Gujarat High Court
Commissioner Of Income-Tax vs Shantilal Rugnathji Desai on 23 October, 1985
Equivalent citations: [1987]163ITR245(GUJ)
Author: A.M. Ahmadi
Bench: A.M. Ahmadi
JUDGMENT A.M. Ahmadi, J.
1. The assessee, an individual, was allowed development rebate in the assessment years 1969-70 to 1971-72 in the sum of Rs. 10,942, Rs. 8,642 and Rs. 13,327 respectively in respect of plant and machinery installed during the relevant previous years. The assessee, however, converted his proprietary business into a partnership business with effect from April 1, 1971. Since conversion, the business has been carried on in the name and style of Billimoria Electricity Supply Company. He became one of the partners of that firm having 20 paise share in a rupee in the profit and loss thereof. In the assessment year 1972-73, the Income-tax Officer learned about the conversion of the proprietary business into a partnership one, whereupon he invoked section 34(3)(b) of the Income-tax Act, 1961 (hereinafter called "the Act"), which provides as under :
"(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."
2. Sub-section (5) of section 155 provides that where an allowance by way of development rebate has been made wholly or partly to an assessee in respect of the 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 1922 Act, and subsequently 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, or in connection with any amalgamation or succession referred to in subsection (3) or sub-section (4) of section 33, the development rebate originally allowed shall be deemed to have been wrongly allowed and the Income-tax Officer may, notwithstanding anything contained in the Act, recompute the total income of the assessee for the relevant previous year and make the necessary amendment. Accordingly, the Income-tax Officer ordered withdrawal of the development rebate allowed earlier in view of section 34(3)(b) read with section 155(5) of the Act. The assessee, feeling aggrieved against the said order, appealed to the Appellate Assistant Commissioner who held that the conversion of the proprietary business into partnership business did not involve a transfer of the plant and machinery in question. He, therefore, allowed the appeal and set aside the order of the Income-tax Officer against which the Revenue preferred an appeal to the Tribunal. The Tribunal dismissed the appeal of the Revenue relying on its earlier decisions in Poonamchand F. Shah v. ITO and Abdulrahim Umarbhai Maniar v. ITO, dated January 31, 1975 in I.T. As Nos. 905 and 906/Ahd/1975-76 and 668 and 669/Ahd/69-70 respectively. The Revenue, therefore, claimed a reference and the following question has been referred for our opinion :
"Whether, on the facts and circumstances of the case, the Appellate Tribunal was justified in law in holding that the conversion of proprietary business into partnership business by the assessee did not amount to a transfer within the meaning of section 34(3)(b) of the Income-tax Act, so as to warrant withdrawal of the development rebate allowed in the original assessment ?"
3. For reasons which we shall presently indicate, we are of the opinion, that the aforesaid question must be answered in the negative, that is, against the assessee and in favour of the Revenue.
4. This court in CIT v. Kartikey V. Sarabhai [1981] 131 ITR 42 held that where a property or asset belonging to an assessee is brought in or introduced by him into a firm in which he is a partner, the property in question passes to the firm and the assessee would no longer have any power of disposition over the said property or any interest therein as a partner has no interest in any specific property of the partnership firm merely because he has a share in the profits and gains of partnership business. Therefore, where an individual has thrown or introduces his property into a partnership firm, it constitutes "transfer" of a capital asset within the meaning of section 2(47) of the Act. This decision was carried to the Supreme Court and in so far as this part of the decision is concerned, the Supreme Court affirmed it in Sunil Siddharthbhai v. CIT [1985] 156 ITR 509.
5. In the context of the expression "otherwise transferred" used in clause (b) of sub-section (3) of section 34 as well as sub-section (5) of section 155 of the Act, the Kerala High Court in Abdul Rahim, (A.), Travancore Confectionary Works v. CIT [1977] 110 ITR 595, held that when the business in the manufacture and sale of confectionery owned by the assessee was converted into a partnership business of the assessee and his son and the firm took over the assets and liabilities of the said business, there was an extinguishment of the right of the assessee in the property which was exclusively his and it was brought in for the purpose of the business of the firm and amounted to a "transfer" of a capital asset within the meaning of section 2(47) read with section 34(3)(b) and section 155(5) of the Act.
6. The Karnataka High Court in Addl. CIT v. M. A. J. Vasanaik [1979] 116 ITR 110, held that where an individual introduces his separate property into partnership business, the property gets converted into partnership property and the individual to whom it belonged loses his exclusive title over it. The court further observed that in order to hold that on the individual business being converted into partnership business, there is a transfer of the assets of individual to the partnership, it is not necessary to rely on the definition of "transfer" in section 2(47) because the said transaction amounts to a "transfer" in the eye of law even when the word "transfer" is understood in the ordinary sense. Both these decisions of the Kerala and Karnataka High Courts were considered and approved by the Supreme Court in Sunil Siddharthbhai v. CIT [1985] 156 ITR 509. Their Lordships have stated (at p. 520) :
".... we agree with the conclusion reached by the Kerala High Court in A. Abdul Rahim, Travancore Confectionery Works v. CIT [1977] 110 ITR 595 [FB], the Karnataka High Court in Addl. CIT v. M. A. J. Vasanaik [1979] 116 ITR 110 and by the Gujarat High Court in the judgment under appeal."
7. It is clear from this observation of the Supreme Court that the Supreme court approved the view of the Gujarat High Court as well as that of the other two High Courts that when an individual converts his private property into partnership property, it becomes the property of the firm and the individual loses his exclusive proprietary rights therein and to that extent, there is a "transfer" of a capital asset in the ordinary. sense of the term as well as under section 2(47) of the Act. In view of this decision of the Supreme Court, we do not think that it is permissible for Mr. Shah to now contend that the definition in section 2(47) of the Act is confined to cases of capital gains under section 45 of the Act and cannot be extended to the expression "otherwise transferred" employed in section 34(3)(b) as well as section 155(5) of the Act. As pointed out earlier, even de hors the definition contained in section 2(47) of the Act, if we are to consider whether conversion of individual property into partnership property amounts to "transfer", the observations made in the aforesaid judgments would lead us to the conclusion that there is a "transfer" of capital asset within the meaning of the said provisions and the action of the Income-tax officer in withdrawing the benefit conferred earlier by way of development rebate must be sustained.
8. For the above reasons, we answer the question referred to us in the negative, that is, against the assessee and in favour of the Revenue. Reference disposed of accordingly with no order as to costs.