SETHURAMAN J.

In this reference under section 256(1) of the Income-tax Act, 1961, the following question of law has been referred :

"Whether, on the facts and circumstances of the case, the Appellate Tribunal was right in law in holding that there can be no assessment of any excess under the provisions of section 41(2) and of capital gains ?"

The assessee is a firm consisting of two partners, namely, Abdullah Rowther, the father, and Mohamed Abdul Khader, the son. The firm was constituted under a partnership deed dated September 28, 1950. The firm was carrying on the business of motor transport, plying buses and lorries. The vehicle together with their route permits stood in the name of Abdullah Rowther, the father. The total cost of the buses in the accounts of the firm as on March 31, 1962, was Rs. 2, 17, 821. The liabilities of the firm as on that date came to Rs. 4, 21, 337. Because of financial difficulties, the firm felt that it was advantageous to enter into a partnership with two other persons to carry on the business of plying the motor buses. A new firm has come into existence with four partners on October 1, 1962, under the name and style of Messrs. Abdul Khader Motor Service. The new firm consisted of these two persons and two others, namely, Chellappa Chettiar of Kandanur and Mohamed Ibrahim of Puduvayal. The buses together with the route permits were transferred to the new firm at the value of Rs. 3, 51, 000. The liabilities of the assessee-firm, to the extent of Rs. 2, 80, 150 were also transferred to the new firm. Two separate returns of income were filed by these firms for the assessment year 1963-64.

The Income-tax Officer came to the conclusion that the transaction resulted in a sale of the buses and the routes by the assessee-firm in terms of section 41(2) of the Income-tax Act, 1961 he held that the transaction was a transfer of certain assets by an assessable entity to another assessable entity for consideration and that the transfer was for a stated price in money's worth so that the transaction was a sale.

On further appeal, the Appellate Tribunal allowed the assessee's appeal holding that there was no transfer or sale of buses by the assessee to the partnership of four persons and that, therefore, there could be no assessment under section 41(2) and also no levy of tax on any capital gains. It is these conclusion of the Tribunal that are challenged in the present tax case.

There is no dispute about the fact that the two persons who constituted the assessee-firm were also partners in the new firm. There can be no dispute about the legal position that the firms are not separate or independent legal entities. This principles has been set out in a decision of this court in Commissioner of Income-tax v. Janab N. Hyath Batcha Sahib. The assessee in that case was an individual carrying on business in forest contracts and he 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 the lorries in the books of the assessee was only Rs. 2, 558, the Income-tax Officer trated the difference of Rs. 12, 442 as profit of the assessee under section 10(2)(vii) of the Indian Income-tax Act, 1922, which corresponds to section 41(2) of the Income-tax Act, 1961. The Tribunal held that there was no sale of the lorries and that there was no profits made by the assessee. The matter came on reference to this court and it was held that when a person handed over his property to a firm of partners consisting of himself and others there was no transfer of property so as to consitute a sale of goods. This judgment has also been followed in D. Kanniah Pillai v. Commissioner of Income-tax, a decision to which one of us was a party. In view of these decisions it would fo