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PETITIONER: COMMISSIONER OF INCOME TAX, TAMIL NADU

       Vs.

RESPONDENT: S. BALASUBRAMANIAN

DATE OF JUDGMENT:       24/03/1998

BENCH: SUJATA V.MANOHAR, D.P. WADHWA

ACT:

HEADNOTE:

JUDGMENT:                       J U D G M E N T Mrs. Sujata V. Manohar, J.      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 case  and  that  the      Developments  rebate   allowed  for      assessment years 1960-61 to 1965-66      cannot be  withdrawn by the Income-      tax officer?"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

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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)

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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

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         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

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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

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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

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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.