3.1 Query
Whether investment allowance availed of by a registered firm will be withdrawn on its dissolution and take over of its business by on of the partners
1.A registered firm, carrying on a manufacturing unit, having two partners X & Y, is dissolved on 31st March, 1986. X however agrees to take-over the manufacturing unit and continue as a proprietor thereof. The second partner, Y, agrees to keep his share in the net assets of the firm as on 31st March, 1986, as a loan in the proprietary unit of X. The firm was registered on 1st April, 1981 and had availed investment allowance U/S 32 A of the Income-tax Act in Various Assessment years.
2.The querist has sought the opinion of the Expert Advisory Committee as to whether, in the abovesaid circumstances:
(i) the investment allowance already availed of by the firm in different assessment years is liable to be withdrawn by rectifying the assessment under Section 155(4-A) of the Income-tax Act;
(ii) the transfer of manufacturing unit, being property of partnership concern, to proprietory concern of X, would be treated as a sale or a transfer in terms of Section 32-A (5) of the Income-tax Act.
3.In this connection, the querist has drawn the attention of the Committee to the Supreme Court judgement in the case of Malabar Fisheries Company Vs. C.I.T.(1979) 2 Taxman 409 (SC) in support of the non-withdrawal of the investment allowance.
Opinion May 15, 1987
1. The Committee notes that a partnership firm under the Indian Partnership Act, 1932, is not a distinct legal entity apart from the partners constituting it. The rights and obligations of the partnership firm are the rights and obligations of the partners jointly and severally. The firm as such has no separate rights of its own in its assets. The Committee is therefore of the view that in the event of dissolution of the firm, no sale or exchange or extinguishments of rights takes place when the assets of the firm are distributed or allocated among the partners, as such a distribution or allocation of assets amounts to mutual adjustment of rights and not transfer of assets within the meaning of section 2 (47) and consequently section 32-A (5) of the Income-tax Act. In these circumstances, in the view of the Committee, the investment allowance availed of by the partnership firm cannot be withdrawn on its dissolution where the business carried on by it is continued by one of its partners. This is also the essence of judgement of Supreme Court in the case of Malabar Fisheries Co. vs. Commissioner of Income-tax, Kerala (1979, 120 ITR 49).
2.On the basis of the above, the opinion of the Expert Advisory Committee on the issues raised by the querist in para 2 of the query, is as below:
(i) In the circumstances of the query, the investment allowance availed of by the firm in different assessment years is not liable to be withdrawn by rectifying the assessment under Section 155 (4A) of the Income-tax Act, 1961.
(ii) The transfer of manufacturing unit, being property of partnership firm, to the proprietory concern of ‘X’, would not be treated as a sale or a transfer within the meaning of Section 32-A (5) of the Income-tax Act, 1961. _________________________ |