Income Tax Appellate Tribunal - Delhi
Income-Tax Officer vs Ispat Udyog on 12 September, 1988
Equivalent citations: [1990]32ITD217(DELHI)
ORDER
M.C. Agarwal, Judicial Member
1. These are two appeals by the revenue arising out of orders passed by the ITO withdrawing development rebate granted to a partnership firm for asst. years 1973-74 and 1974-75. On appeal, the CIT(A), Meerut has cancelled the orders passed by the ITO and that is how the revenue is in appeal.
2. We have heard the learned Departmental Representative and the learned counsel for the assessee and have perused the material placed before us.
3. A partnership firm M/s Ispat Udyog was constituted by two partners, namely, Shri K.B. Lal (60%) and Sudhir Kumar (40%). It was allowed development rebate of Rs. 9,244 for asst. year 1973-74 and of Rs. 26,771 for assessment year 1974-75. Shri K.B. Lal died on 26-7-79 and thereafter the surviving partner Shri Sudhir Kumar took his own wife Smt. Meena Aggarwal as a partner. For the period 26-7-79 to 31-3-80 the new firm did not apply for registration but the ITO treated it as a registered firm under Section 183(b) of the Act. The ITO took the view that by the introduction of Smt. Meena Aggarwal as a partner, assets in respect of which development rebate was allowed to the firm stood transferred and, therefore, in terms of Section 34(3)(b) the development rebate should be withdrawn. He issued a notice to the assessee, who contended before the ITO that on these facts the development rebate could not be withdrawn. The ITO, however, felt that since the assessee had ceased to exist before the expiry of 8 years and did not utilise the reserve as prescribed in law, the development rebate had to be withdrawn. The assessee appealed to the CIT(A), who held that there was no transfer of the assets within the meaning of Section 34(3)(b) because on account of the death of one of the partners, the firm stood dissolved by operation of law and hence there was no transfer of the assets by the dissolved firm to any person. Though the learned CIT( A) has referred to the ITO's contention that the development rebate reserve was not utilised within the period of 8 years, the learned CIT(A) has not dealt with the same in his order. In the appeal before us the learned Departmental Representative laid stress on the point that when Smt. Meena Aggarwal was admitted as a partner she acquired a right in the plant and machinery about which the firm had been granted development rebate and, therefore, there is transfer in her favour and thus withdrawal or development rebate was authorised by the provisions of Section 34(3)(b). He did not press into service the point raised by the ITO that the development rebate reserve was not utilised within the period of 8 years as the firm ceased to exist. The learned counsel for the assessee, on the other hand, contended that there was no transfer by the assessee and hence no action could be taken. For the sake of easy reference, we reproduce below Section 34(3)(b):
If any ship, machinery or plant is sold or otherwise transferred by the assessee to any person at any time before the expiry of eight years from the end of the previous year in which it was acquired or installed, any allowance made under Section 33 or under the corresponding provisions of the Indian Income-tax Act, 1922 (11 of 1922), in respect of that ship, machinery or plant shall be deemed to have been wrongly made for the purposes of this Act, and the provisions of Sub-section (5) of Section 155 shall apply accordingly.
4. The learned Departmental Representative relied upon Chinoor Motor Transport Co. (P.) Ltd. v. ITO [1966] 59 ITR 238 (SC),Addl. CIT v. M.A.J. Vasanaik [1919] 116 ITR110 (Kar.) and Blue Bay Fisheries (P.) Ltd. v. CIT [1987] 166 ITR 1 (Ker.).
5. We have gone through these rulings and none of them seems to help the revenue. In Chittor Motor Transport Co. (P.) Ltd.'s case (supra) a private limited co. transferred its motor buses to its shareholders and it was, therefore, held that there was a transfer of plant and machinery justifying withdrawal of development rebate. In M.A.J. Vasanaik's case (supra) an individual had converted his individual business into a partnership and it was on these facts that it was held that there was a transfer of plant and machinery which belonged to him as an individual to a partnership firm and, therefore, development rebate availed of by him was to be withdrawn. In Blue Bay Fisheries (P.) Ltd.'s case (supra) Hon'ble the Kerala High Court merely held that ah agreement to lease for a certain period and sale at the end of that period amounted to a transfer.
6. We have reproduced above the language of Section 34(3)(b) and a perusal thereof would show that the transfer has to be by "the assessee". Assessee in this clause Would be the same to whom development rebate was allowed by the ITO. In the case before us it was a partnership firm constituted by S/Shri K.B. Lal and Sudhir Kumar that had been allowed development rebate. According to the ITO himself by the death of Shri K.B. Lal the said firm ceased Jo exist and the business was taken over by a new firm. Thus when the old firm ceased to exist subsequently and by operation of law on account of the death of one of its two partners, the firm that had availed of the development rebate could not have transferred the plant and machinery. On the death of K.B. Lal the firm came to an end and the assets of the erstwhile firm became the joint property of Sudhir Kumar and the heirs of K.B. Lal to be shared in accordance with the provisions of the Partnership Act. If thereafter Sudhir Kumar entered into a new partnership with his own wife there might be a transfer of plant and machinery by Sudhir Kumar to the new firm but that cannot be termed as a transfer by the old firm (the assessee) as contemplated under Section 34(3)(b). The judgment of Hon'ble the Karnataka High Court in MA J. Vasanaik's case (supra) was on a different set of facts where it was an individual who had availed the benefit of development rebate and then had taken a partner. In the case before us Sudhir Kumar was not the assessee, who availed the development rebate and, therefore, the said ruling relied upon by the learned Departmental Representative cannot apply.
7. The point was made clear in another judgment of Hon'ble the Karnataka High Court itself in Meghdoot Electrical Corporation v. Addl. CIT [1979] 116 ITR 400. In this case a partnership firm that had availed the development rebate was dissolved and assets in respect of which development rebate was allowed were allotted to one of the erstwhile partners. A new partnership firm was then formed with another erstwhile partner. It was held that there was no transfer of the assets by the dissolved firm and hence development rebate could not be withdrawn. This view has been taken by Hon'ble the Supreme Court as well in Malabar Fisheries Co. v. CIT [1979] 120 ITR 49 in which it was observed as follows at page 60:
There is yet another reason for rejecting the contention of the counsel for revenue and that is that the second condition required to be satisfied for attracting Section 34(3)(b) cannot be said to have been satisfied in the case. It is necessary that the sale of transfer of assets must be by the assessee to a person. Now every dissolution must in point of time be anterior to the actual distribution, division or allotment of the assets that takes place after making up 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 possible to accept the view of the High Court that the distribution of assets effected by a deed takes place to instanti with the dissolution or that it is effected by the dissolved firm.
(Emphasis supplied)
8. In view of the provisions of Section 34(3)(b), therefore, the transfer of the assets has to be by the assessee that was allowed development rebate and that assessee i.e. partnership firm having become non-existent by dissolution on account of death of one of the partners did not transfer the plant and machinery to anyone and therefore, Section 34(3)(b) could not come into play in this case. In our view, therefore, the learned CIT(A) was right in holding that in the present case Section 34(3)(b) could not be invoked. We hereby affirm his view.
9. As stated above, the ITO proceeded on the basis that the firm did not utilise the development rebate reserve for the purposes of business within the period of 8 years as it ceased to exist within that time.
The learned ITO appears to have confused the requirements of law. Section 34(3)(a) which required the creation of development rebate reserve reads as under:
The deduction referred to in Section 33 shall not be allowed unless an amount equal to seventy-five per cent of the development rebate to be actually allowed is debited to the profit and loss account of the relevant previous year and credited to a reserve account to be utilised by the assessee during a period of eight years next following for the purposes of the business of the undertaking other than:-
(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.
What the learned ITO appears to have thought is that after the expiry of the period of 8 years the assessee must use the amount of development rebate reserve for its business. The aforesaid provision, on the other hand, required that right from the time of the creation of the reserve up to a period of 8 years, the amount of the reserve has to be utilised for the purposes of business and if there is a default then Under Section 155(5) the amount of development rebate can be withdrawn. Probably the Commissioner while authorising this appeal was conscious of the misconception operating in the mind of the ITO and that is why in the grounds of appeals set up in the present appeal it was not pleaded that the withdrawal of development rebate was based not on the ground of transfer of the assets in terms of Section 34(3)(b)buton account of non-user of the development rebate reserve for the purposes of business in terms of Section 34(3)(a) read with Section 155(5). The ITO while passing the impugned order has not specified where the amounts relating to the development rebate reserve had gone if they were not utilised for the purposes of business. If the amount is debited to the Profit & Loss Account and credited to a reserve account, the amount involved therein could continues to be utilised in business and, therefore, it was for the ITO to show that this was not so and in fact the assessee withdrew the amounts relating to development rebate reserve from its business and used them for some other purpose. This does not appear to have been the case in respect of the firm in question. Section 155(5)(ii) cannot come into play when the assessee ceased to exist as in the case before us by dissolution of a Firm or by the death of an individual assessee. Therefore, the ITO's action in withdrawing the development rebate for the alleged non-user of the development rebate reserve was also misconceived and not sustainable.
10. In the result, we find no force in these appeals and the same are dismissed.