Income Tax Appellate Tribunal - Madras
Jawahar Mills Ltd. vs Income-Tax Officer on 31 October, 1987
Equivalent citations: [1988]24ITD383(MAD)
ORDER
T.V.K. Natarajachandran, Accountant Member
1. These appeals by the assessee are consolidated and disposed of by this common order for the sake of convenience as they involve a common issue. These appeals pertain to the assessment years 1973-74 to 1975-76, 1977-78 to 1980-81 and arise out of the consolidated order of the Commissioner (Appeals), Coimbatore dated 18-11-1985. In this order the Commissioner (Appeals) upheld the rectificatory orders passed by the Income-tax Officer for these years under Section 155 of the Income-tax Act, 1961 withdrawing development rebate/investment allowance already granted for the reason that the assets of the Chettinad Branch of the assessee, on which development rebate and investment allowance was granted, were transferred to M/s. Sri Nachammai Cotton Mills Pvt. Ltd., a wholly owned subsidiary of the assessee-company. The common issue, therefore, is whether the Income-tax Officer is justified in withdrawing the development rebate/investment allowance when the assessee holding company transferred its assets of Chettinad Branch within the statutory period of eight years to its wholly owned subsidiary company on which development rebate/investment allowance was already granted earlier.
2. The assessee is a limited company engaged in the manufacture and sale of cotton yarn. In the assessment year 1973-74 the assessee-company brought into use certain new machinery in its branch at Chettinad. Development rebate was granted thereon by the Income-tax Officer for that assessment year. During the previous year relevant for the assessment year 1981-82, i.e., on 4-8-1980 the assessee-company had transferred the assets of Chettinad Branch to M/s. Sri Nachammai Cotton Mills Pvt. Ltd., a wholly owned subsidiary of the company. Since development rebate was already granted in respect of such transferred assets, the Income-tax Officer proposed rectificatory action under Section 155 of the income-tax Act, 1961 and called for objections of the assessee, if any. The assessee replied on 28-12-1984 stating that there was no transfer as such in terms of Section 47 of the Income-tax Act, 1961, as the transfer was made only to a wholly owned subsidiary. The Income-tax Officer did not agree with the view of the assessee. According to him the relevant Sections 32A(7), 33(4), 155(4A) and 155(5) (i) clearly indicate that any plant and machinery sold or otherwise transferred by the assessee to any person other than the Government, local authority, Government company, etc., would amount to transfer and therefore the development rebate/investment allowance already allowed on such machinery was to be withdrawn. The provision of Section 47 of the Income-tax Act, 1961 specifying exceptions to the term 'transfer' is not relevant for the purpose of Section 155(4A) and Section 155(5), whereas the 'transfer' as contemplated within the relevant sections empowers the withdrawal of the development rebate. Accordingly he has rectified the assessments for these years under consideration and withdrew the development rebate already granted for these years.
3. Aggrieved over the impugned orders the assessee filed appeals to the Commissioner (Appeals). It was contended on behalf of the assessee that the transferee company was a wholly owned -subsidiary of the assessee company and therefore in the circumstances there was neither any sale nor any transfer as contemplated in Section 155(4A). Reliance was placed on Clause (iv) of Section 47 of the Income-tax Act, 1961 and the decision of the Madras High Court in the case of Addl. CIT v. Dalmia Magnesite Corpn. [1979] 117 ITR 930. The Commissioner (Appeals) held that the provisions of Section 155(5) were very clear and precise and do not contain any ambiguities. According to him a plain reading of Section 34 and Section 155(5) of the Income-tax Act, 1961 shows that the same assessee who installed the plant and machinery must carry on the business in order to be entitled to get the development rebate and must not transfer the machinery before the expiry of eight years. Reliance was placed on the decision of the Patna High Court in the case of CIT v. Mahabir Cold Storage [1975] 100 ITR 686. He further observed that according to Transfer of Property Act the ownership of the assets were no longer rested with the holding company and it ceased to operate such assets in its business and the subsidiary company is a separate legal entity which became the owner and continued to operate those assets. Relying on several other decisions to the effect that the conversion of proprietary business into that of a company or a firm involves a sale or transfer of assets and therefore the development rebate already granted was liable to be withdrawn, he came to the conclusion that the provisions of Section 155(4A) of the Income-tax Act, 1961 squarely apply to this case. In this view of the matter he held that the Income-tax Officer has rightly rectified the assessment orders for these years and he has correctly withdrawn the development rebate already granted for those years. Consequently he dismissed the appeals filed by the assessee.
4. At the time of hearing the learned counsel for the assessee reiterated the grounds taken by the assessee and urged that there was no transfer at all in terms of Clause (iv) of Section 47 although there was change in share holding of the subsidiary company. Since the assessee-company held 100% share of the subsidiary company such transfer is excepted and, therefore development rebate should not be withdrawn. The learned counsel for the assessee referred to the Explanation 6 to Section 43(7) of the Income-tax Act, 1961 for the proposition that when a capital asset is transferred by a holding company to its subsidiary company or by a subsidiary company to its holding company then if the conditions of Clause (iv) or, as the case may be, of Clause (v) of Section 47 are satisfied, the actual cost of the transferred capital asset to the transferee-company shall be taken to be the same as it would have been if the transferor-company had continued to hold the capital asset for the purposes of its business. Reference was also made to Clause (ii) of Explanation to Sub-section (2) of Section 34 for the proposition where a capital asset is transferred by a holding company to its subsidiary company or a subsidiary company to its holding company and the conditions specified in Clause (iv) or Clause (v) of Section 47 are satisfied then in determining the aggregate of deductions in respect of depreciation under this clause, account shall also be taken of the deductions in respect of depreciation allowed in the case of the company from which the asset has been transferred. Reference was also made to the observation of the Calcutta High Court in the case of GTO v. Venesta Foils Ltd. [1980] 124 ITR 660 at page 673, which reads as under:
There is another aspect to be considered. 'Gift' basically is a transfer by one person to another person. In this case, there is really no such transfer since Venesta Foils Ltd., the alleged donor, owns all shares of the India Foils Ltd., the alleged donee. Viewed in this light also, it seems there was no gift in respect of the impugned transaction as defined in Section 2, Clause (xii), but we make it clear that we have not based our decision on this aspect, since no argument was advanced by the parties in this respect thereof.
The learned counsel also made a reference to the Notes on Clauses on the Finance Bill, 1965 appearing in [1965] 55 ITR (St.) 107 wherein it is clarified that the effect of amendment in Section 47 will be that any transfer of a capital asset by a subsidiary company to the holding company will not be treated as a transfer for the purpose of chargeability to tax under the head 'Capital gains' under Section 45 where the subsidiary company is a hundred per cent subsidiary of the holding company and the latter is an Indian company. Therefore, he urged that the authorities were not justified in withdrawing the development rebate.
5. The learned departmental representative on the other hand supported the orders of the authorities and submitted that only the subsidiary company claimed depreciation as owner of the transferred assets. According to him the word 'transfer' as appearing in Sections 32 and 34 are relevant and not in Section 47. On his part he relied upon the decision of the Madras High Court in the case of South India Steel Rolling Mills v. CIT [1982] 135 ITR 322.
6. We have duly considered the rival submissions. At the outset it is to be pointed out that there is no dispute about the fact of the assessee-company transferring its assets of the Chettinad Branch to M/s. Sri Nachammai Cotton Mills Pvt. Ltd. on which development rebate has been claimed and allowed for these years under consideration. The assessee c]aim that the transfer of assets having taken place between a holding company and its subsidiary company there is no transfer at all in terms of Clause (iv) of Section 47 of the Income-tax Act, 1961. For this reason the provision of Section 34(3) (b) is not attracted so as to warrant the withdrawal of the development rebate in terms of Section 155(5) of the Income-tax Act, 1961. After due consideration we are of the opinion that the contentions of the assessee are not valid. In the course of argument the learned counsel for the assessee relied upon the intention of the Legislature while amending Section 47 of the Income-tax Act, 1961 so as to exempt inter-transfer of capital asset between holding company and the subsidiary or vice versa from the capital gains where the subsidiary company is a hundred per cent subsidiary company of the holding company and the latter is an Indian company. The Legislature has made it abundantly clear that the amendment was only for the purpose of chargeability to tax under the head 'Capital gains arising on transfer of capital assets'. Therefore the Legislature itself intended that the word 'transfer' as defined in Section 47 is applicable only for the limited purpose of capital gains and not otherwise. Section 2(47) of the Income-tax Act, 1961 defines 'transfer' in widest terms. This definition was not resorted to by the Madras High Court while deciding the question of withdrawal of development rebate in the case of Dalmia Magnesite Corpn. (supra) but considered the question only with reference to the provisions of Section 34(3)(a), which were held to be clear and do not suffer from any ambiguity. In that case while dealing with the question in TC No. 146 of 1974 the Madras High Court observed as follows :
What has been granted is a concession to the assessee, a concession bound by conditions which formed part and parcel of the concession. If, therefore, there was non-compliance of the conditions or violation of the conditions or if circumstances had come into existence where compliance with those conditions become impossible-which is the case before us-certainly an assessee would not be entitled to claim that notwithstanding the new supervening circumstances which has made it impossible to comply with the conditions, the assessee could still be afforded the benefit of the concession granted by the section to which the conditions have been attached. We have, therefore, to hold that the development rebate could not be granted to the assessee for the years in question, and the question No. 7 in TC No. 240 of 1974 and the question in TC Nos. 146 and 171 of 1974 have to be answered in favour of the revenue and against the assessee. We accordingly do so.
In that case the original partnership consisted of three partners who are three limited companies. By efflux of time, by changes in the constitution of the firm and by reason of a scheme framed by the High Court, one of the partners became a wholly owned subsidiary of another partner to whom the assets and liabilities were transferred and the firm ceased to exist. In this context the Madras High Court held that the condition for grant of development rebate was not fulfilled because of the supervening circumstances that had taken place which made it impossible to comply with the conditions and therefore the development rebate should be withdrawn. This decision of the Madras High Court was referred to and followed in the later judgment of the Madras High Court in the case of South India Steel Rolling Mills (supra). In that case a partnership firm consisting of two partners of which one died subsequently after obtaining development rebate. There was reconstitution of the firm by the surviving partner by taking the legal heirs of the deceased partner and continuing the same business. The Commissioner of Income-tax revised the assessment for violation of condition of Section 34(3) (b) and directed withdrawal of development rebate already allowed. This action was upheld by the Tribunal. On reference by the assessee it was held that there was basic failure of the fact situation to fit in with the terms of the statutory grant of the development rebate implicit in the section. Accordingly the action of the Commissioner was held to be justified. The Full Bench of the Kerala High Court in the case of A. Abdul Rahim, Travancore Confectionary Works v. CIT [1977] 110 ITR 595 was concerned with the withdrawal of development rebate in a case of conversion of individual business into partnership business and held that there was an extinguishment of right of the assessee in the property which was exclusively his and it was brought in for the purpose of business of the firm and this was sufficient to attract Section 2(47) of the Income-tax Act, 1961. Consequently it was held that the provisions of Section 34(3)(b) and Section 155(5) are attracted and the withdrawal of development rebate was justified. The Karnataka High Court in similar circumstances held that a conversion of property of individual into property of the firm in which he is a partner is a transfer of assets of the individual to the partnership and for this purpose it was not necessary to rely on the definition of transfer in Section 2(47) because the said transaction amounted to a transfer in the eyes of law even when the word 'transfer' is understood in the ordinary sense. Consequently it was held that there was transfer of interest of the individual to the partnership and therefore Section 34(3)(6) and Section 155(5) were attracted as the property in respect of which development rebate has been allowed has become the partnership property. While rendering the judgment the Karnataka High Court has duly taken into account the ratio of the Full Bench decision of the Kerala High Court in the case of A. Abdul Rahim, Travancore Confectionary Works (supra). Similar view was taken by the Calcutta High Court in the case of CIT v. Somendra Kumar Neogi [1981] 131 ITR 592, wherein it has been held that where an individual business is converted into partnership business the partnership is not a successor in terms of Section 33 of the Income-tax Act, 1961 and the Income-tax Officer is not bound to allow development rebate even in the first year when the claim is considered when he knew that soon after the accounting year the asset was sold and thereby violating the condition which necessitated withdrawal of the development rebate subsequently. This decision of the Calcutta High Court is recently approved by the Supreme Court. In the case of Mahabir Cold Storage (supra) a firm carried on business at Calcutta with a branch at Purnia. Later on the constitution of the branch at Purnia was changed and ran as a separate business by taking a company as a partner. It was granted separate registration and. separately assessed. In connection with the claim for development rebate by the old firm it was held that as per provisions of Sections 33, 34(3)(b) and 155(5) the same assessee who installed the new plant and machinery must carry on the business in order to entitle to get the development rebate and must not transfer the machinery before the expiry of eight years. In other words, the test that the assessee who installed the machinery should carry on the business was laid down by the Patna High Court in that case.
7. Applying the aforesaid principle laid down by the Courts, we are of the opinion that the authorities were justified in withdrawing the development rebate. In this connection it is necessary to point out that the decision relied upon by the learned counsel for the assessee is not directly applicable to the facts of the case and is not helpful to the assessee. Even the intention of the Legislature relied upon by the learned counsel for the assessee is relevant only for the purpose of capital gains under Section 45 and not for the purpose of Section 155(5). Further, the provisions of Section 155(5) contain a non obstante clause whereby the development rebate originally granted shall be deemed to have been wrongly allowed and the Income-tax Officer may notwithstanding any other provision contained in this Act recompute the total income of the assessee for the relevant previous year and make the necessary amendment. Therefore, the non obstante clause overrides any other definition of transfer contained in any other section of the Act. Consequently the question is to be decided only within the framework of the relevant sections dealing with development rebate or investment allowance and in the light of the judgment of the several Courts in this regard. In this view of the matter we uphold the orders of the Commissioner (Appeals) as they are justified in law. In the result the appeals are dismissed.