1997 (2) TMI 10 - SC - Income Tax

Dissolution of Firm - Even though business was carried on by new firm the dissolution of firm before 8 years of grant did not satisfy the condition for grant of rebate under section 33 read with section 34(3)(a) - assessee s appeal is dismissed

Summary

Issues Involved:
1. Legitimacy of the revision of assessment under section 263 of the Income-tax Act, 1961.
2. Interpretation of sections 33(1)(a) and 34(3) of the Income-tax Act, 1961.
3. Competence of the Commissioner to exercise powers under section 263.
4. Consideration of events subsequent to the passing of the order by the Income-tax Officer.

Detailed Analysis:

Issue 1: Legitimacy of the Revision of Assessment under Section 263
The primary issue in these appeals was whether the revision of assessment under section 263 by the Commissioner for withdrawing the development rebate granted for the assessment years 1962-63, 1963-64, 1967-68, and 1968-69 was proper and justified. The Madras High Court had answered this question against the assessee and in favor of the Revenue, leading to the appeal.

Issue 2: Interpretation of Sections 33(1)(a) and 34(3)
The provisions of sections 33(1)(a) and 34(3) were central to the case. Section 33(1)(a) provided the benefit of development rebate in respect of new machinery or plant owned and used wholly for business purposes by the assessee. This benefit was subject to section 34, which required that 75% of the development rebate be credited to a reserve account to be utilized for business purposes within eight years. The High Court held that the creation of a development rebate reserve was a necessary first step but not sufficient by itself. The reserve account had to be utilized for business purposes for eight years. If the assessee did not utilize the reserve account for the business within this period, the original grant of development rebate would be considered unfulfilled and wrongly made.

The High Court observed that the assessee-firm became extinct before the expiry of the eight-year period due to the dissolution of the partnership. Thus, the conditions for the grant of development rebate were not met. The assessee's argument that the business continued with a new partnership was rejected, as the new entity was different from the original assessee.

Issue 3: Competence of the Commissioner to Exercise Powers under Section 263
The assessee contended that the Commissioner could not invoke jurisdiction under section 263 and that the matter should be dealt with by the Income-tax Officer under section 155. The High Court noted that this issue was not raised by the assessee before the Commissioner or the Tribunal. Moreover, the power of rectification under section 155 and the power of revision under section 263 are distinct. The Commissioner's power under section 263 is broad and can be exercised if the order is erroneous and prejudicial to the interests of the Revenue. This power is not limited by section 155.

Issue 4: Consideration of Events Subsequent to the Passing of the Order by the Income-tax Officer
The High Court held that the Commissioner could consider events that occurred after the Income-tax Officer's order. Explanation (b) to section 263 states 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 dissolution of the assessee-firm due to the death of a partner occurred before the Commissioner's order and could be taken into account.

Conclusion
The Supreme Court upheld the High Court's judgment, agreeing that the conditions for the grant of development rebate were not satisfied due to the dissolution of the assessee-firm before the expiry of the eight-year period. The Commissioner was justified in exercising his powers under section 263 to withdraw the development rebate. The appeals were dismissed, with no order as to costs.