Madras High Court
Commissioner Of Income Tax vs P.K. Ramaswamy Raja on 15 February, 1996
Equivalent citations: [1997]223ITR324(MAD)
JUDGMENT K.A. Thanikkachalam, J.
1. Pursuant to the direction given by this Court in TCP No. 119 of 1981 dt. 27th October, 1981, the Tribunal referred the following question for the opinion of this Court under s. 256(2) of the IT Act, 1961 :
"Whether, on the facts and in the circumstances of the case and having regard to the provisions of s. 2(47) of the IT Act, 1961, the Tribunal was correct in law in holding that when the HUF business was taken over by the partnership firm, there was no transfer or relinquishment or extinguishment of rights and hence the provisions of s. 155(5) of the IT Act for the asst. yr. 1972-73 cannot be validly invoked for withdrawing development rebate granted earlier ?"
2. The assessee is an HUF consisting of the Kartha, Sri Ramasamy Raja, his wife, three minor sons and three minor daughters. The ITO noticed that this family was allowed development rebate in the asst. yr. 1967-68 to the extent of Rs. 33,353 but it was carried forward and set off in 1972-73 assessment. With effect from 1973-74 assessment, the assessee formed a partnership firm by name, M/s Sri Ram Products. Since the assets of the family had been taken over by the new firm, the development rebate allowed earlier had to be withdrawn under s. 155. Hence, the ITO issued a notice, and there was no reply. The ITO revised the assessment for the asst. yr. 1972-73 under s. 155(5) by order dt. 21st February, 1995. On appeal before the AAC, the assessee contended that the ITO failed to consider the representation made by the authorised representative as well as the fact that there was no transfer. The AAC held that the assets were transferred from the HUF to the firm and accordingly he upheld the order of the ITO.
3. Aggrieved, the assessee filed appeal before the Tribunal. According to the Tribunal, the family was carrying on business of manufacture and sale of surgical dressing and absorbent cotton wool and other allied products under the name and style of Sri Ram Products. A partial partition was effected on 28th March, 1963 by which the capital employed in the business was divided equally and the business was taken over and carried on by the Kartha and the partnership was formed on 4th April, 1972 consisting of the Karta and his eldest son. The other two sons being miners were admitted to the benefits of partnership. Therefore, according to the Tribunal, what happened was that the property of the HUF became the property of the partnership firm consisting of the very same coparceners of the family. According to the Tribunal, though the HUF ceased to hold the property the coparceners of the HUF held the property as partners. Therefore, there was no transfer of property involved in this process. Reliance was placed upon the decisions reported in the case of CIT vs. Janab N. Hyath Batcha Sahib (1969) 72 ITR 528 (Mad), D. Kanniah Pillai vs. CIT (1976) 104 ITR 520 (Mad) : TC 20R.913, CIT vs. Abdul Khader Motor & Lorry Service (1978) 113 ITR 360 (Mad) : TC 20R.378 and A. Subbiah Pillai vs. CIT (1976) 104 ITR 564 (Mad). Accordingly, the Tribunal allowed the appeal filed by the assessee.
4. Before us, the learned standing counsel for the Department submitted that the Tribunal was not correct in holding that there was no transfer when the assets of the HUF were taken over by the newly constituted firm. Development rebate was granted to the HUF in the asst. yr. 1967-68. The HUF is entitled to the development rebate for the period of eight assessment years. In the meanwhile, there was a partition in the family on 28th March, 1963. The divided members of the HUF formed a partnership from 4th April, 1972. The assets of the HUF were taken over by the partnership firm. Therefore, according to the learned standing counsel, as per the provisions of s. 34(3)(b) and s. 155(5) of the IT Act, 1961 in as much as the assets to which development rebate was already granted, were transferred otherwise the development rebate granted is liable to be withdrawn. According to the learned standing counsel, the HUF who is the assessee and the partnership firm are two different entities. It was submitted that the word otherwise transferred should be given a widest meaning so as to take note of all kinds of transfer of ownership in whatever kind it may be. The learned standing counsel further submitted that the Tribunal was not correct in holding that when the HUF assets were taken over by the partnership firm, it is not transfer. According to the learned standing counsel, the decisions relied on by the Tribunal are not applicable to the facts of this case. The learned standing counsel relied on the decision of this Court in the case of Baldevji vs. CIT (1985) 156 ITR 776 (Mad) : TC 28R.609 in order to support his contention.
5. Learned standing counsel further submitted that according to the facts arising in the present case, the development rebate was granted after the partition in favour of the HUF. Therefore, according to the learned standing counsel, the Tribunal was not correct in holding that there is no transfer in this case.
6. On the other hand, the learned counsel for the assessee while supporting the order passed by the Tribunal submitted that even in the case of 'otherwise transfer' there must be delivery of possession for consideration. In the concept of otherwise transfer, there is no consideration. Therefore, there is no transfer. According to the learned counsel s. 2(47) of the Act defines the word "transfer". Sale will not include otherwise transfer. In the present case there is no sale. There is also no consideration for the otherwise transfer when the assets of the HUF became the assets of the partnership while the members of the HUF and the partners of the firm are same persons.
7. We have heard the learned counsel for the Department as well as the learned counsel for the assessee. The fact remains that the ITO was processing the assessment from the asst. yr. 1972-73. The assessee is an HUF consisting of the Kartha, Shri Ramasamy Raja, his wife, three minor sons and three minor daughters. Development Rebate was granted to the HUF for the asst. yr. 1967-68. There was a partition on 28th March, 1963 and according to the Tribunal, there was a partial partition which took place on that date and the capital employed in the business was divided equally and the business was taken over and carried on by the Kartha and the coparceners. The partnership firm was formed on 4th April, 1972 consisting of the Kartha and his eldest son. The other two sons being minors, were admitted to the benefits of the partnership. Therefore, the assets belonging to the HUF were taken over by the partnership consisting of Kartha and his eldest son and the two minor sons were admitted to the benefit of the partnership. It remains to be seen that the development rebate was granted in favour of the HUF in the asst. yr. 1967-68. The HUF is entitled to enjoy the benefit of the development rebate for a period of 8 years from the asst. yr. 1967-68. Since the assets of the HUF were taken over by the partnership, on 4th April, 1972, the Department was of the view that the development rebate already granted is liable to be withdrawn. If there is otherwise transfer of the assets belonging to the HUF, in favour of the partnership, then the Department is entitled to withdraw the development rebate granted in favour of the HUF.
8. The point for consideration is "Whether there is any otherwise transfer occurred while the assets of the HUF were taken over by the partnership firm ?"
9. In the case of Sunil Sidharth Bhai vs. CIT , the Supreme Court while considering the provisions of s. 45 of the IT Act, 1961 held that, "Where a partner of a firm makes over capital assets which are held by him to a firm as his contribution towards capital, there is a transfer of a capital, asset within the terms of s. 45 of the IT Act, 1961, because an exclusive interest of the partner in personal assets is reduced, on their entry into the firm, into a share interest."
10. In the case of Baldevji vs. CIT (supra) while considering the provisions of s. 33 and s. 155(5), this Court held as under :
"The normal position of a firm under the scheme of the IT Act, 1961 is that it is an entity assessable on its own. It is an entity distinct even from its partners. Apart from various charging and machinery provisions of the Act, which regard a firm as possessing a taxable personality of its own, the definition of the expression "person" occurring in s. 2(31)(iv) of the IT Act, 1961, expressly includes a firm. There is nothing in the subject or context of s. 155(5), wherein the expression "person" occurs, which would render repugnant the application of the definition of the expression "person" occurring in s. 2(31)(iv) as including a firm.
The expression "Transfer" occurring in s. 155(5) has not been defined. However, in legal parlance, it bears a wide connotation. Even the transfer of a mere fractional interest in property would come within the conception of transfer of property. There is an indication in s. 155(5) itself that Parliament intended the term "transfer" to be understood in the widest sense possible. This is seen from the expression "sold or otherwise transferred". The transfers, as it were, are divided into two categories, sales and non-sales. The expression 'otherwise' exhausts all the categories of transfers other than sales which are transfers of a kind for consideration. The expression "otherwise" occurring in a combination of words has sometimes been regarded as indicating the application of the ejusdem generis rule. The subject and context of s. 155(5) clearly point to the intention of Parliament that the machinery which has obtained a grant of development rebate by reason of its having come under the ownership of the assessee should continue to remain in the same ownership and should not be parted with by him for a period of at least eight years from the date of installation. In this context, therefore, any parting with that asset would involve a breach of the statutory condition, subject to which alone development rebate is originally granted. It stands to reason, therefore, that the expression "otherwise transferred" must be given such wide amplitude of meaning as is consistent with its ordinary connotation. There can be no warrant for cutting down that meaning, to any extent. When persons who become partners bring into the partnership firm their separate properties, what actually happens is a change in the ownership of everyone of those properties. What was property of an individual a moment before the formation of the partnership becomes, by virtue of the terms of the partnership contract, the property of the partnership firm as such. Sec. 14 of the Partnership Act speaks of property originally "brought" into the stock of the firm by partners as forming part of the property of the firm. But the process of bringing separate properties of the partners into the joint stock of partnership assets itself involves a change of ownership.
Hence, where a sole proprietary concern is converted into a partnership and the machinery which was the property of the sole proprietor becomes the property of the firm, there is a "transfer" of ownership of the machinery and if development rebate had been granted in respect of such machinery, it is liable to be withdrawn under the provisions of s. 155(5) of the IT Act, 1961."
11. The above decision rendered by this Court was followed by the Andhra Pradesh High Court in the case of CIT vs. Suresh Chandra Jain wherein it was held as under :
"We may refer to a more recent judgment of the Madras High Court in Baldevji vs. CIT (1985) 156 ITR 776 (Mad) : TC 28R.609. This was also a case where on the individual transferring the assets in respect of which development rebate was originally granted, the Revenue withdrew the rebate acting under s. 155(5) of the Act. The correctness of the Revenue's action was questioned. The Madras High Court referred to CIT vs. Batcha Sahib (1969) 72 ITR 528 (Mad) and referred to the Court's finding that the transaction was neither a sale nor a transfer otherwise. The view that it was not a transfer otherwise was not followed by the Madras High Court in Baldevji's case (supra) on the short ground that the clear-cut distinction made by the Supreme Court between the legal consequence of the formation of a partnership on the one hand and the dissolution of a partnership on the other was not followed by the Court. We may refer to the following observations at page 782 :
'Notwithstanding the clear-cut distinction made by the Supreme Court between the legal consequences of the formation of a partnership on the one hand, and the dissolution of partnership on the other, as respects the plural character of the transactions, this Court in CIT vs. Janab N. Hyath Batcha Sahib (1969) 72 ITR 528 (Mad) seems to have thought that there was no material difference between the two terminal transactions. For coming to that conclusion, this Court not only relied on the observations of the Supreme Court, but set them down verbatim in a quotation. The quotation, however, is not of a contiguous passage of the Supreme Court's judgment, but widely separated portions of the Supreme Court's judgment taken from different parts of the judgment, and jointed together with the help of dots. Without any further discussion of the Division Bench ruling, therefore, we should express our preference, as we must abide by the decision of the Supreme Court rather than be led by the observations contained in the judgment of this Court."' It would, therefore, be seen that while the view that the impugned transaction was not a sale was held to be correct, the decision in Baldevji's case (supra) recognised that there is a "transfer otherwise" within the meaning of s. 34(3)(b) of the Act and, consequently s. 155(5) of the Act becomes applicable. The Bench held that when an individual throws his individual assets into the common stock of a partnership firm of which he becomes a partner, there is no sale, nevertheless, there is a transfer otherwise. The learned judges deciding Baldevji's case (supra) came to the conclusion that the expression "sold or otherwise transferred" occurring in s. 34(3)(b) of the Act is fairly wide and the subject and the context of s. 155(5) clearly pointed out to the intention of Parliament that the machinery which was obtained on a grant of development rebate by reason of its having come under the ownership of the assessee should continue to remain in the same ownership of the assessee and should not be parted with by him for a period of at least eight years from the date of installation. The High Court held that :
"It stands to reason, therefore, that the expression 'otherwise transferred' must be given such wide amplitude of meaning as is consistent with its ordinary connotation. There cannot be a warrant for cutting down that meaning to any extent."
12. The same view was also taken by the Allahabad High Court in the case of Tarun Bhai vs. CIT (1992) 193 ITR 543 (All) : TC 28R.614. In this decision, the Allahabad High Court followed the decision of the Andhra Pradesh High Court cited supra.
13. In the case of S. M. Chemicals & Electronics (P) Ltd. vs. CIT (1995) 215 ITR 943 (Bom) : TC 28R.301 the Bombay High Court while considering the provisions of ss. 32A(5), 34(3)(b), 155(4A) and 155(5) of the IT Act, 1961 held that on a reading of the provisions of ss. 32A(5), 34(3)(b), 155(4A) and 155(5) of the IT Act, 1961, the intention of the legislature is to withdraw the benefit of development rebate given to the assessee in respect of certain machinery if such is sold or "otherwise transferred" by the assessee within the stipulated period. The expression "otherwise transferred" is a very wide expression and takes within its sweep transfer of the assets from the assessee to another person by any means or mode whatsoever.
14. Thus, considering the facts arising in this case, in the light of the judicial pronouncements cited supra, we are also of the opinion that in as much as while the assets belonging to the HUF were taken over by the partnership firm, there is transfer otherwise as contemplated under ss. 34(3)(b) and 155(5) resulting in the withdrawal of the development rebate already granted in favour of the HUF. Therefore, the Tribunal was not correct in holding that there is no transfer while the assets belonging to the HUF were taken over by the partnership firm. In this view of the matter, we answer the question referred to us in the negative and in favour of the Department. No costs.