Income Tax Appellate Tribunal - Ahmedabad
Income-Tax Officer vs Pratik Prints on 31 December, 1990
Equivalent citations: [1991]37ITD159(AHD)
ORDER
B.M. Kothari, Accountant Member
1. The revenue has raised the following identical ground in these appeals against a common order passed by the learned CIT (Appeal) for assessment years 1977-78 and 1978-79:
On the facts and in the circumstances of the case, the CIT (Appeals) has erred in allowing the investment allowance correctly withdrawn by the ITO by his order under Section 155(4)(a) of the IT Act, in view of the fact that there is a breach of requisite conditions of granting investment allowance within the meaning of Section 32A(4)(ii)(a) and/or (b) of the Act inasmuch as the firm has been dissolved within the statutory period of ten years and there is no possibility of utilising the investment allowance reserve in purchase of new machinery.
2.1 The assessee firm was dissolved on 31st March, 1978 and a deed of dissolution of partnership was executed on 19-9-1978. Upon the said dissolution, all the assets and liabilities of the firm were taken over by one of the partners Smt. Nilam Swami Rajbharti and she continued the said business as a sole proprietor under the name and style of "M/s. Pratik Prints Business". The Income-tax Officer invoked the provisions of Section 155(4A) r.w.s. 32A(4)(ii)(a) and withdrew the investment allowance in both the years under consideration.
2.2 The CIT(A) held that allotment of assets and liabilities upon the dissolution of the firm does not amount to transfer within the meaning of Sections 155(4A)and 32A(4) and further held that there was no justification in withdrawing the investment allowance in both the years under consideration.
3.1 The learned Senior Departmental Representative contended that a plain reading of the aforesaid sections namely Sections 155(4A) & 32A(4) supports the view taken by the ITO and the investment allowance already granted for assessment years 1977-78 & 1978-79 was rightly withdrawn by him. He explained that provisions of Section 155(4A) can be invoked if any one of the three conditions prescribed therein are fulfilled;
(a) If the machinery or plant on which investment allowance has been granted is sold or otherwise transferred at any time before the expiry of eight years from the end of the previous year in which the machinery was acquired or the same was installed;
(b) If at any time before the expiry of ten years, the assessee does not utilise the amount credited to the investment allowance reserve account for the purposes of acquiring a new machinery or plant;
(c) If at any time before the expiry of the ten years, the assessee utilises the amount credited to the investment allowance reserve account for distribution by way of dividends or profits, for remittance outside India as profits or for the creation of any asset outside India or for any other purpose which is not a purpose of the business of the undertaking.
3.2 In the present case not only any one of the conditions have been violated, but all the conditions have been followed by the assessee as the plant and machinery has been sold or otherwise transferred before the expiry of eight years, and the assessee has not utilised the amount of investment allowance reserve within a period of ten years for purchase of new machinery or plant. The possibility of utilisation of investment allowance reserve by the assessee for purchase of new plant and machinery within the prescribed period has also come to an end, as the business has been taken over by one of the erstwhile partners, who became the sole proprietor of the said business. He also relied upon the judgment of the Hon'ble Madras High Court in the case of South India Steel Rolling Mills v. CIT [1982] 135 ITR 322. It was further contended that since the amount of investment allowance reserve was also transferred, the same amounts to distribution between the partners before the expiry of the prescribed period. In this connection, he invited our attention towards the judgment of Hon'ble Punjab and Haryana High Court in the case of Leader Engg. Works v. CIT[1980] 124 ITR 44. lt was strongly urged by him that the order passed by the CIT(A) should be set aside and that of the ITO should be restored.
4.1 The learned counsel for the assessee contended that this matter is clearly covered in favour of the assessee by several decisions including judgment of Hon'ble Gujarat High Court and the Supreme Court. He submitted that no transfer is involved when the assets and liabilities are distributed amongst the partners upon dissolution of a firm. This view has been finally confirmed by the Hon'ble Supreme Court in the case of Malabar Fisheries Co. v. CIT [1979] 120 ITR 49. As regards utilisation of investment allowance reserve, it was submitted that there was a continuation of the same business and the partner who had taken over the assets and liabilities of the firm had fulfilled this condition by purchase of plant and machinery in the subsequent years. It was also submitted that the condition regarding utilisation of investment allowance reserve for purchase of new plant and machinery applies only if the assessee who was granted investment allowance continue to exist. He placed reliance on judgment of Hon'ble Madras High Court in the case of CIT v. S. Balasubramanian [1982] 138 ITR 815. The learned counsel for the assessee relied upon the following decisions to support his contention that the order passed by the CIT(A) is perfectly valid :
D.K. Trivedi & Sons v. ITO [1989] 33 TTJ (JP) 63, Malabar Fisheries Co.'s case (supra), IAC v. Kumar Steel, First 1TO v. Industrial & General Products [1985] 12 ITD 132 (Mad.) and ITO v. Ispat Udyog [1990] 32 ITD 217 (Delhi).
4.2 It is also pointed out that some of the above referred cases including the judgment of the Hon'ble Supreme Court deals with withdrawal of development rebate. The provisions relating to withdrawal of development rebate are pari materia with the provisions governing the withdrawal of investment allowance and the ratio of all such judgments equally apply in relation to investment allowance. Even the CBDT had issued certain circulars saying that the provisions relating to investment allowance on development rebate are more or less similar in relation to various aspects of such deductions. He strongly supported the order passed by the CIT(A).
5. We have carefully considered the rival submissions made by the learned representatives. We have also carefully gone through all the decisions relied upon by the learned representatives. The details of investment allowance allowed to the assessee in assessment years 1977-78 and 1978-79 are as under: -
I. Machinery acquired during 1977-78 assessment year Rs. 6,21,173 Investment allowance at 25% Rs. 1,55,295 Investment allowance reserve at 75% 31-3-1977 Rs. 1,16,469 II. Machinery acquired during 1978-79 assessment year Rs. 3,24,000 Investment allowance at 25% Rs. 81,000 Investment allowance reserve at 75% Rs. 60,750
The assessee claimed that investment allowance reserve created in assessment year 1977-78 was utilised in the very next year by purchase of plant and machinery costing Rs. 3,24,000. The investment allowance reserve created in assessment year 1978-79 amounting to Rs. 60,750 was also utilised by the partner who took over the assets and liabilities by purchasing plant and machinery amounting to Rs. 1,74,917 in very next year, i.e., assessment year 1979-80.
5.1 Let us first consider the judgment of Hon'ble Madras High Court in the case of South India Steel Rolling Mills (supra) relied upon by the learned senior Departmental Representative. In that case, one of the two partners of the assessee firm died and consequently the firm stood dissolved. Thereafter, the surviving partner and the heirs of deceased partner constituted a fresh partnership and continued the business with all its assets and liabilities including the items of machinery on which development rebate reserve had been granted in respect of which development rebate reserve had been created in the books of account. The CIT took action under Section 263 of the IT Act and directed cancellation of the development rebate allowance already granted to the assessee in view of Section 155(5). The Hon'ble Madras High Court held that the action of the CIT was justified. The ratio of this judgment goes against the assessee's contention in the present case. But this judgment is based on an earlier judgment of Hon'ble Madras High Court in the case of Addl. CIT v. Dalmia Magnesite Corpoaration [1979] 117 ITR930.TheHon'bleMadras High Court also did not have the benefit of considering the judgment of Hon'ble Supreme Court in the case of Malabar Fisheries Co. (supra). It will be worthwhile to observe that in a subsequent judgment, the Hon'ble Madras High Court in the case of 5. Balasubramanian (supra) has clearly taken a contrary view then the view taken in above referred earlier judgment by the Hon'ble Madras High Court. In this subsequent judgment the Hon'ble Madras High Court have clearly observed that the decision in the case at Dalmia Magnesite Corporation (supra) requires re-consideration in the light of the decision of the Hon'ble Supreme Court in the ease of Malabar Fisheries (supra). It will also pertinent to add that one of the Hon'ble Judges who decided the aforesaid case of S. Balasubramanian (supra) was also one of the Judges who decided the earlier case of South India Steel Rolling Mills (supra). It is thus evident that the judgment relied upon by the learned Senior D.R. does not hold good after the judgment of the Hon'ble Supreme Court in the case of Malabar Fisheries (supra).
5.2 The Hon'ble Supreme Court in the case of Malabar Fisheries Co. (supra) was also considering the question relating to withdrawal of development rebate in view of Section 155(5) r.w.s. 34(3)(b)and also read with Section 2(47) of Income-tax Act, 1961. After considering the earlier judgment of Hon'ble Supreme Court and other Courts, the Hon'ble Judges observed that 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 firm's assets all that is meant is property or assets in which all partners have a joint or common interest. The firm as such has no separate rights of its own in the partnership assets, but it is the partners who owned 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 the partners, and there is no question of any extinguishment of the firm's rights in the partnership assets amounting to a transfer of assets. The Supreme Court, therefore, clearly held that there is no transfer of assets involved when the assets are allotted to one or more of the partners upon dissolution of the firm.
5.3 The Hon'ble Supreme Court further held that the second condition required to be satisfied for withdrawal of development rebate by attracting Section 34(3)(b) cannot also be said to have been satisfied in such a case. It is necessary that the sale or transfer of assets must be by the assessee to a person. Now every dissolution must in point of time be interior 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 there upon 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. In view of the aforesaid judgment of the Hon'ble Supreme Court, the view taken by the CIT(A) is perfectly valid and justified as the allotment of all the assets and liabilities to one of the partners upon dissolution of the firm cannot be termed as transfer of assets as contemplated in Section 155 r.w.s. 32A(4).
6. As regards the other conditions prescribed in Section 155(4A) r.w.s. 32A(4) about non-utilisation of investment allowance reserve, it will be worthwhile to make a useful reference to the Judgment of the Hon'ble Madras High Court in the case of S. Balasubramanian {supra). It was held in that case that utilisation of development rebate reserve, i.e., contemplated under Section 155(5)(ii)(c) can only be by the assessee, who got the rebate, continuing to exist and if the assessee, who got the rebate did not utilise the reserve for the business but for certain other purposes set out in the section, then the ITO would be justified in applying Section 155(5). As the HUF in that case did not continue to exist, there was no scope for attracting Section 155(5), the Hon'ble High Court held that the Tribunal was correct in its view and there was no justification for withdrawal of the development rebate originally granted. In the present case also, the assessee firm who got the deduction of investment allowance ceased to exist upon the dissolution of the firm. Therefore, question of utilisation of investment allowance reserve by the assessee, after it is dissolved, cannot arise and this would not constitute any breach of any of the conditions prescribed in Section 155(4A). It is a pre-condition for invoking the condition relating to utilisation of investment allowance reserve that the same assessee should continue to exist. Even if the matter is viewed from an other angle, the assessee has not in any manner violated the conditions prescribed under Section 155(4A) r.w.s. 32A(4). The investment allowance reserve created in assessment year 1977-78 amounting to Rs. 1,16,469 has been utilised in the next year when the assessee has purchased machinery amounting to Rs. 3,24,000. Similarly, the investment allowance reserve created in assessment year 1978-79 of Rs. 60,750 has also been utilised by the partner who took over the entire assets and liabilities alongwith other assets who had purchased machinery worth Rs. 1,74,917 in the immediately next year. The purpose of granting investment allowance reserve for purchase of new machinery was to promote the growth of industries. The partner who took over the assets and liabilities of the dissolved firm is continuing the same business and the amount of investment allowance reserve created by the firm in assessment year 1978-79 has also been utilised for purchase of new machinery in the subsequent year. The series of Judgments relied Upon the learned counsel for the assessee led to one conclusion that if the conditions prescribed for grant of investment allowance which can be fulfilled, but the same have not been fulfilled, it would be a case of unfulfilment of those conditions and the investment allowance would be withdrawn, if it is covered by the conditions mentioned in Section 155A(4) r.w.s. 32A(4). But if those conditions cannot be fulfilled on account of compelling circumstances like partition of HUF, dissolution of firm etc., it would not be a case fit for withdrawal of investment allowance or development rebate.
6.1 The various benches of the Tribunal have taken the view that under such facts and circumstances, the amount of development rebate or investment allowance granted to the assessee cannot be withdrawn, where the assets and liabilities are allocated, allotted or distributed amongst the partners upon dissolution of a firm and has been held that provisions of Section 155A(4)are not applicable in such cases. For instance the IT AT, Jaipur in the case of D.K. Trivedi & Sons (supra) and IT AT, Ahmedabad Bench in the case of Nipa Twisting Works v. ITO [1985] 11 ITD 387 (TM) took a similar view on similar facts. The provisions relating to withdrawal of investment allowance are in pari materia with the provisions governing the withdrawal of development rebate. The judgment of Hon'ble Supreme Court in the case of Malabar Fisheries Co. (supra) fully supports the view taken by the CIT(A).
7. The Gujarat High Court in the case of Lakshmi Wvg. Factory v. Addl. CIT [1979] 116 ITR 80 has also taken a similar view while dealing with the question relating to withdrawal of development rebate on the dissolution of the partnership firm. The Hon'ble Gujarat High Court held that development rebate allowed to a partnership firm cannot be withdrawn under Section 34(3)(b) r.w.s. 155(5) of Income-tax Act because surplus assets of the partnership are distributed amongst the partners on the dissolution of the firm. There cannot be said to be utilisation of the assets in which the development rebate was allowed otherwise than for the purposes of the business of the undertaking. It was held that development rebate cannot be withdrawn under such circumstances.
8. In view of the aforesaid discussions, we are of the considered opinion that the CIT(A) has rightly held that there was no justification in withdrawing the investment allowance granted to the assessee.
9. In the result, the revenue's appeals are dismissed.