Rajasthan High Court - Jaipur
Commissioner Of Income-Tax vs D.K. Trivedi And Sons on 7 February, 2001
Equivalent citations: [2001]250ITR561(RAJ), 2002(1)WLN230
JUDGMENT
1. The Income-tax Appellate Tribunal, Jaipur, has referred the following question of law for the opinion of this court which arises out of the order of the Tribunal in ITA No. 860/JP of 1986, dated November 17, 1998.
"Whether, on the facts and in the circumstances of the case, the Tribunal was legally justified in setting aside the order passed by the Commissioner of Income-tax (Appeals) and in holding that investment allowance granted to the assessee cannot be withdrawn ?"
2. The facts of the case are that the respondent-assessee which is a registered firm had installed new machinery during the relevant previous year of the value of Rs. 2,07,017 on which investment allowance under Section 32A was claimed which came to Rs. 51,754. As required under law, the assessee had created reserve for Rs. 39,000 for the purpose of making the above claim for investment allowance. This allowance was allowed, while computing the assessment originally made under Section 143(3) on March 31, 1980. After the close of the previous year relating to the assessment year 1979-80, the firm was dissolved on October 22, 1979, and the assets and liabilities of the firm were distributed amongst the four partners, namely, Jetha Lal D. Trivedi, Jitcndra D. Trivcdi, Jaswant D. Trivedi and Ravindra D, Trivedi. The outgoing partners started their own business separately. On the distribution of the firm, the amount in the credit of the investment allowance reserve was also distributed between the two partners, namely, Jetha Lal D. Trivedi and Jitendra D. Trivedi, in the sum of Rs. 24,000 and 15,000, respectively. The distribution of investment allowance was done in the third year after the investment allowance was allowed for the assessment year 1979-80. The Assessing Officer holding it to be in contravention of the provisions of Section 32A(5)(c) of the Income-tax Act, 1961, invoked the provisions of Section 155(4A)(c) for the purpose of making necessary amendment in the assessment order of the assessment year 1979-80 by withdrawing the investment allowance.
3. Aggrieved by the said order under Section 155(4A), read with Section 154 of the Income-tax Act amending the assessment order for the year 1979-80 in the aforesaid manner, the assessee carried the matter before the Commissioner of Income-tax (Appeals). He confirmed the view taken by the Income-tax Officer.
4. Being aggrieved, the assessee further appealed before the Tribunal. The Tribunal taking note of a decision of the Supreme Court in the case of Malabar Fisheries Co. v. CIT [1979] 120 ITR 49 and the decision of the Madras High Court reported in CIT v. S. Balasubramanian [1982] 138 ITR 815, allowed the appeal and held that the distribution of assets on the dissolution of a firm does not amount to utilisation of the amount of reserve fund in contravention of the provisions of Section 32A(4).
5. In the aforesaid facts and circumstances, the Tribunal has raised the above question of law and referred it to this court for its decision.
6. We have heard Mr. Sandeep Bhandawat, learned counsel for the Revenue, and Mr. Vineet Kothari, learned counsel for the assessee. The relevant provision of Section 32A(5)(c) of which breach is alleged reads as under :
"If at any time before the expiry of the ten years aforesaid, the assessee utilises the amount credited to the reserve account under Sub-section (4) for distribution by way of dividends or profits or for remittance outside India as profits or for the creation of any assets outside India or for anyother purpose which is not a purpose of the business of the undertaking, and the provisions of Sub-section (4A) of Section 155 shall apply accordingly."
7. Consequence of breach of condition for awarding benefit of claiming deduction of any sum as "investment allowance" has been provided under Section 155(4A) of the Act of 1961.
8. Sub-section (4A) of Section 155, to the extent relevant, reads as under :
"(4A) Where an allowance by way of investment allowance has been made wholly or partly to an assessee in respect of a ship or an aircraft or any machinery or plant in any assessment year under Section 32A and . . .
(c) at any time before the expiry of the ten years referred to in Clause (b), the assessee utilises the amount credited to the reserve account under Sub-section (4) of Section 32A--
(i) for distribution by way of dividends or profits ; or
(ii) for remittance outside India as profits or for the creation of any asset outside India ; or
(iii) for any other purpose which is not a purpose of the business of the undertaking, the investment allowance originally allowed shall be deemed to have been wrongly allowed, and the Assessing 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 of Section 154, shall, so far as may be, apply thereto . .."
9. The question, therefore, falls for consideration is whether distribution of assets on the dissolution of a firm amongst partners amounts to utilisation of amount credited to the reserve account under Sub-section (4) of Section 32A for distribution by way of dividends or profits or for any other purpose which is not a purpose of the business of the undertaking so as to invoke the provision for deeming the investment allowance having been wrongly allowed enabling the Assessing Officer to rectify the assessment order in terms thereof.
10. We are of the opinion that the matter stands concluded by the decision of the Supreme Court in the case of Malabar Fisheries Co. v. CIT [1979] 120 ITR 49.
11. The controversy before the apex court had arisen in the wake of an identical provision relating to development rebate allowed under Section 33 of the Act of 1961 whereunder development rebate allowed as deduction in the assessment order in respect of acquisition of new ship, machinery or plant installed after December 31, 1957, has been subjected to the very same conditions under Section 155(5). For a comparative reading of the provision, the relevant part of Sub-section (5) of Section 155 is reproduced hereunder :
"(5) 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 under Section 33 or under the corresponding provisions of the Indian Income-tax Act, 1922 (11 of 1922), and ...
(ii) at any time before the expiry of eight years referred to in subsection (3) of Section 34, the assessee utilises the amount credited to the reserve account under Clause (a) of that Sub-section--
(a) for distribution by way of dividends or profits ; or
(b) for remittance outside India as profits or for the creation of any asset outside India ; or
(c) for any other purpose which is not a purpose of the business of the undertaking, the development rebate originally allowed shall be deemed to have been wrongly allowed, and the Assessing 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 of 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."
12. The Supreme Court, considering the question in the light of distribution of assets on the dissolution of a firm, said (see [1979] 120 ITR 49, head-note) :
"A partnership firm under the Indian Partnership Act, 1932, is not a distinct legal entity apart from the partners constituting it and equally in law the firm as such has no separate rights of its own in the partnership assets and when one talks of the firm's property or the firm's assets all that is meant is property or assets in which all partners have a joint or common interest. It cannot, therefore, be said that, upon dissolution, the firm's rights in the partnership assets are extinguished. It is the partners who own jointly or in common the assets of the partnership and, therefore, the consequence of the distribution, division or allotment of assets to the partners which flows upon dissolution after discharge of liabilities is nothing but a mutual adjustment of rights between partners and there is no question of any extinguishment of the firm's rights in the partnership assets amounting to a transfer of assets within the meaning of Section 2(47) of the Income-tax Act, 1961. There is no transfer of assets involved even in the sense of any extinguishment of the firm's rights in the partnership assets when distribution takes place upon dissolution.
In order to attract Section 34(3)(b) it is necessary that the sale or transfer of assets must be by the assessee to a person. Dissolution of a firm must, in point of time, be anterior to the actual distribution, division or allotment of the assets that takes place after making accounts and discharging the debts and liabilities due by the firm. Upon dissolution the firm ceases to exist : then follows the making up of accounts, then the discharge of debts and liabilities and thereupon distribution, division or allotment of assets takes place inter se between the erstwhile partners by way of mutual adjustment of rights between them. The distribution, division or allotment of assets to the erstwhile partners is not done by the dissolved firm. In this sense, there is no transfer of assets by the assessee (dissolved firm) to any person. It is not correct to say that the distribution of assets takes place of instant), with the dissolution of the firm or that it is effected by the dissolved firm."
13. In conclusion, the Supreme Court held that in the case of distribution of assets on the dissolution of a partnership firm, Section 34(3)(b) was not applicable and, consequently, the development rebate allowed to the firm could not be withdrawn en such distribution of assets under Section 155(5).
14. The same principle applies while considering the utilisation of the amount credited to the reserve account in the case of investment allowance. . . '
15. In view of the aforesaid, the answer to the question referred to is affirmative, i.e., in favour of the assessee and against the Revenue.