V. Ramaswami, J.
1. The assessee is an individual. He was the proprietor of a transport service styled as Sri Meenakshiamman Motor Service. On October 1, 1961, he converted this proprietary business into a partnership firm consisting of himself and one Viravan Chettiar both having equal share. The terms of the partnership are evidenced by a deed dated October 16, 1961. According to the terms of this document all assets and liabilities of the assessee in the transport business were taken over by the firm at the book values and the value of the goodwill of the proprietary business was determined at Rs. 3,75,000. The capital of the partnership business was fixed at Rs. 6,00,000 which was to be contributed equally by the two partners. In the assessee's current account the book value of the assets and the value of goodwill were credited which along with another credit of Rs. 12,930 amounted to Rs. 6,12,930. The assessee had withdrawn from this account a sum of Rs. 3,00,000 by way of transfer to the capital account. He had also drawn a sum of Rs. 1,44,865 during the accounting year from this account. The account at the end of the year showed a credit of Rs. 17,060. The other partner also contributed his capital of Rs. 3,00,000.
2. For the assessment year 1962-63, corresponding, to the accounting period ending March 31, 1962, the assessee submitted a return declaring a total income of Rs. 35,768 and in a covering letter asked the Income-tax Officer to determine the profits, if any, under Section 41(2) to be included in the assessment. The Income-tax Officer worked out the profits arising on the sale of assets by the assessee to the partnership concern at Rs. 91,160 in terms of Section 41(2) and assessed it to tax in full. He also worked out the capital gain on transfer of goodwill by the assessee to the partnership concern at Rs. 3,32,500 and assessed it to tax under Section 45 of the Act. The assessee preferred an appeal and contended that there was no sale by the assessee when he converted the proprietary concern into a partnership firm and that, therefore, no profit or gain chargeable under Section 41(2) or under Section 45 arose to the assessee. The Appellate Assistant Commissioner was of the view that to the extent of the half share held by the assessee in the partnership firm, there was no sale but there was a sale in respect of the other share. Accordingly, he determined the profits chargeable to tax under Section 41(2) and the capital gain chargeable under Section 45 at one-half of the amount determined by the Income-tax Officer. The department preferred an appeal to the Tribunal contending that the Appellate Assistant Commissioner's view was wrong and that the entire amount is chargeable to tax under Sections 41(2) and 45 of the Act. Theassessee preferred a cross-objection contending that no profits or gains chargeable to tax under Section 41(2) or Section 45 arose, and that the Appellate Assistant Commissioner was wrong in assessing to tax one-half of the profits chargeable under Section 41(2) or Section 45. The Tribunal after referring to certain decisions came to the conclusion that there was a real sale when the assessee converted his sole proprietary concern into a partnership consisting of himself and another and, therefore, the provisions of Section 41(2) and Section 45 were attracted. The Tribunal did not agree with the Appellate Assistant Commissioner that only a half of the' profits and gains was chargeable to tax. After noting that the entire book value of the assets and the value of the goodwill were credited to the current account of the assessee and that a major portion of the same had been withdrawn by the assessee leaving only a small balance, the Tribunal came to the conclusion that the whole consideration belonged to the assessee, that it had been treated as such in the accounts by 'the parties concerned, that it had been in fact withdrawn and utilised by the assessee on his own account and, therefore, not only one-half of the profits or gains, but the entirety is chargeable to tax under Sections 41(2) and 45 of the Act. The Tribunal accordingly allowed the department's appeal and dismissed the cross-objections. At the instance of the assessee the following two questions have been referred to this court:
' 1. Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the sum of Rs. 91,160 was charge-able to tax under Section 41 of the Income-tax Act, 1961 ?
2. Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the sum of Rs. 3,32,500 was chargeable to tax as capital gains under Section 45 of the Income-tax Act, 1961?'
3. Learned counsel for the assessee contended that when an individual converts his sole proprietary concern into a partnership of which he himself is a partner, no question of sale arises. In this connection, he also relied on the decision of this court in Commissioner of Income-tax v. Janab N. Hyath Batcha- Sahib : [1969]72ITR528(Mad) ..
4. Under the partnership law a partnership is not a legal entity. Even the Income-tax Act only enables an assessment to be made in the name of the firm and it does not in terms make it a legal entity with all its consequences. Therefore, there could not be a sale within the meaning of the Sale of Goods Act when one person converts his sole proprietary concern into a partnership of which he is a partner. What in such circumstances he does is' to throw his private property and make it a partnership asset on such terms as may be mutually agreed to between the parties. This was the view expressed by this court in Commissioner of Income-tax v. Janab N. HyathBatcha Sahib. In that case also the assessee who was carrying on aproprietary business converted the same into a partnership business consisting of himself and another. For the proprietary business the assessee was having three lorries. Though the book value of the lorries was Rs. 2,558 at ,the time of converting the business into a partnership business, it was valued at Rs. 15,925 and in the account of the firm the assessee's capital account was credited with the value of the lorries and the lorry purchase account was debited with a similar amount. The difference between the written down value of the lorries and the sum of Rs. 15,925 which was given credit to by the firm was treated as profits made by the assessee and brought to tax under Section 10(2)(vii) of the Indian Income-tax Act, 1922, corresponding to Section 41(2) of the new Act. When the includability of this money as profit under Section 10(2)(vii) came up for consideration this court held that when the sole proprietary concern was converted into a partnership, the assessee did not divest himself completely of his rights or interest in the lorries, though by reason of the transaction he became entitled to certain rights which were regulated by the terms of the agreement of partnership, and that there was no sale within the meaning of the Sale of Goods Act. This decision squarely applies to the facts of this case and clearly supports the argument of the learned counsel for the assessee. But the learned counsel for the revenue sought to distinguish this decision on the ground that the principle would have to be applied only to a case where the parties had not chosen to treat the transaction as sale, but if they had entered into a form of transaction of sale it would amount to a sale attracting the provisions of Sections 41(2) and 45 of the Act. He also submitted that it is not uncommon for an individual partner to enter into a sale transaction with a partnership firm in which he is a partner and he being treated as a creditor for the price. It is true that in commercial parlance a partner is treated as any other third party and very often they enter into transactions of sale and purchase with the firm in which they are partners. The Code of Civil Procedure also enables such a partner to enforce his claim against the partnership. But that is not to say that even for a limited purpose the firm is treated as a legal entity. In fact, in cases where the partner is treated as a creditor while enforcing the claim, unless the partners agree he would not be entitled to a decree against the partnership firm as such and it would be open to the defending partners to ask for a dissolution of the partnership instead of paying the credits of the partner. This principle is well-settled, and neecls no reference to the decided cases. Therefore, even in such cases, we are of the view that it could not be stated that there was a legal sale within the meaning of the Sale of Goods Act. If there was no possibility of a transaction of sale when a proprietary concern is converted into a partnership, the mere fact that the parties chose to adopt a form which is in the nature of a sale will notconvert that transaction into a sale. The decision of the Supreme Court in Commissioner Income-tax v. B. M. Kharwar, : [1969]72ITR603(SC) relied on by the learned counsel for the revenue related to a sale by a partnership firm to a private limited company which is a legal entity and, therefore, is of no assistance. We are, therefore, of the view that the Tribunal was wrong in holding that there was a sale of the assets by the assessee to the partnership firm. We, accordingly, answer the first question in the negative and in favour of the assessee. For the same reason we also hold that no question of capital gains arise under Section 45 of the Act. We, accordingly, answer the second question also in the negative and in favour of the assessee. The assessee will be entitled to his costs. Counsel's fee Rs. 250.