Commissioner
of Income Tax, Tamil Nadu Vs. S. Balasubramanian [1998] INSC 175 (24
March 1998)
Sujata
V.Manohar, D.P. Wadhwa
Mrs. Sujata
V. Manohar, J.
ACT:
HEAD NOTE:
The
following question was referred to the High court of Madras under Section 256(1) of the
Income-tax Act, 1961:
"Whether
on the facts and in the circumstances of the case, the Appellate Tribunal was
right in holding that the provisions of Section 15595) of the income-tax Act,
1961 are not applicable to the facts of the case and that the Developments
rebate allowed for assessment years 1960-61 to 1965-66 cannot be withdrawn by
the Income- tax officer?" The assessee at t he material time, was a Hindu
undivided family of which one Srinivasa Iyer was the Karta and his son, the
respondent, was a coparcener. The joint family carried on business. For the
assessment years 1960-61 to 1965-66 development rebate was allowed to the joint
Hindu family on new machinery and plant installed by joint Hindu family for the
purpose its business. On 1.8.1967, there were a partial partition of the joint
family and the plant and machinery which had been the subject matter of
development rebate was allotted to the two coparceners at written down value.
After the partition, the two members sold the machinery and plant allotted to
them respectively to a third party on 1st of October, 1967.
On
coming to know of the sale within a period of eight years from the installation
of the said plant and machinery, the Income-tax officer by his letter dated 6th
of February, 1961, proposed to withdraw the development rebate granted to the assessee
on the ground that the machinery had been sold within the statutory period. It
was contended on behalf of the assessee that the person to whom the development
rebate had been allowed was the Hindu undivided family. the Hindu undivided
family did not sell or transfer the plant or machinery and hence Section 155(5)
of the Income-tax Act, 1961 would not be attracted. This contention has been
upheld by the Tribunal as well as by the High Court. The High Court further
held that the Hindu undivided family had not merely not sold the machinery or
plant itself, or transferred it, but it had also not ceased to utilise by
Section 34(3). As a result, the withdrawal of the development rebate by the
Income-tax officer was held to be wrong.
To
decide the controversy before us, it is necessary to set out the relevant
provisions of Sections 33, 34 and 155(5) as they stood at the relevant time.
"33.
Development rebate - (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 previous year in which the ship was acquired or the
machinery or plant was installed or, if he 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).
...................
...................
34.
Conditions for depreciation allowance and development rebate- ...
(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 and
credited to a reserve account to be utilised by the assessee during a period
purposes of the business undertaking. Other than - ...
(b) If
any ship, machinery or plant is sold or otherwise transferred by the assessee
to any person at any time before the expire of eight years form the end of the
previous year in which it 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 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:
.....................
(underlining
ours) Section 155(5) which deals with withdrawal of development rebate provides
as follows:
"155(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 day of December, 1957, in any assessment year under Section 33 or under
the corresponding provisions of the Indian Income Tax Act, 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 or in connection with any amalgamation
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 expire 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 for as may be, apply thereto, the period 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." (underlining
ours) In the present case, we are concerned with the application of Section
155(5) and the withdrawal of development rebate. There are two situations in
which the development rebate which was originally allowed shall be deemed to
have been wrongly allowed. And the Income-tax officer will be entitled to recompute
the total income of the assessee for the relevant previous years and make the
necessary amendment as set out in that section. These two conditions are: (1)
That at any time before the expiry of eight years from the end of the previous
year in which the machinery or plant was installed, the machinery or plant is
sold or otherwise transferred by the assessee as set out in that section. 92)
If the assessee at any time before the expiry of eight years utilises the
amount in the reserve account either 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. In the present case, the
reason for invoking the provisions of Section 155(5) is that the assessee has,
before the expiry of eight years, sold or other wise transferred the machinery
or plant.
The
joint Hindu family, in the present case, effected a partial partition. As a
result of that partial partition, portions of plant and machinery came to the
share of each of the coparceners. These coparceners, in turn, sold the
machinery to a third party. Section 155 95)
(1) the
plant or machinery should be sold or otherwise transferred:
(2) the
transfer should be by the assessee to any person.
Here,
on a partial partition of the joint Hindu family portions of plant and
machinery have come to the share of two coparceners. We have to examine first,
whether this amounts to a transfer of plant and machinery by the joint Hindu
family to the individual coparceners. The term 'transfer' is defined under
Section 2(47) of the Income-tax Act, 1961, in a wide manner so as to include
not merely a sale or exchange, but also extinguishment of any right in the
capital assets (vide capital gains). Whether in the present case the partial
partition results in the extinguishment of any right of the assessee joint
Hindu family in the assets of the joint Hindu family, or amounts to a transfer
of its assets to the individual coparcener, requires to be considered.
A
similar question came up before this Court and was considered by a Bench of
three judges in Malabar Fisheries Co. v. Commissioner of Income-tax, Kerala
(120 ITR 49). In that case the development rebate had been granted to he
partnership firm which was dissolved within a period of eight years. On
dissolution of the firm, assets were distributed between the partners. This
Court examined the question whether on dissolution of the partnership firm
there was any transfer of assets from the partnership firm to the partners.
This Court held that there was not transfer of any asset from the partnership
firm to its partners on dissolution of the firm. This Court observed (p.54) ,
"On a plain reading of Section 34 (3)(b) it will appear clear that before
that provision can be invoked or applied three conditions are required to be
satisfied:
(a) that
the ship, machinery or plant must have been sold or otherwise transferred,
(b) that
such a sale or transfer must be by the assessee, and
(c) that
the same must be before the expiry of eight years from the end of the previous
year in which it was acquired or installed.
It is
only when these three conditions are satisfied that any allowance made under
Section 33 shall be deemed to have been wrongly made and the Income-tax officer
acting under Section 155(5) will be entitled to withdraw such allowance."
Referring to the definition of 'transfer' in Section 2(47) the Court said.
" The question is whether the distribution, division or allotment of
assets of a firm consequent on its dissolution amounts to a transfer of assets
within the meaning of words 'otherwise transferred' occurring in Section
34(3)(b) of the Act, regard being had to the definition of 'transfer' contained
in section 2(47). To put it pithily, the question is whether the dissolution of
a firm extinguishes the firms' rights in the assets of the partnership so as to
constitute a transfer of assets under Section 2(47)." Af ter examining a
number of authorities in a detailed judgment, this court came to the conclusion
that the 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. 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. if that be the position, it is difficult to accept the contention
that upon dissolution the firm's rights in the partnership assets are
extinguished. The firm as such has no separate rights of its own in the
partnership assets but it is the partners who own 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
within the meaning of Section 2(47) of the Act." The same reasoning would
apply to partition of a Hindu Joint family. In "principles of Hindu
Law", Mulla, at page 262 (16th Edition) has compared a partnership firm
and a joint Hindu family firm and set out points of distinction between the
two. The main distinction is that in a joint family business no member of the
family can say that he is the owner of any specific share. The essence of joint
Hindu family property is unity of ownership and community of interest. shares
of the members are not defined. However, in view of the unity of ownership and
community of interest of all coparceners in the joint Hindu family business,
the position on partition of joint Hindu family business, whether it be partial
or complete, is very similar in law to be position on dissolution of a partnership
firm. on partition the shares of the coparceners in the joint family business
become defined and their community of interests is separated. Division of
assets is a matter of mutual adjustment of accounts as in the case of a
dissolved partnership firm. The property which so comes to the share of the
coparcener, therefore, cannot be considered as transfer by the joint family to
a coparcener or the extinguishment of the right of the joint family in that
property, the joint family not having its own separate interest in that
property which can be transferred.
Therefore,
the entire reasoning in the case of Malabar Fisheries Co. (supra) equally
applies to the partition of the assets of a joint Hindu family. If that be so,
then the ratio in the case of Malabar Fisheries Co. (supra) covers the present
case as has been held in the impugned judgment of the Madras High Court.
In the
Malabar Fisheries Co.(supra) there is an additional reason given for holding
that Section 34(3)(b) is not attracted. The court has said that the sale or
transfer of assets must be by the assessee to a person. Upon dissolution, the
firm ceases to exist. Then follows the making up of the accounts, distribution
of assets etc. This distribution is not done by the dissolved firm. In this
sense, there is no transfer of assets by the assessee, that is to say, the
dissolved firm, to any person. The same will be the position in the case of
partition of a joint Hindu family when assets are divided between the
coparceners.
In the
present case, however, unlike the Malabar Fisheries Co.'s case (supra), a
further event has occurred within eight years after the partial partition of
the Hindu Joint family and distribution of its assets amongst the coparceners.
The coparceners have sold the machinery to a third party within a period of
eight years. Looking to the conditions which have been stipulated in Section
3493)(b), the sale or transfer is required to be by the assessee to a third
party. In the present case since the sale is not by the joint family to the
third party this condition is held as not fulfilled by the madras High Court,
although there is, in fact, a sale to a third party. In the light of the
judgment in the Malabar Fisheries Co.'s case (supra), the Madras High Court
has, therefore, held that the re-opening by the Income-tax officer under
Section 155(5) of the Income-tax Act, 1961 was not in accordance with law.
The
appellant, however, has drawn out attention to two recent decisions of this
Court where a somewhat different view has been taken of the provisions relating
to development rebate. In the case of South India Steel Rolling Mills, Madras
V. Commissioner of Income tax, Madras ([1997] 9 SCC 728), a Bench of two judges
of this court examined the case where the partnership firm had obtained the
benefit of development rebate under Section 33(1)(a) but the partnership firm
stood dissolved before the expiry of eight years on account of the death of one
of the two partners, although from the next day a new partnership firm was
constituted. This Court said that under Section 33(1)(a), the words which
qualify an assessee for obtaining development rebate are, (plant and machinery)
"which is owned by the assessee and is wholly used for the purposes of the
business carried on by him. "Therefore, the machinery must be used for a
period of eight years by the assessee for the purposes of the business carried
on by him. since the assessee had ceased to carry on business within the period
of eight years, it ceased to comply with section 33(1)(a) and the similar
requirements of Section 34(3)(a). hence it would lose its right to the
development rebate which was earlier granted. This Court distinguished the
decision in Malabar Fisheries Co.'s case (supra) by saying that in that case
this Court had construed the expression 'transfer' in the context of Section
34(3)(b) of the Act which in the case before it the partnership firm ceased to
exist because it was dissolved before the period of eight years. In the case of
Commissioner of Income-tax V. Narang Dairy Products (219 ITR 478) development
rebates was withdrawn when the assessee did not use the machinery for the
purpose of his business for eight years.
The
right to recompute the total income which is given to the Income-tax officer
under Section 155(5) on the ground that the development rebate originally
allowed shall be deemed to have been wrongly allowed has to be exercised in
accordance with the provisions of Section 155 (5). The Circumstances under
which the development rebate shall be deemed to have been wrongly allowed are
set out in Section 155(5) and these are: (9) That at any time before the expiry
of eight years, the plant or machinery is sold or otherwise transferred by the assessee
to any person. (2) The second condition is about the breach of terms relating
the utilisation of the reserve account. There is no express requirement under
Section 155(5)(1) or section 34(3)(b) that the plant or machinery should be
used for a period of eight years by the assessee wholly for the purpose of his
business. However, Sections 155(5) and 34(3)(b) cannot be read in isolation
ignoring Section 33. In Malabar Fisheries Co.'s case (supra) the question
whether the asset could be said to be used by the partnership firm for a period
of eight years for the purposes of its business when the firm was dissolved
within eight years, was never raised.
Moreover,
this question possibly did not arise because the machinery remained with the
partners during eight years although the firm was dissolved. In the present
case, although the partial partition does not result in any transfer and we may
treat the machinery as with the assessee, there is a sale of the machinery to a
third party within eight years. Therefore, this is a clear case where the assessee
has not used the machinery for his business for a period of eight years even if
we take the assessee as a compendium of joint Hindu family-cum-coparceners.
Sections 33, 34 and 155(5) have to be read together. Development rebate can be
granted when the new machinery is wholly used by the assessee for the purpose
of his business. it should be so used by the assessee for a period of eight
years. It should also not be sold or otherwise transferred by the assessee.
Since that is not the case here, Section 155(5) has been rightly invoked in the
present case.
The
appeals are, therefore, allowed. The question is answered in the negative and
in favour of the revenue.
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