TMI Blog1982 (10) TMI 1X X X X Extracts X X X X X X X X Extracts X X X X ..... an assessee should part with the machinery in question within the statutory period, then he forfeits the development rebate already granted. The procedure by which the forfeiture is effectuated by the Act is to be found in section 155(5) of the Act. The provision enables the Income-tax Officer to withdraw development rebate already granted to an assessee, if within the statutory period, the assessee either sells or otherwise transfers the machinery which had obtained development rebate, as if the grant of the development rebate, even in the first instance, is a palpable mistake in the assessment. The only question in this reference before us is whether the assessee in this case has rendered himself liable to forfeiture of the development rebate under section 155(5) of the Act. The assessee was the sole proprietor of a business. He purchased certain new items of machinery and installed them in his business. During the relevant years of assessment, the Income-tax Officer granted development rebate on these items of machinery. Within eight years from their installation, however, the assessee formed a partnership with himself and his son as partners and gave over the items of mach ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... perty 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. Section 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. The expression " transfer " occurring in section 155(5) of the Act is not defined by Parliament. But that does not matter. In our judgment, the word is used in its widest import. In the normal acceptation of that term, a transfer indicates any process by which property changes hands from one owner to another. Wherever property passes in this manner or is parted with by one person in favour of another, there occurs a transfer of property. Property, when analysed, is a bundle of rights. Therefore, any interest in property is also regarded under the general law as property. It follows that the transfer of a mere fractional interest in property would also come within the concept of transfer of property. The Tr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y Act, 1953, was interpreted by courts to mean either a sale or something akin to a sale. See Attorney-General v. Seccombe [1911] 2 KB 688 and George Da Costa v. CED [1967] 63 ITR 497 (SC). This interpretation of the expression " otherwise " can, however, be explained by reference to the particular context of the estate duty provisions, and also, presumably, by the court's disinclination to give a wider berth than was felt absolutely necessary to give effect to an anti-tax avoidance provision like section 10 of that Act. In construing the expression " sold or otherwise transferred " occurring in section 155(5) of the Income-tax Act, however, we are under no such compulsion or restriction. This is because the subject and context of section 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he dissolution. Elsewhere in the course of their discussion, however, the Supreme Court made it quite clear that under the Partnership Act, property which is brought into the partnership by the partners at the time when it is formed does become the property of the partnership. Adverting to the facts in the particular case before them, the Supreme Court observed that when the two partners brought in the theatres of their respective separate ownership into the partnership, the theatres must be deemed to have become the property of the partnership firm. This part of the judgment of the Supreme Court indicates that the learned judges did not regard the bringing into the partnership of the separate properties of the partners at the time of the formation of the partnership as a mere " adjustment " of partner's rights inter se. 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 jural character of the transactions, this court in CIT v. Janab N. Hyath Batcha Sahib [1969] 72 ITR 528 seems to have thought that there was no mater ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Court considered this judgment of the Karnataka High Court as a decision dealing with a position converse to the case before them in the case of Malabar Fisheries Co. v. CIT [1979] 120 ITR 49 (SC), which was a case of dissolution and allotment of firm's properties to the shares of the partners in dissolution. The Supreme Court observed that there was no scope for any parity of reasoning for deciding these two kinds of cases, the one involving the distribution, division or allotment of assets to the partners which flows from the firm's dissolution and the converse case of individual assets of a partner being brought into a partnership firm at the inception of the firm. Having pointed out this distinction and having observed that there was no parallel between the two kinds of cases, the Supreme Court, however, did not wish to proceed further and express any opinion as the correctness or otherwise of the view of the Karnataka High Court on the applicability of section 155(5) of the Act to the case before that court. In our judgment, the observations of the Supreme Court as respects the decision of the Karnataka High Court in Addl. CIT v. M. A. J. Vasanaik [1979] 116 ITR 110, clear ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e in this controversy seem to us to be a little overworked. Even in England, the home of the pure theory of partnership, a firm is not completely regarded to be a legal person. Those who were responsible for bringing the Indian Partnership Act into the statute book, however, would seem to have steered a middle course, giving to a partnership firm a limited personality. Indeed, a report of the Special Committee which drew up the draft of the Indian Partnership Act, 1932, endorsed the view of Lindley that non-recognition of the firm as an entity was a defect in the law of partnership. They also pointed out that even the English Partnership Act, 1890, has been forced to depart from the strict legal view of the firm considering that it contains appropriate provisions of changes in the constitution and the like. The framers of the Indian Partnership Act, therefore, have accepted, in principle, the position that the firm must have some degree of personality, of continuity in its existence, in spite of internal changes. This explains the whole gamut of provisions in our Partnership Act in Chapter V, especially relating to introduction of partners, retirement or expulsion of partner and th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... partners. partner can retire with the consent of the other partners and a person can he introduced in the partnership by the consent of the other partners. The reconstituted firm can carry on its business in the same firm name till dissolution. The law with respect to retiring partners as enacted in the Partnership Act is to a certain extent a compromise between the strict doctrine of English Common law which refuses to see anything in the firm but a collective name for individuals carrying on business in partnership and the mercantile usage which recognises the firm as a distinct person or quasi-corporation. But under the Income-tax Act, the position is somewhat different. A firm can be charged as a distinct assessable entity as distinct from its partners who can also be assessed individually ......... The partners of the firm are distinct assessable entities, while the firm as such is a separate and distinct unit for purposes of assessment. Sections 26, 48 and 55 of the Act fully bear out this position. These provisions of the Act go to show that the technical view of the nature of partnership, under English law or Indian law, cannot be taken in applying the law of income-tax. " ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssable entity under the Income-tax Act, but whether a firm can be regarded as a " person " within the meaning of section 4 of the Indian Partnership Act, 1932. That section defines a partnership as the relation between " persons " who have agreed to share the profits of a business carried on by all or any of them acting for all. The question before the Supreme Court in that case was whether the firm as such can be persons in such a sense that two firms, as such, can enter into a common partnership. The view of the Supreme Court was that it was not possible, under the Indian law, for such a firm to come into existence. In the course of their discussion, the Supreme Court referred to section 3(42) of the General Clauses Act which defines a person as including any association or body of individuals, whether incorporated or not. While referring to this clause in the General Clauses Act, the Supreme Court, however, expressed the view that the definition in the General Clauses Act cannot be applied to section 4 of the Partnership Act for getting at the meaning of the expression " person " occurring in it since to do so would be repugnant to the subject of partnership law. This decision o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o. Indeed, in the course of their judgment, the learned judges instituted such a searching inquiry into the factual position of the case which enabled them to observe that the deed of reconstitution only made explicit what was already implicit in the original deed of partnership, thereby suggesting that there was not even a reconstitution of the original partnership firm. Apparently, on the facts of that case, the learned judges took the view that even in the original partnership firm, all the original partners only represented their respective branch families and in the process of reconstitution of the firm all that happened was that the several individual members of the three branches became partners in name whereas they were already partners in fact. We agree with respect with the underlying principle of this decision, namely, that a mere change in the constitution of firm does not bring about a transfer of assets from the firm as constituted before the change to the firm as reconstituted after the change. The case under reference before us, however, is quite different from that of a mere reconstitution of the firm. What in this case had occurred was the transfer, as change of o ..... X X X X Extracts X X X X X X X X Extracts X X X X
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