Kerala High Court
Radhas Printers vs Commissioner Of Income-Tax And Ors. on 12 July, 1979
Equivalent citations: [1981]132ITR300(KER)
JUDGMENT George Vadakkel, J.
1. For the assessment years 1966-67 to 1971-72, the petitioner-firm got the benefit of development rebate under Section 33(1) of the I.T. Act, 1961. On the ground that it transferred its assets and liabilities to one "N.R. Trust", the second respondent, recomputing its total income during the relevant years as contemplated by Sections 34(3)(b) and 155(5) of the Act issued Exs. P-4A to P-4F revised assessment orders in respect of the years 1966-67 to 1971-72. The first respondent affirmed this on revision as per Ex. P-6 order.
"N.R. Trust" was created by Ex. P-2 trust deed dated October 27, 1971. The founder trustee therein is one of the partners of the petitioner-firm. There are 20 beneficiaries mentioned therein. They include the partners of this firm and minors admitted to its benefits and others. These beneficiaries--"agreed with the founder trustee and delivered to the said trustees all properties, furniture, machinery, stock-in-trade and other properties and chattels and book debts of the business of Radhas Printers, Quilon and Cochin ; Radhas Agencies, Quilon ; Sangam, Changanacherry ; Radhas, Kottayam ; R.K.T. Reddiar & Company, Bombay and Kunkumam Printers & Publishers, Trivandrum, and others as going concerns on and from the 27th day of October, 1971, in consideration of the said trustees agreeing to discharge the liabilities, such assets and liabilities specifically described in a separate agreement entered into for assignment up to the trustees absolutely by the respective beneficiaries who are partners or minors admitted to the benefits thereof which in effect resulted in the transfer and assignment to the trustees, upon trust either by themselves or through their nominees the sums referred to in Clause 17 against their respective names". Radhas Printers is the petitioner-firm. As contemplated by Ex. P-2 trust deed, the partners of the petitioner-firm by a separate deed, Ex. P-3, of the same date assigned to the trustees the assets and liabilities of the firm. The assignment was with effect from November 1, 1971. Clause 1 therein reads:
"1. The vendors, as beneficial owners, have agreed to assign unto the assignees all that the goodwill of the vendors and in the business of Radhas Printers, Quilon, carried on by them in partnership and to hold the assignees and their assigns out as carrying on the said business in succession to the vendors and all book and other debts owing to them on account of the said business and all securities for the same and the benefit of all contracts and engagements made with the vendors and to which they are entitled in respect of the business hereby assigned to hold the same unto the assignees with effect from the first day of November One thousand nine hundred and seventy-one absolutely."
2. The question for consideration, as raised by the learned counsel for the petitioner-firm, is whether Exs. P-2 and P-3 transactions involve a transfer by the firm of its assets and liabilities to the trustees.
3. There can be no doubt that the firm changed hands as a going concern from the partners to the trustees ; no doubt, one of the trustees, the founder trustee, is one of the partners of the petitioner-firm. Admittedly, the partners of the petitioner-firm and those admitted to its benefits are, along with some others, the beneficiaries as per the trust deed. However, this is not a case of a declaration of trust by will, nor one, where the author of the trust is himself the trustee, for, as per Ex. P-2 trust deed, there are three trustees. Nor is one partner by himself competent to declare a trust in respect of the partnership property. Therefore, this is a case, where it was necessary to transfer the trust property to the trustees, and was transferred as per Ex. P-3 deed.
4. In Tulsidas Kilachand v. CIT [1961] 42 ITR 1, with reference to a case of a husband constituting himself a trustee for his wife in respect of certain shares held by him in some companies, the Supreme Court said (p. 6):
"The contention that there was no transfer at all in this case is not sound. The shares were previously held by Mr. Tulsidas Kilachand for himself. After the declaration of trust by him, they were held by him not in his personal capacity but as a trustee. No doubt, under Sections 5 and 6 of the Indian Trusts Act, if the declarer of the trust is himself the trustee also, there is no need that he must transfer the property to himself as trustee; but the law implies that such a transfer has been made by him, and no overt act except a declaration of trust is necessary. The capacity of the declarer of trust and his capacity as trustee are different and, after the declaration of trust, he holds the assets as a trustee. Under the Transfer of Property Act, there can be a transfer by a person to himself or to himself and another person or persons. In our opinion, there was in this case a transfer by Mr. Tulsidas Kilachand to himself as a trustee, though there was no formal transfer."
5. In view of what is stated above it is not necessary to examine the submissions made by the learned counsel for the revenue seeking reliance therefor on the definition clause, Section 2(47), of the Act.
6. On behalf of the petitioner, it was then contended that Sections 33(3) and (4) and 155(5) of the Act are unconstitutional. Sub-sections (3) and (4) of Section 33 provide that when two companies amalgamate, the amalgamated company shall continue to fulfil the conditions mentioned in Section 34(3), and so also, a company succeeding a firm. The bar on transfer is not by these provisions, but by Section 34(3)(b), and this provision is not impugned herein. How a striking down of Section 33(3) and (4) would advance the petitioner's case is beyond my comprehension. So long as Section 34(3)(b) stands, the attack on Section 155(5) also would be of no avail to the petitioner. The former provision says that if the machinery is transferred within the expiry of eight years from the end of the previous year in which it was acquired, any allowance made under Section 33 in respect of that machinery shall be deemed to have been wrongly made for the purpose of the Act, and the provisions of Section 155(5) shall apply accordingly. Section 155(5) confers power to recompute the total income on the basis that the allowance had been wrongly made, and to make the necessary amendment in the assessment orders. This is a procedural section, the substantive provision being Section 34(3).
7. Relying on the passage in Kanga and Palkhivala's The Law and Practice of Income Tax, 7th Edn., Vol. I, at p. 402, the learned counsel for the petitioner-firm submitted that there is no reason for singling out the two cases mentioned in Section 33(3) and (4) for favourable treatment and inflicting loss of development rebate in other cases like the one on hand where the firm, according to him, is succeeded by a trust, which, according to him, is also a case of bona fide business reorganisation. In view of what is stated in the preceding paragraph it is not really necessary to examine this submission. However, it would be useful to recall to mind the oft-repeated passage in Willis on Constitutional Law :
"In tax matters the State is allowed to pick and choose districts, objects, persons methods and even rates for taxation if it does so reasonably. The Supreme Court of America has been practical and has permitted a very wide latitude in classification for taxation."
8. In East India Tobacco Co. v. State of Andhra Pradesh [1962] 13 STC 529 ; AIR 1962 SC 1733, 1735, and in Khyerbari Tea Co. Ltd. v. State of Assam, AIR 1964 SC 925, the Supreme Court has approved and recognised this principle. It should also be noted that, here, it is not a matter of imposition of tax but withdrawal of a concession, thereby making the assessee liable for tax as others.
9. In view of what is stated above I am not satisfied that the case on hand involves the determination of the constitutional validity of the provisions of Sections 33(3) and (4) or of Section 155(5) of the I.T. Act, 1961, or that such determination is necessary for the disposal of this case.
10. Dismissed. No costs.
JUDGMENT OF DIVISION BENCH Gopalan Nambtyar, C.J.
11. We are in agreement with the view taken by the learned judge and we think no interference is called for with his judgment. The appellant questions the correctness of the ITO's order withdrawing the development rebate granted to the appellant under Section 33(1) of the I.T. Act, 1961. The ground for withdrawal was that the appellant had transferred his assets and liabilities to one "N.R. Trust". The ITO, accordingly, recomputed the income under Section 34(3)(b) and Section 155(5) of the Act and issued revised assessment orders, copies of which are Exs. P-4A to P-4F, for the years 1966-67 to 1971-72. These orders were confirmed on revision by the Commissioner of Income-tax--vide Ex. P-6.
12. The question agitated is whether the conclusion that there was a transfer of assets and liabilities was correct and was warranted in law. Exhibit P-2 dated October 27, 1971, is a copy of the trust deed constituting the trust. The founder of the trust is a partner in the assessee's firm. The trust comprised in all twenty beneficiaries. These included all the partners of the firm and some minors admitted to the benefits of the partnership and others. The trust deed records that the beneficiaries agreed with the founder-trustee and delivered to him all the properties, furniture, machinery, stock-in-trade and other chattels and book debts of the business of Radhas Printers, Quilon and Cochin; Radhas Agencies, Quilon ; Sangam, Chariganacherry ; Radhas, Kottayam ; R.K.T. Reddiar & Company, Bombay, and Kunkumam Printers and Publishers, Trivandrum. These were transferred as going concerns from 27th October, 1971. The trustees agreed to discharge the liabilities which were separately described along with the assets, in a separate agreement entered into for assignment to the trustees. The appellant is one of the business concerns, namely, Radhas Printers. This was assigned to the trustees by a separate deed (copy Ex. P-3). The partners assigned to the trustees the assets and liabilities of the firm with effect from November 1, 1971. The question of the propriety and correctness of the withdrawal of the development rebate had to be decided essentially in the light of Exs. P-2 and P-3 transactions and on the question as to whether they constituted transfer of assets and liabilities of the firm within the meaning of Section 34(3)(b) of the I.T. Act read with Section 155(5).
13. Section 33 provides for development rebate in respect of a new ship or new machinery or plant owned by the assessee and wholly used for the purpose of the business carried on by him, on certain terms and conditions. Section 34(3)(b) provides :
"34. Conditions for depreciation allowance and development rebate.--...
(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 :
Provided that this clause shall not apply-
(i) where the ship has been acquired or the machinery or plant has been installed before the first day of January, 1958 ; or
(ii) where the ship, machinery or plant is sold or otherwise transferred by the assessee to the Government, a local authority, a corporation established by a Central, State or Provincial Act, or a Government company as defined in Section 617 of the Companies Act, 1956 (1 of 1956); or
(iii) where the sale or transfer of the ship, machinery or plant is made in connection with the amalgamation or succession, referred to in Sub-section (3) or Sub-section (4) of Section 33."
Section 155(5), which is referred to in the above section, reads :
"155. Other amendments.--......
(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 subsequently-
(i) at any time before the expiry of eight years from the end of the previous year in which the ship was acquired or the machinery or plant was installed, the ship, machinery or plant is sold or otherwise transferred by the assessee to any person other than the Government, a local authority, a corporation established by a Central, State or Provincial Act or a Government company as defined in Section 617 of the Companies Act, 1956 (1 of 1956), or in connection with any amalgamation or succession referred to in Sub-section (3) or Sub-section (4) of Section 33 ; or
(ii) at any time before the expiry of the eight years referred to in Sub-section (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 Income-tax 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."
14. The controversy arising for determination has to be resolved in the light of the aforesaid provisions of the Act, and the terms of the deeds, Exs. P-2 and P-3. Clause (1) of Ex. P-3 may usefully be extracted :
"1. The vendors, as beneficial owners, have agreed to assign unto the assignee all the goodwill of the vendors and in the business of Radhas Printers, Quilon, carried on by them in partnership, and to hold the assignees and their assigns out as carrying on the said business in succession to the vendors and all book and other debts owing to them on account of the said lousiness and all securities for the same and the benefit of all contracts and engagements made with the vendors and to which they are entitled in respect of the business hereby assigned to hold the same unto the assignees with effect from the first day of November one thousand nine hundred and seventy-one absolutely."
15. We think, on an assessment of the nature of the transaction and the terms of the documents, that the learned judge was right in his conclusion that there was a transfer of the assets and liabilities of the firm as a going concern to the trustees. The fact that one of the trustees was the founder-partner does not make a difference.
16. Counsel for the assessee placed reliance on the decision of the Supreme Court in CIT v. R.M. Chidambaram Pillai [1977] 106 ITR 292, and, in particular, on the following observations (p. 300) :
"Contrary views are not wanting in some rulings, but a catalogue of cases on the other side may be productive of confusion and not resolution of conflict. We abstain from that enterprise and confine ourselves to the statement of the law that although, for purposes of the Income-tax Act, a firm has certain attributes simulative of personality, we have to take it that a partnership is not a person but a plurality of persons."
17. In the light of the above observations, it was the contention of the assessee that it would not be possible and permissible to regard the firm as having transferred its assets and liabilities under Exs. P-2 and P-3, as the firm is not a person. We do not think that the above observation of the Supreme Court is of assistance to the appellant in advancing this extreme contention. Counsel for the revenue stressed the decision of the Supreme Court in Tulsidas Kilachand v. CIT [1961] 42 ITR 1 at p. 6. The decision has been noticed by the learned judge in the judgment under appeal. The Supreme Court there stated as follows (p. 6) I "The contention that there was no transfer at all in this case is not sound. The shares were previously held by Mr. Tulsidas Kilachand for himself. After the declaration of trust by him, they were held by him not in his personal capacity but as a trustee. No doubt, under Sections 5 and 6 of the Indian Trusts Act, if the declarer of the trust is himself the trustee also, there is no need that he must transfer the property to himself as trustee; but the law implies that such a transfer has been made by him, and no overt act except a declaration of trust is necessary. The capacity of the declarer of trust and his capacity as trustee are different and, after the declaration of trust, he holds the assets as a trustee. Under the Transfer of Property Act, there can be a transfer by a person to himself or to himself and another person or persons. In our opinion, there was in this case a transfer by Mr. Tulsidas Kilachand to himself as a trustee, though there was no formal transfer."
18. We are in complete agreement with the reasoning and the conclusion of the learned judge and we think that the authorities, noted supra, support the said conclusion. We see no ground to interfere. We dismiss this appeal with no order as to costs.