Gujarat High Court
Kalindi Investment P. Ltd. vs Commissioner Of Income-Tax on 11 October, 1994
Equivalent citations: [1995]213ITR207(GUJ)
JUDGMENT Rajesh Balia, J.
1. The Income-tax Appellate Tribunal, Ahmedabad Bench 'A' (hereinafter referred to as "the Tribunal"), at the instance of the assessee, has referred the following question, along with the statement of case, for the opinion of the High Court :
"Whether, on the facts and in the circumstances of the case, development rebate originally granted was properly withdrawn ?"
2. The facts and circumstances giving rise to the aforesaid question may be noticed. The assessee, a private limited company, transferred and assigned its undertaking and business carried on in the name of Messrs. Sarabhai M. Chemicals to Telerad Pvt. Ltd., a wholly owned subsidiary company, on March 30, 1973. Since development rebate has been granted to the assessee in the earlier years, the Income-tax Officer acting under section 155(5) of the Income-tax Act, 1961 (hereinafter referred to as "the Act"), withdrew the development rebate, deduction in respect of which was given in the year 1970-71, amounting to Rs. 11,45,826. It was claimed by the assessee that the development rebate could not be withdrawn because of change of ownership. Having considered the facts, the Tribunal found that whether the whole business was transferred or the individual assets were transferred, the fact that these assets changed hands and got transferred was clear and the change of ownership necessarily attracted the provisions of the Act dealing with the withdrawal of the development rebate granted in earlier years.
3. Learned counsel for the assessee contended that the transfer of the undertaking as a whole cannot be equated with the transfer of specific assets in respect of which deduction on account of development rebate under section 33 of the Act was claimed by the assessee, attracting the provisions of section 34(3)(b) read with section 155(5) of the Act. He further elaborated his contention with reference to other provisions of the Act wherein transfer of assets from a holding company to a subsidiary company or from a subsidiary company to a holding company was treated differently and also to the provisions relating to bringing the consideration, recovered on sale of the assets on which depreciation was claimed, for the purpose of computing the balancing charge for including the same in the taxable income. He also contended that the transfer of the undertaking as a whole by the assessee to its holding company was akin to succession of business with all its assets, liabilities and obligations and, therefore, keeping in view the object and intention of allowing development rebate as deduction the continuity of the benefit of the going concern, ownership of which is changed, was not intended to be affected by the provisions of section 155(5) of the Act and in that background it must be held, according to learned counsel for the applicant, that the transfer of the whole undertaking cannot amount to transfer of specific asset for the purpose of invoking the provisions of section 34(3)(b) read with section 155(5) of the Act. Learned counsel strongly placed reliance on the decision of this court in the case of Sarabhai M. Chemicals Private Ltd. v. P. N. Mittal, Competent Authority, IAC of I. T. [1980] 126 ITR 1, wherein this court while considering the provisions of section 41(2), had observed that the question of a balancing charge would arise only if there is sale of a particular asset of the business or particular building, plant or machinery, etc., as distinct from transfer of the undertaking as a whole.
4. Mr. Thakore, learned counsel appearing of the Revenue, contended that the language of the statute is clear and indicates the clear intention of the legislation. The carving out of an exception in the case of the transfer of asset made in the course of amalgamation of companies or as a result of succession in terms of section 33(3)(4) of the Act clearly indicates that all the transfers, including the transfer of the undertaking as a whole, fall within the mischief of section 34(3)(b) attracting action under section 155(5) of the Act.
5. It would be appropriate to refer to the relevant provisions of the Act, in order to appreciate the contentions of learned counsel in support of their respective cases made before us.
6. The relevant provision of section 33(1)(a) of the Act reads as under :
"33. (1) (a) In respect of a new ship or new machinery or plant (other than office appliances or road transport vehicles) which is owned by the assessee and is wholly used for the purposes of the business carried on by him, there shall, in accordance with and subject to the provisions of this section and of section 34, be allowed a deduction, in respect of the previous year in which the ship was acquired or the machinery or plant was installed or, if the ship, machinery or plant is first put to use in the immediately succeeding previous year, then, in respect of that previous year, a sum by way of development rebate as specified in clause (b)."
7. Sub-section (3) and sub-section (4) of section 33 read as under :
"(3). Where, in a scheme of amalgamation, the amalgamating company sells or otherwise transfers to the amalgamated company any ship, machinery or plant in respect of which development rebate has been allowed to the amalgamating company under sub-section (1) or sub-section (1A), -
(a) the amalgamated company shall continue to fulfil the conditions mentioned in sub-section (3) of section 34 in respect of the reserve created by the amalgamating company and in respect of the period within which such ship, machinery or plant shall not be sold or otherwise transferred and in default of any of these conditions, the provisions of sub-section (5) of section 155 shall apply to the amalgamated company as they would have applied to the amalgamating company had it committed the default; and
(b) . . . .
(4) Where a firm is succeeded to by a company in the business carried on by it as a result of which the firm sells or otherwise transfers to the company any ship, machinery or plant, the provisions of clauses (a) and (b) of sub-section (3) shall, so far as may be, apply to the firm and the company.
8. Explanation. - The provisions of this clause shall apply only where -
(i) all the property of the firm relating to the business immediately before the succession becomes the property of the company;
(ii) all the liabilities of the firm relating to the business immediately before the succession become the liabilities of the company; and
(iii) all the shareholders of the company were partners of the firm immediately before the succession."
9. Section 34(3) reads as under :
"34. (3) (a) 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 any previous year in respect of which the deduction is to be allowed under sub-section (2) of that section or any earlier previous year (being a previous year not earlier than the year in which the ship was acquired or the machinery or plant was installed or the ship, machinery or plant was first put to use) 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 :
Provided that this clause shall not apply where the assessee is a company, being a licensee within the meaning of the Electricity (Supply) Act, 1948 (54 of 1948), or where the ship has been acquired or the machinery or plant has been installed before the 1st day of January, 1958 :
Provided further that where a ship has been acquired after the 28th day of February, 1966, this clause shall have effect in respect of such ship as if for the words 'seventy-five', the word 'fifty' had been substituted.
(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 :
10. Provided that this clause shall not apply -
(i) where the ship has been acquired or the machinery or plant has been installed before the 1st 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);
(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."
11. Section 155(5) of the Act reads as under :
"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 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 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. From a perusal of the scheme of the Act, it appears that the deduction of development rebate is allowable in respect of a new ship or machinery or plant owned by the assessee in the previous year in which such new ship was acquired or such new machinery or plant was installed or in the immediately succeeding previous year in which such asset is first put to use. The development rebate is a one-time deduction allowable with reference to the actual cost of acquisition which is to be determined in accordance with the provisions of section 43(1) of the Act at specified rates with reference to the period in which such asset has been acquired. It may be noticed that no development rebate is allowable in respect of any used ship, machinery or plant except as provided under sub-section (1A) of section 33, which applies to the ship which was not previously acquired by the Indian resident or the assets which were not previously used in India. The other condition for allowing the development rebate is that the assessee has to create a development reserve fund equal to the prescribed per cent. of the development rebate to be actually allowed and is debited to the profit and loss account of the previous year in respect of which such deduction is allowed. Such development reserve has to be utilised by the assessee during the period of eight years next following for the purpose of the business of the undertaking. There is, however, a prohibition that such development reserve cannot be utilised for distribution by way of dividends or profits or for remittance outside India as profits or for the creation of any asset outside India. The other condition subject to which development reserve has been put is that the assessee to whom deduction on account of development rebate has been allowed does not sell or otherwise transfer the concerned asset before the expiry of eight years from the end of the previous year in which such asset was acquired or installed. Any transfer of such asset before the expiry of eight years brings into operation the fiction created under section 34(3)(b) that the development rebate "shall be deemed to have been wrongly made for the purposes of the Act", in which case the provisions of sub-section (5) of section 155 of the Act, calling for amendment in the original assessment in which such deduction has been allowed become operative.
13. These provisions clearly indicate the police behind the benefit of deduction made available to the assessee in respect of acquisition of a new ship or plant or machinery. It is to create enough viability with the assessee for putting new technology in business by acquiring new assets with the assistance of the reserve fund created as a result of allowing of deduction in addition to depreciation, over and above off-setting the actual post of acquisition and this benefit is not made available for the acquisition of old machinery and plant for carrying on business.
14. Keeping in view the aforesaid provisions and the objective behind the benefit of development rebate made available to an assessee, the language of the statute leaves no room for doubt that if a person who acquires a new asset and avails of the benefit of deduction of development rebate after fulfilling the conditions for availing thereof, is unable to retain that asset for a specified period for any person, he is also not entitled to retain the benefit of reduced taxability relatable to the said assets on account of development rebate under section 33 of the Act. The transferee of such used asset is not entitled to any development rebate under the provisions of the Act. The exceptions wherein the acquirer has been allowed to retain the benefits of the development rebate have been carved out under sub-sections (3) and (4) of section 33, referred to above. One of such exceptions is that where the assets are transferred in connection with the scheme of amalgamation. In such an event, the amalgamating company is under an obligation to fulfil the conditions mentioned in sub-section (3) of section 34 of the Act in respect of the reserve created by the amalgamated company and is also subject to the condition of holding such asset for the remaining period as provided under section 34(3)(b). The period for which the amalgamated company is subject to obligation to fulfil such condition is for the balance of the period which the amalgamated company would have been subjected to, had the assets not been so transferred to the amalgamating company.
15. The other exception is, where a firm is succeeded by a company in the business carried on by it as a result of which the firm sell or otherwise transfers to the company any such assets, the transferee-company is also allowed to retain the benefits of development rebate subject to fulfilling the obligations attached to the allowability of development rebate as in the case of the amalgamation for the remaining period and the restriction on transfer of such assets. However, one significant condition may be noticed that this continuity of benefit is envisaged only in case all the shareholders of the company are the partners of the firm immediately before the succession. If the shareholders of the company consist of partners of the firm from which business is acquired and some other partners also, the condition of section 33(4) is not fulfilled. This is significant in the sense that unless there is absolute identity of the firm, partners of the firm and the members of the company, the benefits under section 33(4) are not available. In the fact of this scheme, the contention on behalf of the assessee that the case of transfer of the undertaking as a whole is akin to succession of the business of a firm by the company as envisaged under section 33(4) of the Act cannot be accepted. The condition for operation of section 33(4) makes it abundantly clear that the provision is not of generic nature dealing with succession of business, but is applicable to that specie only with which it is dealing. In this connection, it may also be noted that the charge of tax under the Act is a specie of direct taxation affecting the person and ordinarily the provisions of exemption are also attached to a person and not to a business. The scheme of sections 33 and 34 is discussed above reveals that the benefits of deduction is annexed to ownership of asset and not with the undertaking.
16. In the context of the provisions of sections 33 and 34 of the Act the submission of learned counsel for the assessee that unless there is a transfer of the specific asset in respect of which development rebate was availed of by the assessee, the provisions of section 34(3)(b) are not attracted in the case of transfer of undertaking as a whole, is also not well-founded. The analogy of the provisions of section 41(2) or section 269C cannot be pressed into service. Sub-section (2) of section 41 of the Act concerns the sale of an asset in respect of which depreciation has been claimed as deduction in the past. The sale of an asset is indicative of a transaction pointing out a direct nexus between the assets and the consideration. So also section 269C of the Act also relates to a transfer of an immovable property for an apparent consideration which is less than the fair market value of the property and where the agreed consideration has not been truly stated in the instrument of transfer. In such case also for invoking the provisions of the statue a direct nexus between the specific property and the consideration is a sine qua non, whereas for the purpose of availing of the benefit of development rebate and the conditions for retaining it until the expiry of its full period the requisite condition is continuous ownership of the assessee over the assets during the relevant period.
17. In the aforesaid context it can well be said in the present case that the assessee has lost ownership of the property in question by transfer of the undertaking as a whole which includes transfer of ownership of the assets in question also to the transferee-company. The provision of section 34 of the Act is not confined to transfer by sale necessarily linked with consideration. For attracting the provisions of section 34(3)(b) of the Act, it is enough that the ownership of the assessee in the asset is transferred to any other person subject to the exceptions carved out in the statute at any time before the expiry of the period of eight years. The language used in section 34(3)(b) has been used in the widest possible terms. When it states that "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" it cannot be disputed and has not been disputed by learned counsel that the ownership of the concerned plant and machinery has been transferred to the transferee-company even in the case of transfer of the undertaking as a whole. The only condition is that since it is not severable from the entire transaction it cannot be treated as a transfer of the plant and machinery as such. This argument in the context of the provisions of the Act, in our opinion, is not sustainable.
18. The decision of this court referred to and relied upon by learned counsel, in this connection, in our opinion, has no application to the interpretation of sections 33 and 34 read with section 155(5) of the Act. It may be noticed that the said decision referred to by learned counsel relates to the very same transaction under consideration but to the question of charging to tax that part of the consideration as can be attributed to the transfer of the specific asset over and above its written down value as a result of depreciation or balancing charge; or with regard to the invoking of the provisions of section 269C for acquisition of the immovable property by the Union of India on the assumed ground of understatement of agreed consideration or the apparent consideration being less than the fair market value of the immovable property concerned. As discussed above, sections 41(2) and 269C have entirely different objectives and for attracting the aforesaid provisions it is a pre-condition that there is a direct link between the assets concerned in respect of which depreciation was allowed or in respect of which an issue relating to the fair market value arises, and the consideration for which such assets have been transferred or sold. As held by the Supreme Court in the case of CIT v. Mugneeram Bangur and Co. (Land Department) [1965] 57 ITR 299, in the case of sale of a whole concern, no part of the slump price can be attributed to specific assets for the purpose of bringing the balancing charge to tax under section 41(2) of the Act or for invoking the powers under section 269C of the Act to acquire the property for the assumed understatement. Obviously no part of the slump consideration can be specifically attributed to the specific asset which has been subjected to depreciation so as to fall in the category of sale of the asset. It may be noticed that under both the said provisions the only form of transaction that is amenable is sale of the asset concerned and not transfer of ownership, in any form.
19. As discussed by us above, those are the provisions for which the live link with the consideration of the assets concerned are material factors under which those provisions come into play. As far as the provisions of sections 33, 34 and 155(5) of the Act are concerned, it is the link between the assets and the ownership of the assessee which is relevant. If the link of ownership of the assessee with the assets before the expiry of the period of eight years is snapped unless the case is governed by the proviso to section 34(3)(b) read with section 33(3) and (4) of the Act, it must be deemed that the development rebate for the relevant years was wrongly allowed necessitating the amendment of the assessment of the relevant previous year by having recourse to section 155(5) of the Act.
20. It was then urged by learned counsel for the assessee that as the question whether transfer of the undertaking as a whole attracted the provisions of sections 34(3)(b) and 155(5) of the Act is debatable issue calling for interpretation of the provisions through long-drawn reasoning the same cannot be made the subject-matter of proceedings under section 154. It is only a mistake apparent from the record that can give jurisdiction to the authority concerned to rectify to mistake by amending the order.
21. Having carefully considered the contention we find no substance in it. The concept of "mistake apparent from the record" as envisaged under section 154 cannot be read as such into section 155. By reading the two provisions closely it is clear that, while section 154 confers a general power on the authority to amend his earlier order within a period of four years if such authority finds that there is a mistake apparent from the record, which needs to be rectified. However, section 155 comes into operation as a result of certain events having taken place subsequent to the passing of the original order, which renders the original order erroneous. The exercise of power under section 155 is not hedged in with the condition of there being a mistake apparent on the face of the record in all cases but depends on the coming into existence of certain facts envisaged under section 155 which may result in making the entire order erroneous. Necessarily, the authority concerned will have to establish the existence of such facts before he acquires jurisdiction. If for establishing the jurisdictional fact inquiry into debatable issues of fact and law are to be gone into, that jurisdiction is inherent in the exercise of power under section 155.
22. It may also be noticed that while proceedings under section 154 are envisaged "with a view to rectify a mistake apparent from the record", section 155(1) and (2) comes into play "where, in respect of a completed assessment it is found" or as a result of proceedings under section 147 it becomes necessary to recompute the income of succeeding years in terms of sub-section (4) or depreciation allowance or development rebate or development allowance rightly allowed in the relevant assessment year is required to be withdrawn as a result of breach of certain conditions of such allowances in the subsequent year as envisaged under sub-sections (4), (5) and (5A). Essentially section 154 comes into play where there is mistake apparent from the existing record of the relevant year. Section 155 comes into play where the assessment of the relevant assessment year becomes erroneous as a result of certain findings arrived at in other proceedings or the happening of certain events subsequently. Such conditions being different conditions to be fulfilled in each case requiring amendment of the order, the conditions of section 154 cannot be read in the abstract in each case concerned under section 155. Therefore, merely because it has to be established whether the condition for exercise of power under section 155(5) has come into existence or not by a process of reasoning or interpreting the statute, the same cannot be said to be falling beyond the jurisdiction of the assessing authority by applying the principles governing the exercise of power under section 154 of the Act.
23. As a result of the aforesaid discussion, the answer to the question referred to above is in the affirmative, i.e., in favour of the Revenue and against the assessee.
24. This reference accordingly stands disposed of with no order as to costs.