the plant and machinery by all the seven partners in favour of four of them in one case and in favour of three of them in

the other case and, therefore, the provisions of Section 155(5) were attracted. In view of the facts of the case, we are of the opinion that the

decision therein does not have any bearing on the question which we have to consider in the present case.

The next decision is that of the Patna High Court in Commissioner of Income Tax v. Mahabir Cold Storage [1977] 100 ITR 686. In that case,

there, was a firm consisting of two partners which had installed machinery in the accounting year relating to the assessment year 1959-60. The said

firm took over a new partner and a new partnership was executed on November 10, 1958. After the new partnership firm came into existence, the

three partners claimed development rebate in the assessment year 1959-60 in respect of the cold storage plant and machinery. The Income Tax

Officer disallowed the claim and held that as the assets transferred to the new firm constituted ""transfer"" as contemplated in Section 34(3)(b) of the

1961 Act, corresponding to Section 10(2)(vib), proviso to Explanation 2, of the 1922 Act, the old firm was not entitled to any claim of

development rebate. He also held that the new firm had not inherited this claim as the transfer in this case did not amount to a succession as

contemplated in the 1961 Act. It was this action of the Income Tax Officer which was the subject-matter of consideration before the Patna High

Court. From the facts stated above it will be clear that the action of the Income Tax Officer was not one u/s 155(5) of the Act. On the other hand,

he declined to allow development rebate in favour of the new firm on the ground that the machinery was installed by the other firm. This aspect of

the matter is made clear by the observations contained in the judgment. After referring to the provisions of the Act, the court observed (pages 693,

694) :

It would thus be seen that the same assessee who installed the new plant or machinery must carry on the business with them in order to be entitled

to get development rebate, and he must not transfer them before the expiry of eight years. If he does so, the development rebate granted is

cancelled. In the instant case, if the identity of the two firms was different, as assessable identity was clearly so, then it is plain that in respect of the

plant and machinery installed by the old partnership firm at Purnea, the new firm, a distinct and different assessable entity, could not claim

development rebate either under the 1922 Act or under the 1961 Act. Whether the rebate granted to the old firm in the year 1959-60 was rightly

withdrawn or wrongly withdrawn is not relevant for the purpose of considering the question of allowing reabte to the new firm. I am not concerned

in the present reference to find out whether the order of the Tribunal in an appeal arising out of Section 155(5) proceeding was right or wrong. For

the purpose of withdrawing the rebate it may well be I shall assume to be so at the moment, that there was no sale or transfer within the meaning of

Section 34(3)(b) of the 1961 Act. But I fail to understand how that fact by itself will entitle this new and distinct assessee to claim rebate in respect

of the plant and machinery not installed by it but by another firm, the identity of which continued and was in existence even on the day the new firm

was making the claim for development rebate.

Thus, it will be seen that far from supporting the contention of the revenue that decision will indicate that the learned judges were inclined to

take the view that for the purpose of Section 155(5) of the Act, the taking in of a third person as a partner, would not constitute a ""sale"" or

transfer"" of the machinery or the asset. Consequently, this decision also is not of any assistance to support the contention advanced on behalf of

the revenue. Therefore, we are left only with the decisions of this court to which we have drawn attention and which will tend to support the

conclusion of the Tribunal.

Independently, on the facts of this case, we are of the opinion that there cannot be any question of transfer. We have already referred to the

fact that the three persons, namely, Shanmugha Nadar, Nataraja Nadar and Arunachala Nadar were partners of the firm representing their

respective Hindu undivided families. We also referred to the fact that there was a partition in the families of Shanmuga Nadar and Arunachala

Nadar, and it is the four divided sons of Shanmugha Nadar and one divided son of Arunachala Nadar who were taken in as additional partners for

the purpose of carrying on the business with which we are concerned. We have also referred to the fact that the two partnership deeds, namely,

one with reference to the carrying on of the business of match works under the name of ""Sri Kaliswari Colour Match Works"" by the original three

partners and the other for the purpose of carrying on the business of manufacturing fire-works and printing and lithography under the name and

style of ""Raja Litho Works"" have been annexed to the statement of the case. A perusal of these annexures will clearly show that the firm had only

been reconstituted by making the divided sons of Shanmugha Nadar and Arunachala Nadar as eo nomine partners in the reconstituted firm. This is

made absolutely clear by the shares which have been allotted to the partners in the respective two partnerships. In respect of the partnership to be

carried on in the name of ""Sri Kaliswari Colour Match Works"" by three partners, the shares in the profit and loss of the business as agreed to by

them are as follows :

A. Shanmugha Nadar 3/7

A. Nataraja Nadar 3/7

A.M.A. Arunachala Nadar 1/7

It is the 3/7ths share of Shanmugha Nadar which has been distributed as between him and his four sons in the reconstituted firm for the

purpose of carrying on the business of fire-works and printing and lithography because the shares as shown in that partnership deed are--A,

Shanmugha Nadar 1/7th, his four sons, A.S. Rasappan, A.S. Chinna Nadar, A.S. Graham and A.S. Poornachandran,--1/14th each, thus the

father and the four sons retaining the original share of 3/7ths. Since no son-of Nataraja Nadar was included in the partnership, he retained his

original share of 3/7ths even after reconstitution. The 1/7th share of Arunachala Nadar was distributed as between himself and his son, Paulrajan,

as 1/14 and 1/14 in the reconstituted firm. Consequently, a comparison of these shares themselves will show that the reconstituted firm merely

brought in the divided members of the original coparcenaries as eo nomine partners in the firm, and, consequently, the ownership as well as the

business continued to be carried on by the same persons. The learned counsel for the revenue contended that there would have been minor sons

and their shares had not been accounted for. There are no materials one way or the other with regard to the existence of the minor sons. However,

if any guess can be hazarded, a provision has been made in this behalf also. We have already referred to A. Shanmugha Nadar retaining 1/7th

share and bis four sons being allotted only 1/14th share each. It may be that Shanmugha Nadar had a minor son and that minor son had not

become divided from the father and that is the reason why Shanmugha Nadar was allotted 1/7th share representing his individual share and the

share of his minor son. Consequently, taking into consideration all the facts of the case, we are clearly of the opinion that there cannot be said to be

any transfer of the assets from the partnership consisting of three partners to the reconstituted firm consisting of eight partners. In other words, by

the reconstitution, what was implicit in the original partnership has been made explicit, since in the original partnership the three persons

represented their respective Hindu undivided families, and, consequently, in substance it was the Hindu undivided families that were the partners

and the members of the erstwhile coparcenaries alone that were subsequently assigned their respective interests, in the reconstituted firm, after a

partition had taken place in the two families out of the three families constituting the original partnership. Having regard to all these circumstances,

we are of the opinion that the Tribunal was right in its conclusion that the action taken u/s 155(5) of the Income Tax Act, 1961, was not warranted

since there was no transfer of the assets in question. The result is that we answer the question referred to this court in the affirmative and against the

revenue. There will be no order as to costs.