http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 1 of 6  

PETITIONER: M/S SOUTH INDIA STEEL ROLLING MILLS, MADRAS

       Vs.

RESPONDENT: COMMISSIONER OF INCOME TAX, MADRAS

DATE OF JUDGMENT:       25/02/1997

BENCH: S.C. AGRAWAL, G.B. PATTANAIK

ACT:

HEADNOTE:

JUDGMENT:                       J U D G M E N T      These appeals, by certificate granted under Section 261 of the Income Tax Act, 1961 (hereinafter referred to as ’the Act’),  Have  been  filed    by  the  assessee  against  the judgement of the Madras High Court dated November 2,1981. By the said judgment the High Court has  answered the following question referred to it by the Income Tax Appellate Tribunal (hereinafter referred  to as  ’the  Tribunal’)  against  the assessee and in favour of the Revenue.      "Whether   on    the   facts    and      circumstances  of   the  case   the      revision   of    assessment   under      Section 263 by the Commissioner for      withdrawing the  development rebate      granted for  assessment years 1962-      63. 1963-64  1967-68 and 1968-69 is      proper and justified."      The  assessee   as  a   partnership  firm  having  been constituted on  September 1.1960.   It  was running  a steel rolling mill.   Initially, there were four partners, namely, M/s S.L.Nahata,  M.S.Bedi, Biharilal  and M.K.Raheja, in the assessee  firm.     Two  of  the  partners    Biharilal  and M.K.Raheja, subsequently  retired from  the partnership  and the partnership  was reconstituted  with the  remaining  two partners continuing  the same  business.   On March  3,1968, Shri M.S. Bedi one of the two partners died.  Since only one surviving partner was left the partnership  stood dissolved. On March 4,1968 a new partnership was constituted comprising of Shri  S.L.Nahata and the Legal heirs of Shri M.S. Bedi to carry on  the business under taking previously carried on by the partnership firm of which shri M.S. Bedi was a partner.      In these  appeals we are concerned with the partnership firm as  it existed  prior to  its dissolution  on March  3, 1968.   The  assessee  firm  had  obtained  the  benefit  of Development Rebate under Section 33(1) (a) of the Act during the assessment  years in  question.   Since the  partnership stood dissolved  on March  3, 1968, before the expiry of the period of  8  years  the  Commissioner  of  Income  Tax,  in exercise of the powers conferred on him under Section 263 of the Act withdrew Development Rebate that had been granted to

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 2 of 6  

the  assessee   for  the   said  assessment  years.  Feeling aggrieved  by  the  said  order  of  the  Commissioner,  the assessee filed  an appeal  before  the  Tribunal  which  was decided against  the assessee.    At  the  instance  of  the assessee the  Tribunal referred the question above mentioned for the opinion of the High Court.      The question  raised  involves  interpretation  of  the provisions of  Section 33(1)  (a) and  34(3)  which  at  the relevant time read as under:      "Development Rebate      33(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  f      Section 34, be allowed a deduction,      in respect  of the previous year in      which the  ship was acquired or the      machinery or  plant  was  installed      or, if  the  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):      "conditions    for     depreciation      allowance and development rebate      34(3) (a),  The Deduction  referred      to  in   Section  33  shall  no  be      allowed unless  an amount  equal to      seventy  five   r   cent   of   the      Development   Rebate to be actually      allowed is  debited to  the  profit      and loss  account of  the  relevant      previous  years   and  credited  to      reserve account  to be  utilised by      the assessee  during  a  period  of      eight years  next following for the      purposes    of     the     business      undertaking, other than --      (i)  for  distribution  by  way  of      dividends or profits; or      (ii) for  remittance outside  India      as profits  or for  the creation of      any asset outside India:      Provided that this clause shall not      apply  where   the  assessee  is  a      company, being  a  licensee  within      the  meaning   of  the  Electricity      (Supply) Act, 1948 [54 of 1948], or      where  the hip has been acquired or      the machinery  or  plant  has  been      installed before  the  1st  day  of      January, 1958.      Provided further  that where a ship      has been  acquired after  the  28th      day of  February, 1966  this clause      shall have  effect   in respect  of      such  ship   s  if  for  the  words      "seventy five"  , the  word "fifty"

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 3 of 6  

    had been substituted.      Explanation.- For  the  removal  of      doubts, it  is hereby declared that      the  deduction   referred   to   in      section 33  shall bot  be denied by      reason only that the amount debited      to the  profit and  loss account of      the  relevant   previous  year  and      credited  to  the  reserve  account      aforesaid exceeds the amount of the      profit of  such previous  year  (as      arrived at without making the debit      aforesaid )  in accordance with the      profit and loss account.      (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;      Provided that this clause shall not      apply --      (i)  where   the  ship   has   been      acquired of  the machinery or plant      has been  installed before  the Ist      day of January, 1958; or      (ii) Where  the ship  machinery  or      plant     is  sold   or   otherwise      transferred by  the assessee to 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 (1 of 1956): or      (iii) Where the sale or transfer of      the ship,  machinery  or  plant  is      made   in   connection   with   the      amalgamation     or     succession,      referred to  in sub-section  (3) or      sub-section (4) of section 33."      These provisions  indicate that  under Section 33(1)(a) the benefit  of Development  Rebate was available in respect of a  new sip  or new machinery or plant which was (i) owned by the assessee and (ii) was wholly used for the purposes of the business  cared on by him.  The availability of the said benefit of  Development Rebate  under Section  33(1) (a) was however, subject  to the  provisions of  Section 34.   Under clause (a)  of sub-section (3) of section 34 deduction under Section 33 was permissible only if an amount equal to 75% of the amount   of Development Rebate that was actually allowed was credited  to a  reserve account  to be  utilised by  the assessee during  a period of eight years next following  for the purposes  of the business of the undertaking.  In clause

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 4 of 6  

(b) it  was prescribed  that  in  the  event  of  the  ship, machinery or  plant in  relation to which development rebate has been  allowed being sold or otherwise transferred by the assessee   before the  expiry of  the period  of eight years from the  end of  the previous year in which it was acquired or installed,  the allowance  made in respect of it shall be deemed to  have been  wrongly made and the assessing officer may recompute  the total  income of  the  assessee  for  the relevant previous  year and  made  the  necessary  amendment under Section  155(5)   of the  Act .    This  is,  however, subject to  the exception contained in the proviso to clause (b).      The High Court has held      "As   part   of   the   fundamental      requirement  for   the   grant   of      Development Rebate,  is a necessary      first step.   but that alone is not      enough.   The reserve  account  has      got to  be utilised by the assessee      for the purposes of the business of      the undertaking  for  a  period  of      eight  years   running  immediately      following the  installation  of the      machinery .    The  implication  of      these condition  are that  were the      assessee does    not  utilises  the      reserve account for the purposes of      his business  during a  period of 8      years , then the very  condition on      which the  rebate is  granted would      remain  unfulfilled.   Hence    the      original   grant   of   Development      Rebate  itself   must  perforce  be      regarded  as   having   been   made      without   the  necessary  condition      being fulfilled therefor."      The   High Court  has observed that in the present case the assessee  firm became  extinct before  the expiry of the eight-year period  and what  came afterwards  was  different entity even  if it comprised only the surviving  partner and the deceased  partners’ legal  representatives, According to the High  Court there  was  a  basic  failure  of  the  fact situation in the assessee’s case to fit in with the terms of the statutory  grant of  Development Rebate  implicit in the Statutory provisions.      Ms. Janki  Ramachandran, the  learned counsel appearing for the  assessee, has  submitted that Development Rebate is granted in  respect of  a business  and that  under  section 33(1)(a)   and Section 34(3)(a) what is required is that the business must  be continued  for the  prescribed  period  of eight  years   and  that  in  the  present  case  after  the dissolution of  the old  partnership,  the  new  partnership carried on  the same business and  therefore, the benefit of the Development  Rebate could  not be withdrawn. the learned counsel has  placed reliance  on the decisions of this court in Malabar  Fisheries Co..  Vs. Commissioner  of income Tax, Kerala, (1979)  120 ITR  49 and  commissioner of  Income Tax Bangalore vs  J.H.Gotla (1985)  156 ITR  323.   The  learned counsel has  also invited  our attention to the Statement of Objects and  Reasons appended  to  the  Finance  Bill,  1958 whereby   the provisions  relating to  grant  of development Rebate as  contained in  Section 10  of the  Income Tax Act, 1922 were amended.      Dr. Gauri Shankar, the learned senior counsel appearing for the  Revenue, has  on the other hand, submitted that the

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 5 of 6  

High Court has rightly construed the provisions contained in Sections 33(1)  (a)   and 34(3)(a)  of the  Act and the said view taken  by the  High Court  is in  consonance  with  the object sought to be achieved by the said provisions.  he has in this  context, invited our attention to the report of the Taxation Enquiry  commission (1953-54)  which was  the basis for  introducing  the  provisions  relating  to  development rebate in  the Income  Tax Act,  1922.   It has been pointed that the  said report  shows that  the object underlying the grant of  development rebate  is that  it would  afford as a direct stimulus to expansion and quicker replacement and aid the efficiency   and  competitive power  of the  industries. The submission  is that have regard to the object underlying the said  provision the  development rebate can be available only to   a  particular assessee in respect of his business. Dr. Gauri  Shankar has  also pointed  out that  wherever the legislature intended to extend  a particular tax benefit  in circumstances where  the  partnership  stood  dissolved,  an express provision  has been  made in  that regard and he has invited our  attention t o sub-section (5A) of section 32 AB where in  express provision  has been made for withdrawal of the amount  standing to  the credit  of the  assessee in the investment Deposit  Account before  the expiry of the period of five  years from  the date  of deposit  in the  event  of dissolution of  a firm.   The learned counsel has urged that since the  provisions contained  in Sections  33(1)(a)   and 34(3)(a) do  not make any provision regarding dissolution of a partnership  firm and  speak of the assessee only, it must be held  that the  expression "assessee" in these provisions means the  partnership firm  as it  stood before dissolution and would  not cover  a newly  constituted   firm after  the dissolution of the old firm      Having regard  to the  words "which  is  owned  by  the assessee and is wholly used for the purposes of the business carried on by him," in Section 33(1)(a) it must be held that the benefit  of development  rebate is available only to the assessee which is owning the machinery or plant and is using it wholly   for  the purpose   of the business carried on by him. Similarly  in Section  34(3)(a)  the words used are "to be utilised  by the  assessee during a period of eight years next following  for the  purposes of  the  business  of  the undertaking".  The grant of development rebate under Section 33(1) (a)  is subject to the condition  laid down in Section 34(3)(a)   which means  that assessee  who has  obtained the development rebate  under Section 33(1)(a)  must also be the assessee who  should   utilise the  amount credited  to  the Reserve Account  during the  period   of  eight  years  next following  for   the  purposes   of  the   business  of  the undertaking for  which the development rebate was given.  in other words,  the expression  " by  the assessee"  in  these provisions refer  to the  same assessee.   The condition for grant of  rebate under Section 33 read with Section 34(3)(a) would not  b satisfied  if the  assessee who has availed the rebate ceases  to exist  before the  expiry of the period of eight years.      The decisions  on which reliance has been placed by Ms. Ramachandran have  no direct  bearing on the point in issue. In Malabar  Fisheries Co..  (supra) this Court has construed the expression "transfer" in the context of Section 34(3)(b) of the act .  In the instant case, we are not concerned with transfer of  machinery or  plant by  the  appellant-assesse. Here the  assessee firm  had ceased  to exist as a result of dissolution before  the expiry of the period of eight years. In Commissioner  of Income  Tax V.  J.H. Gotla  (Supra) this Court, while  considering the provisions of Section 16(1)(c)

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 6 of 6  

of the  Income Tax  Act, 1922,  has observed t hat where the plain  literary  interpretation  of  a  statutory  provision produces a  manifestly unjust result  which could never have been intended by the Legislature, the Court might modify the language so  as to achieve that intention of the Legislature and produce  a rational   construction.   We  are unable  to hold that  the said  principle requires  to be invoked while construing Section  33(1)(a) and  opinion, has  rightly held that in  view of  Section 34(3)(a)  the appellant - assessee could not avail the benefit of development rebate.      The other  contention of  Ms. Ramachandran was that the Commissioner  could  not  invoke  his    jurisdiction  under Section 263  of the  Act and that the matter  could be dealt of  rectification  under  Section    155  of  the  Act.  The submission is  that since Section 155 is a special provision dealing with  the partnership  firms, the  general provision Contained in  Section 263  could not be invoked. It was also contended that  the power  under Section  263  can  only  be invoked   on the  basis of  the record  as it stood when the order was  passed by  the Income Tax Officer and that it was not open  to the  Commissioner  to  take  into  account  the dissolution   of the  assessee firm, which took  place after the passing  of the  order, because that circumstance is not disclosed in  the the  record before the Income Tax officer. As pointed  out by  the High  Court ,  no question as to the competence of  the Commissioner   to exercise his power s of decision was  raised  by  the  assessee  either  before  the Commissioner or before the Tribunal. Even otherwise there is no merit  in this contention.  Merely because the Income Tax Officer could  have rectified  the order,  the  Commissioner could not  be precluded  form  the  exercising    the  power conferred  on  him  under  Section  263  .    the  power  of rectification conferred  on the  Income Tax  officer   under Section 155  and the  power of  revision  conferred  on  the Commissioner under  Section 263  are  distinct  powers.  The principle that one is a  special provision and the other  is a general  provision has  no application.    The  revisional power conferred  on the commissioner under Section 263 is of wide amplitude  .   It enables the Commissioner to revise an order passed  by the Assessing Officer if he considers it to b erroneous   and prejudice to the interests of the Revenue. We find  no reason  to limit  this   power by  reference  to Section 155.      As regards his taking into consideration an event which had occurred  subsequent to the passing of the order  by the Income Tax  Officers, it  may be  stated that in Explanation (b) in  Section 263 there is an express provision wherein it is prescribed that "record shall include and shall be deemed always   to  have  included  all  records  relating  to  any proceeding  under  this  act  available    at  the  time  of examination by  the commissioner".  The death  of one of the two partners  resulting in  the dissolution  of the assessee firm   on account  of such  death took  place prior  to  the passing of  the order  by the  commissioner  and  it  could, therefore, be  taken  into  consideration  by  him  for  the purpose of  exercising his  powers under  Section 263 of the Act.      For the  reasons aforementioned,  we do  not  find  any merit in the appeals and the same are accordingly dismissed. But in the circumstances there will be no order as to costs.