JUDGMENT

S.C. Agrawal, J.-This appeal by certificate granted by the Gujarat High Court under Section 261 of the Income Tax Act, 1961 (hereinafter referred to as the 1961 Act ) involves the question whether the surplus as a result of difference between the written down value and the sale consideration for the Plant, machinery and dead stock transferred by the assessee is taxable under Section 41(2) of the 1961 Act. The appeal relates to the assessment year 1967-68.

2. The assessee is a partnership firm which was carrying on the business of manufacturing artsilk cloth. A private limited company by the name of Artex Manufacturing Company Private Ltd. (hereinafter referred to as the company ) was formed with a view to take over the business of the assessee as a running concern. On March 31, 1966, the assessee and the company entered into an agreement whereunder the assessee agreed to sell to the company the business hitherto carried on by the assessee as a whole going concern. The consideration for the said sale was Rs. 11,50,400/- which was paid and satisfied by allotment of 11,504 fully paid up equity shares of Rs. 100/- each according to original shares of partners of the assessee. In pursuance of the said agreement, the assessee ceased to carry on the business with effect from April 1, 1966 and the said business stood transferred to the company. In respect of the assessment year 1967-68, the assessee filed its return showing nil income. On January 9, 1970, a revised return was filed showing nil income with a note that since the partnership firm was converted into a private limited company as a going concern there was no income chargeable to tax either under Section 41(2) or under Section 45 of the 1961 Act. During the course of the assessment proceedings before the Income Tax Officer, for the purpose of determination of purchase consideration, the assets were shown at Rs. 41,73,973/-, out of which the machinery and dead-stock, as revalued by M/s. Hargovandas Girdharlal, was Rs.15,87,296/-. The liabilities were shown at Rs.30,23,573/- and the balance amount of Rs.11,50,400/- was shown as the purchase consideration. The Written Down Value of Plant, machinery and dead-stock as per assessee s books, was Rs. 4.36,896/- The difference between Rs. 15,87,296/- the value of Plant, machinery & dead-stock as revalued, and Rs. 4,36,896/- the written down value of Plant, machinery and dead-stock as per assessee s books, came to Rs. 11,50,400/-. Relying upon the decision of this Court in Commissioner of Income Tax, Gujarat II v. B.M. Kharwar1, the Income Tax Officer held that tax was payable under Section 41(2) on the surplus amount, i.e., difference between the written down value of Plant, machinery and dead-stock as per assessee s books and the value of the same as revalued by M/s Hargovandas Girdharlal. The Income Tax Officer held that the written down value of Plant, machinery and dead-stock as per Income Tax records was Rs. 3,32,276/- and after deducting the same from the amount of Rs. 15,87,296/- for which Plant, machinery and dead-stock were transferred to the company, the Income Tax Officer held that tax was payable under Section 41(2) on the income of Rs. 12,56,020/-. The Appellate Asstt. Commissioner, on appeal, has held that the surplus was assessable under the head Capital Gains and not under the head Business . As regards the status of the assessee it was held that the assessee must be taxed in the status of Association of Persons and not in the status of a Registered Firm . The assessee as well as the Revenue filed appeals against the said decision of the Appellate Asstt. Commissioner before the Income Tax Appellate Tribunal (hereinafter referred to as the Tribunal ). The Tribunal framed the following questions for consideration :

(i) Whether the surplus is taxable at all?

(ii) If the surplus is found to be taxable, whether it should be taxed under Section 41(2) or under the head Capital Gains ?

(iii)