Commissioner of Income Tax vs S. Balasubramanian

Sethuraman, J.—In the reference made u/s 256(1) of the income tax Act, 1961 (''the Act''), the following question is referred :

Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in holding that the provisions of section 155(5) of the

income tax Act, 1961, are not applicable to the facts of the case and that the development rebate allowed for assessment years 1960-61 to 1965-

66 cannot be withdrawn by the income tax Officer ?

In making the original assessment for the years 1960-61 to 1965-66, development rebate was allowed on the new machinery and plant installed

by the HUF of which one Srinivasa Iyer was the karta and his son was a coparcener. It is not necessary for us to trouble our selves with the

figures. There was a partial partition of this family under which the machinery and plant were allotted to the two coparceners at their written down

value. After the partition, the two members sold the said machinery and plant allotted respectively to them, to the Gemini Pictures Circuit (P.) Ltd.

On coming to know of the sale within a period of eight years from their installation, the ITO proposed, by his letter dated 6-2-1971 to with draw

the development rebate on the ground that the machinery had been sold within the statutory period.

For the assessee-family it was contended be fore the ITO that the person to whom the development rebate was allowed, namely, the HUF, did

not sell or transfer the same and that section 155(5) of the Act would not be attracted. This contention was rejected by the ITO and passed orders

withdrawing the development rebate allowed for the relevant assessment years 1960-61 to 1965-66. On appeal, the AAC up-held the order of

the ITO and the assessee carried the matter on appeal to the Tribunal. The Tribunal held that the provisions of section 34(3)(b) of the Act were

not attracted, since the HUF to whom the development rebate was originally granted did not sell or otherwise transfer the machinery and plant

before the expiry of eight years from the end of the previous year in which they were installed. It was also held that section 155(5) was not

attracted because the HUF had not sold the machinery or plant nor had it ceased to utilise the amount credited to the reserve fund as contemplated

by section 34(3). The result was that the withdrawal of the development rebate by the ITO was held to be wrong. Aggrieved by this decision of

the Tribunal, the matter has been brought to this court by the Department, raising the question already extracted.

In order to appreciate the controversy it would be necessary to refer to the relevant statutory provisions. Section 33 of the Act, ''provides for

allowance of development rebate in respect of machinery and plant owned by the assessee and wholly used by the assessee for the purposes of

the business. The relevant conditions for the allowance are to be found in section 34. Section 34(3)(a) provides that the deduction referred to in

section 33, namely, allowance of development rebate, was not to be allowed unless an amount equal to 75 per cent of the development rebate to

be actually allowed was debited to the profit and loss account of the relevant previous year and 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. There were, however, two exceptions to

the manner of user. The assessee could not distribute the amount by way of dividends or profits and the assessee could not also utilise the amount

for remittance outside India as profits or for the creation of any asset outside India. In other words, the utilisation of the reserve must be in a

manner, other than by way of distribution of dividends or profits, or remittance outside India as profit to, or for the creation of, any asset outside

India. Section 34(3)(b) provides that 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 of development rebate by

section 33 is to be deemed to have been wrongly made for the purposes of the Act and the provisions of sub-section (5) of section 155 would

apply accordingly. The transfer of machinery as a result of nationalisation or on amalgamation or succession has been excepted from the category

of transfers as a result of which the provisions came to be attracted.

Section 155(5) provides that where an allowance by way of development rebate has been made wholly or partly to an assessee in respect of the

machinery or plant installed and subsequently, 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 said machinery or plant was sold or otherwise transferred by the assessee to any person other than the Government, or

in connection with any amalgamation or succession, or at any time before the expiry of the period of eight years the amount is utilised for

distribution by way of dividends or profits, or 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, then the development rebate originally allowed is to. be deemed to have been

wrongly allowed, and the ITO is authorised to recompute the total income of the assessee for the relevant previous year and make the necessary

amendment to the assessment, by rectification. The provisions of section 154 of the Act, insofar as they are necessary, would apply to such an

amendment, the period of four years contemplated by section 154(7) being reckoned from the end of the previous year in which the sale or

transfer took place or the money was so utilised.

One word of explanation is necessary as to why the words ''distribution by way of profits'' or ''remittances outside India as profits'', are used. In

the case of a company the amount is likely to be used for distribution of dividends. In the case of assessees, other than companies, the amount will

be available for distribution to others, and in the case of firms, for distribution among partners. This is prohibited. Similarly the assessee may utilise

the amount for remittance as profits or for the creation of any asset outside India. The idea is to ensure circulation of the money in the business.

This provision is intended to catch those cases, and withdraw the relief already granted, where the amount is utilised by the assessee for the

offending purposes contrary to the statutory intent.

In the present case, the ITO has applied section 155(5). The question is whether it was proper for him to do so. It is not in dispute that when a

joint family is partitioned and a particular asset is allotted to the erstwhile member, there is no transfer of any asset from the joint family to the

erstwhile member. We have already, in summarising the provisions, underlined the words ''by the assessee'' in order to emphasize that the transfer

or sale contemplated by the provision is to be effected by the assessee and not by any other person. The joint family having gone out of existence,

as far as this particular asset is concerned, there cannot be any sale or transfer by the joint family.

The only point that survives for consideration is, whether the sale by the member, after the joint family has ceased to exist with reference to that

particular asset, is such as to attract the operation of this provision, namely, section 155(5). There are no words in the provision to comprehend

cases where the transfer is not by the assessee but by some other person to whom the assets have been allotted. Therefore, the assessee-family in

the present case, cannot be subjected to an order u/s 155(5). The sale by the divided member does not offend the provision.

Realising the difficulty that stands in the way of the department, the learned standing counsel for the department drew our attention to section

155(5)(ii). According to him, the joint family had ceased to utilise the amount credited to the reserve, for the purpose of its business. When the

HUF has ceased to exist, then there is no question of its being in a position to utilise the amount or the amount being utilised by it for any other

purpose. With the disappearance of the joint family, the capacity to utilise the amount transferred to the reserve for any offending purpose set out in

the provision also ceases. Therefore, on a plain reading of the provision, it is not possible to hold that section 155(5) is attracted.

The learned counsel for the revenue drew our attention to two decisions. One is reported in Additional Commissioner of Income Tax Vs.

Dalmia Magnesite Corporation, In that case, the assessee was a firm consisting of three limited companies as partners, with equal shares. The firm

carried on an industrial undertaking for the prospecting of magnesite ores and manufacture of dead burnt magnesite. On 16-6-1959, there was a

change in the constitution of the firm by the retirement of two of the partners. Certain changes took place also, as a result of a scheme framed by

the High Court. On 1-1-1964, the firm ceased to exist by virtue of the fact that one of the two partners of the firm got extinguished and there

remained thereafter only the other erstwhile partner. The question was whether the development rebate originally granted was liable to be

withdrawn for certain years, which was the subject-matter of the reference to the High Court. There was also a refusal of the development rebate

with reference to some of the years even in the original assessment. We are not really concerned with what happened in the original assessment,

because our case is one where section 155(5) is being applied. With reference to the assessment years, for which section 155(5) was applied, the

Division Bench of this Court held :

It is not enough if there is a transfer in order that the clause may be attracted. There must be a transfer by the assessee. We are not able to posit

that there has been a transfer by the assessee of the plant or machinery and that any change in the ownership of the assets had been effectuated by

an order which vested the rights of one of the partners in the assets in the other partners. This can by no stretch of imagination be stated as a

transfer by the assessee of the plant and machinery. In view of this, clause (i) of sub-section (5) of section 155 would not be attracted."" (pp. 941-

42)

Regarding the applicability of section 155(5)(ii), the learned Judges pointed out :

...The question is whether the firm, that is, the assessee, had utilised the amounts credited to the reserve for any purpose other than the business of

the undertaking. We are not able to say so. In view of this, the order passed by the income tax Officer rectifying the original assessment order

purporting to act u/s 155(5) is not sustainable... "" (p. 942)

The only difference between that case and the present case is that in that case the Bench was concerned with the dissolution of the firm, while in

the present case, we are concerned with partial partition in the joint family. We do not find that there is any scope for differentiating between a firm

and a joint family as far as the present provisions are concerned. Whatever applies to the dissolution of the firm would equally apply to the partial

or complete partition of a joint family. Thus, this decision, which has actually ruled out the applicability of section 155 in the case of the dissolved

firm, cannot support the contention of the revenue.

With reference to the other years, the learned judge has come to the conclusion that the development rebate should not be granted to the

assessee. But as far as this part of the decision is concerned we have to consider it in the light of a decision of the Supreme Court in Malabar

Fisheries Co. Vs. Commissioner of Income Tax, Kerala, That was a case of a firm consisting of four partners carrying on six different businesses.

During the accounting period, relevant to the assessment years 1960-61 to 1963-64, the firm had installed various items of machinery in respect of

which it received development rebate, in its respective tax assessments u/s 33 of the Act. The firm was dissolved on 31-3-1963 and under a deed

of dissolution one of the firm''s businesses was taken over by one of the partners, and five by two of the other partners. The fourth partner received

a large sum in lieu of his share in the assets of the firm. The question was whether the rebate allowed to the firm could be withdrawn on the ground

that there was a sale or transfer of the machinery within the meaning of section 34(3)(b) read with section 2(47) of the Act. It was held that section

34(3)(b) was not applicable to the case and the development rebate allowed to the firm could not be withdrawn. Their Lordships observed :

Section 155(5) is a procedural provision enabling the ITO in a case falling u/s 34(3)(b) to recompute the total income of the assessee for the

relevant previous year and make the necessary amendments;..."" (p. 54)

The above observations would go to show that section 155(5) is the only machinery to effectuate the withdrawal and is limited in its application

only to cases coming u/s 34(3)(i). Referring to section 34(3)(b), their Lordships further observed :

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 8 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 u/s 33 shall be deemed to have been wrongly made and the ITO acting u/s

155(5) will be entitled to withdraw such allowance...."" (p. 54)

The following passage occurs in relation to section 34(3)(b):

It is necessary that the sale or transfer of assets must be by the assessee to a person. Now every dissolution must in point of time be anterior to the

actual distribution, division or allotment of the assets that takes place after making up accounts and discharging the debts and liabilities due by the

firm. Upon dissolution the firm ceases to exist, then follows the making up of accounts, then the discharge of debts and liabilities and thereupon

distribution, division or allotment of assets takes place inter se between the erstwhile partners by way of mutual adjustment of rights between them.

The distribution, division or allotment of assets to the erstwhile partners, is not done by the dissolved firm. In this sense there is no transfer of assets

by the assessee (dissolved firm) to any person...."" (p. 60)

It is in these circumstances that the Supreme Court held that the second condition required to be satisfied for attracting section 34(3)(b) could not

be said to have been satisfied in that case. If in the above passage, we substitute the words ''Hindu Undivided Family'' for the word ''firm'' then the

whole passage would squarely fit in with the situation which is before us and the passage setting out the legal position is apposite to cover the

problem before us.

We have already adverted to the contention of the learned counsel for the Commissioner that section 34(3)(a) and (b) are the provisions with

reference to which section 155(5) has been brought into the statute and that it may not be proper to look at section 34(3)(b) alone for seeing

whether section 155(5) applies or not. In section 155(5) apart from the sale or transfer by the assessee, clause (ii) provides for situations where

the assessee utilises the amount credited to the reserve for distribution of dividends, for remittances outside India and for any purpose which is not

a purpose of the business of the undertaking. It is possible to apply section 155(5) with reference to this situation, provided all of them are done by

the assessee. For instance, a distribution by way of dividends is possible only by a company which is in existence. Similarly distribution of profits is

possible only by an assessee who continues his business. As regards remittance outside India or creation of assets outside India the position is in

no way different and the person who creates the asset outside India must exist. The position cannot be different when we come to sub-clause (c)

of section 155(5)(b), that is, the utilisation for any other purpose which is not a purpose of the business of the undertaking. Utilisation can only be

by the assessee who got the rebate and if it did not utilise the reserve for its business but for certain other purposes set out in the statute, then the

ITO would be justified in applying section 155(5). As the HUF did not continue to exist in the present case, there is no scope for attracting clause

(ii) of section 155(5) either.

Neither with reference to the time when the development rebate was granted, nor with reference to the time of the disruption of the family, is there

any finding that the profits were utilised for any non-business purpose. When those conditions were satisfied when the grant of development rebate

was made, the subsequent disruption of the family and the sale by the erstwhile member cannot affect the validity of the grant of allowance, having

regard to the language of section 34(3) read with section 155(5). The section does not prevent the disruption of the family. When it ceases to exist

those provisions also cease to operate in relation to it.

We would take leave to point out at this stage that the decision of this Court in Addl. CIT v. Dalmia Magnesite Corporation (supra) would

require reconsideration in the light of the decision of the Supreme Court in Malabar Fisheries Co. v. CIT (supra). In so far as the Supreme Court

has pointed out that the provisions of section 34(3) could be operated only through the mechanism of section 155(5), the view taken by this Court

that even in the original assessment there can be refusal of development rebate to the assessee would be open to doubt. The result is the reference

is answered in the affirmative and in favour of the assessee. The assessee will be entitled to his costs. Counsel''s fee Rs. 500 (one set).