TMI Blog1999 (2) TMI 108X X X X Extracts X X X X X X X X Extracts X X X X ..... on 21-1-1984 determining the total income at Rs. 1,07,234. It is stated that this was after granting investment allowance of Rs. 40,244 for this year. For the assessment year 1980-81, the assessment was made on 15-4-1982 determining the total income at Rs. 64,925 after setting off business loss and investment allowance of Rs. 1,12,843. 3. By an indenture of Trust declared on 1-4-1981 the Karta of the assessee HUF declared the business carried on in the style of T.R. Ganapathy Chettiar and Ganapathy Refineries as trust property held for the benefit of the maintenance of his children and family members. He himself was to be the trustee, until the death and thereafter by Board of Trustees. The trust was to exist for a period of 20 years and thereafter until extinguishment by the beneficiaries. The conversion of the business as trust property was also returned as a gift but it was claimed that it was exempted under Gift-tax Act because it was made in the course of the business. The gift-tax assessment was made on 28-3-1985 which is stated to be pending consideration in appeal. 4. The ITO was of the opinion that this conversion of the business from the property of the HUF into the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... stment allowance granted should not be withdrawn. On the other hand, the contention of the Revenue is that the declaration of the trust itself amounted to transfer and disentitled the assessee from claiming the investment allowance. 7. Before we consider the rival submissions, a look at the legislative history would be necessary to keep the matter in the right perspective. The development rebate was introduced by the Finance Act, 1955. In the Budget speech (27 ITR Statutes page 42), the Finance Minister referred to the recommendation of the Taxation Enquiry Commission and said that he proposed to allow development rebate 25% of the cost of all the new plant and machinery installed for business purposes instead of the present initial depreciation allowance of 20%. The Act introduced clause (vib) in section 10(2) and the only condition prescribed was that no allowance shall be made unless the particulars prescribed had been furnished by the assessee. 8. There was an amendment proposed by the Finance Bill of 1958 (33 ITR Statutes 61) prescribing the further condition that an amount equal to the amount of allowance due is debited to the profit loss account of the relevant previou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or development rebate except that there was now a positive obligation to utilise the reserve within a period of ten years for acquiring new assets for the purposes of the same business. The section as it stands at present excludes the conversion of the firm's property into the property of a company as well as the amalgamation by one company with another from the operation of the condition relating to the transfer of the plant or machinery, as in the case of development rebate earlier. Section 155(5) reproduced the provision in old section 35(11) for rectification of assessment to withdraw the development rebate in case of breach of condition. Section 155(4A) made a similar provision to meet any breach of conditions relating to investment allowance given under section 32A. 11. In the fight of this background, we have to consider the scope and object of the expression "sold or otherwise transferred" which occurs in section 32A. As we have seen above this expression came into the statute in 1958 to prevent certain abuses. The Revenue has not enlightened us about the nature of the abuse which was sought to be prevented by this expression so that we can understand the scope of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... case of George Da Costa v. CED [1967] 63 ITR 497 that the word "otherwise" in the expression "contract or otherwise" should be construed ejusdem generis and it should be interpreted to mean some kind of legal obligation akin to a contract. If we apply this principle of ejusdem generis here we have to consider that the word "transfer" should have the meaning analogous to that of a sale in the sense of a transaction in the nature of a sale. There is also the other principle of noscitur a saciis according to which where two or more words which are susceptible to analogous meaning are coupled together, they take the colour from each other, the meaning of the more general term being restricted to a sense analogous to that of the less general. On this principle also the meaning of the word "transfer" takes the colour from its context and particularly from the word "sold" preceding it. 13. But the more important rule of interpretation is Ut Res Magis Valant Quam Pereat. This is a crucial rule which states that the words of statute should be given a sensible meaning so as to make them effective. The Supreme Court has said in the case of Tirath Singh v. Bachittar Singh AIR 1955 SC 830, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e held that balancing charge is not to be applied where the business is transferred as a going concern and not the individual machinery. Thus a reading of these provisions clearly indicate that there is a distinction between an asset and an undertaking as well as between the assessee and the business in which an asset is used. In other words, there is a clear indication that the intention of Parliament was to see that the asset should be continuously used in the undertaking and not that the assessee should continue to be the owner of the asset. We are fortified in inferring this distinction by the decision of the Supreme Court in the case of Sir Kikabhai Premchand v. CIT(Central) [1954] 24 ITR 506. In that case, an assessee withdrew certain stocks from the business and declared it a trust and the revenue sought to tax the transaction. The Supreme Court observed: "It is well recognised that in revenue cases regard must be had to the substance of the transaction rather than to its mere form. In the present case disregarding technicalities it is impossible to get away from the fact that the business is owned and run by the assessee himself. In such circumstances we are of opinion th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at question has not arisen here presumably because the undertaking continues to be operated by the business which has been taken over as a running concern by the trust and the trust continues to have the reserve which can be properly utilised as required by the section. There is nothing in the Act which prevents the successor in the interest in fulfilling the conditions stipulated for the grant of the development rebate especially when that development rebate is allowed to be carried forward and set off in computing the income of the business even in the hands of the successor assessee. 18. In the circumstances, we are convinced that not only was there no transfer within the meaning of the expression "sold or otherwise transferred" but also that the section was not intended to affect cases of a transfer of the undertaking as such where the successor in interest ensures that the conditions required for the development rebate are fulfilled and the objects of the legislature namely the use of the machinery in the industry is effectuated. If the development rebate is to be withdrawn even when the undertaking is kept up, it would, in our opinion, go against the intention of the Parlia ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he document are to be considered. This is the dicta of the Supreme Court in the case of CIT v. Durga Prasad More [1971] 82 ITR 540 545. The McDowell principle is also required to be applied McDowell Co. Ltd. v. CTO [1985] 154 ITR 148 (SC). According to Galmond the purpose of trusteeship is to protect the rights and interests of persons such as unborn, infants, lunatic etc. who for any reason are unable effectively to protect them for themselves. The law vests those rights and interest for safe custody, as it were, in some other person who is capable of guarding them and dealing with them and also is placed under a legal obligation to use them for the benefit of those to whom they in truth belong. In this context the creation of the trust is nothing but a device for ulterior purpose or with a view of tax planning. Thus the assessee who has hither to become the owner of he trust property ceases to be so with effect from 1-4-1981 by virtue of the trust created. The trust is said to be irrevocable though it could be terminated earlier if all the beneficiaries agreed to do so vide para 5(ii) or as decided by the trustee/board of trustees. 3. Section 63 defines "transfer" as includ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he reserve for distribution of dividends or profits or remittance outside India for any other purpose which is not a purpose of the business of the undertaking and in the event of any such eventuality the provisions of section 155(4A) would be attracted. 9. Applying the aforesaid statutory prescription to the facts of the assessee's case, clause (a) and clause (b) of section 5 are applicable in the facts and circumstances of the case. Even clause (c) of that section can also be said to be applicable insofar as the utilisation of the reserve for the purpose other than the purpose of business of the undertaking because the assessee is the sole trustee and the trust business is carried on him at his discretion and even the trust could be determined as per his discretion. 10. The trust created by the assessee is not a successor to the erstwhile proprietary business so as to be entitled to the benefit of carry forward and set off of investment allowance. It is not also bound to utilise the reserve for the purpose for which it was created. Consequently, clause (a) and clause (b) of section 155(4A) of the I.T. Act, 1961 are attracted and, therefore, the investment allowance already gr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... consideration. 14. Consequently the orders of the CIT (Appeals) are upheld and the appeals filed by the assessee are dismissed. ORDER UNDER SECTION 255(4) OF THE INCOME-TAX ACT, 1961 We have differed in our opinions and the Point of Difference is set out below:- "Whether on the facts and in the circumstances of the case the investment allowance already granted should be withdrawn under section 155(4A) read with section 32A(5) of the Income-tax Act, 1961?" 2. Accordingly the case is stated to the President of the Income-tax Appellate Tribunal for favour of necessary action. THIRD MEMBER ORDER Per Shri T.V. Rajagopala Rao (Third Member)-The following difference arose between the Members while disposing of these appeals by a common order: "Whether, on the facts and in the circumstances of the case, the investment allowance already granted should be withdrawn under section 155(4A) read with section 32A(5) of the Income-tax Act, 1961?" The then President constituted himself as Third Member to resolve the difference as per Head Office's order communicated to the Vice-President (SZ) in U.O. No. F/232(AT) dated 2-2-1988. As successor President, I resumed jurisdiction to h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er, the creation of the trust amounted to a transfer of the businesses hitherto carried on by Shri Ganapathy Chettiar in favour of the trust. This act of transfer, in the opinion of the Assessing Officer, called for withdrawal of investment allowance under the provisions of section 32A(5) read with section 155(4A) of the I.T. Act. Therefore, he issued notices under section 154 to the assessee on 22-1-1985. The assessee-HUF filed its objections on 29-5-1985. In the objections, it was contended that by a mere declaration of trust relating to the assessee's business assets, there was neither sale nor transfer. It was contended that a transfer should always be in favour of a person who was in existence, whereas in the case on hand the trust came into existence only at the time of declaration and never before. Therefore, there was no element of transfer in the declaration of trust and so sub-section (a) of section 155(4A) was not attracted or applicable. It was also contended that since the investment allowance granted for these four years was already utilised for purchase of new assets, the conditions laid down in section 32A were all fulfilled and, therefore, it should not be withdraw ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ee was not successful in the appeals. Hence, the appeals were dismissed by separate orders dated 21-7-1986 for assessment year 1978-79, 30-12-1985 for assessment year 1979-80, 13-11-1985 for assessment years 1980-81 and 1981-82. Challenging the orders of the CIT(A), the assessee-HUF came up in the second appeal before this Tribunal. 4. These appeals were taken up together and the Bench sought to dispose them off by a common order. The then ld. Judicial Member, by his order dated August 1987, proposed to allow the appeals. However, the then ld. Accountant Member did not agree with the ld. Judicial Member on the reasons stated in his dissenting order dated 9-10-1987. The ld. Members identified their difference of opinion as already extracted above and referred the matter to Third Member. Thus, the matter stands for my consideration. 5. The ld. Judicial Member traced out the origin of the investment allowance right from Finance Act, 1955. Ultimately, he traced out that section 32A, which provided investment allowance came into the statute book under the Finance Act of 1976. He held that the conditions prescribed for relief under section 32A were the same as in the case of developm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... section 2(47) of the I.T. Act in paragraphs 12 13 of his order and in para-14 he observed that in the appeals before him also, shorn of technicalities, one finds that the business continues to be carried on by the same person first on behalf of the HUF and later on behalf of the trust. Thus, the learned Judicial Member found that in substance there was no abuse of the provisions which was required to be met by treating the transaction as a transfer within the scope of the expression "sold or otherwise transferred". He went to the extent of holding that no doubt, the conversion of the property of the HUF into the property of the trust by declaration of the trust constituted a transfer under the general law but it would not be a transfer within the restricted meaning of the expression "sold or otherwise transferred" keeping in mind the object and intention of Parliament in enacting this provision. He distinguished the Kerala High Court decision in the case of Radhas Printers where the development rebate was withdrawn when a business of a firm was converted into a trust. The distinguishing feature, according to him, was that in that case it was not disputed that the transfer by cre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ecision in Sir Kikabhai Premchand's case , for the proposition that it was wholly unreal and artificial to separate the business from its owner and treat them as separate entities. In other words, they co-existed. Having regard to the terms of the trust deed dated 1-4-1981 that beneficiaries under the trust deed the beneficial owners as well as the legal owners of the trust property, he held that the author of the trust was desirous of not only making provision for the welfare, well being and prosperity, etc., of all the beneficiaries but also provided them (sons and their wives) with assets, properties and the like, i.e., corpus of the trust property vide clauses 2(a), 2(b) and 4(a) of the trust deed. Thus, he held that there was not only transfer of income but also the corpus to the beneficiaries. Therefore, he held that the assessee was no longer the owner of the business in general and the asset in particular on which the investment allowance was granted earlier. He held that the business was no longer carried on by the assessee; the assessee could be said to be carrying on the business for and on behalf of the beneficiaries as sole trustee under the trust deed. As per the term ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... upreme Court decision in Malabar Fisheries' case did not help the assessee and this was duly considered by the Madras D-Bench of the Tribunal in Wilson Industries' case which were all disposed of by a consolidated order dated 11-4-1986 wherein it was held that the scope of the observation of the Madras High Court in S. Balasubramanian's case could not be equated with the ratio of the Madras High Court in the case of Dalmia Magnesite Corpn. and on that scope the ratio of Dalmia Magnesite Corpn.'s case could not lose its binding nature over the Madras Tribunal. Ultimately, he justified the withdrawal of investment allowance under section 155(4A) read with section 32A(5) of the I.T. Act. In view of the conflicting views expressed by the learned Members, the difference was referred to the then President and thus the matter now stands for my consideration. 7.1 have heard Shri Devanathan, learned counsel for the assessee, and Shri Ganapathy Iyer, learned Jr. Departmental Representative. Shri Devanathan fully adopted the reasoning given by the Id. Judicial Member in his order and thus he fully supported his order. He, inter alia, contended the following: It would appear that the Id. A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... F, if at all, had transferred the whole of the going concern with all its assets and liabilities and, therefore, it cannot be said that plant and machinery, for which the investment allowance was granted, were the only assets transferred. (2) He raised a pivotal contention that the relief of investment allowance was attached to the plant and machinery for which it is to be granted and the relief does not belong to a person who is the owner of the plant and machinery. (3) In the facts and circumstances of this case, if at all the Tribunal holds that there was a transfer it should be taken that the transfer is not only of assets but also liabilities incurred by the business and the transfer was effected with regard to a going concern. (4) He relied upon Circular No. 378 dated 3-3-1984 (1991) Vol. I Page 781 and letter No. F. 15/563 dated 15-12-1963 under section 80J. (5) He also cited and relied upon CIT v. Narang Dairy Products [1996] 219 ITR 478/85 Taxman 375 (SC) at page 484 and CIT v. P.K. Ramaswamy Raja [1997] 223 ITR 324/95 Taxman 173 (Mad.) to convey the true meaning of the words "other-wise transferred". (6) When I brought to his notice that the decisions were given ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t property changed hands. He maintained that without divesting the ownership of the property, trust cannot be created. (4) Explaining the ratio in Narang Dairy Products' case , which was cited for the assessee, the learned D.R. submitted that the issue there was about the withdrawal of development rebate. He submitted that the ultimate decision in this case was in favour of the department. He further submitted that the Hon'ble Supreme Court duly took into consideration the fact that plant and machinery changed hands and that itself empowered the withdrawal of development. (5) The ratio of the above decision clearly applies to the facts of this case. Here also, the ownership changed hands and not merely user. (6) He submitted that the withdrawal of development rebate under section 34(3)(b) is analogous to withdrawal of development rebate under section 32A(5). So, according to him, the decision in Narang Dairy Products' case , though given with reference to the withdrawal of development rebate, equally applies to the case of withdrawal of investment allowance also. (7) He invited my attention to the decision of the Hon'ble Supreme Court in the case of South India Steel Rollin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he assessee who had 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 8 years next following for the purpose of the business of the undertaking for which the development rebate was given. Since the firm which had been granted the rebate had been dissolved and ceased to exist before the expiry of 8 years, the rebate was liable to be withdrawn. The ld. Departmental Representative also cited and relied upon the Delhi High Court decision in CIT v. Northern India Iron Steel Co. Ltd. [1997] 226 ITR 342 (Delhi). In that case, the plant and machinery were leased out and development rebate was claimed by the lessor. The Delhi High Court refused to grant the development rebate on the ground that the assessee after leasing out the machinery had no control over the use of the machinery and could not be said to be manufacturing and producing articles. The ld. Departmental Representative had drawn my attention to the Hon'ble Supreme Court's decision in Sunil Siddharthbhai's case wherein it was held that an asset belonging to an individual partner was brought to the partnership busi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sons were all married and also were having children. So also his daughter was married and having her own children. As can be called out from the trust deed, the following appears to be the relationship between the author of the trust and the several beneficiaries under the trust deed: T.R. Ganapathy Chettiar S/o. Ramaswamy Chettiar Mrs. Ammakannu Ammal (W)-(B1) --------------------------------------------------------------------------- | | | | (B2) | | (B8) | | | | Raghunathan (S1) Gunase- Prabhakaran (S3)(B6) Mrs. Maragatham Mrs. Rani (W) kharan Shanti (W)(B4) W/o G. Bala- | (S2)(B5) | chandran (B8) ----------------- | | | | Sundara- | | Master Vinaya- valli (W) Mas ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t in each of the accounting years in question. In the deed of trust, the author declares himself to be holding the properties in trust for the beneficiaries. The question was whether the trust could come into existence even before the trust deed was executed. In the commentary of Shri O.P. Aggarawala on the Indian Trusts Act, 1882 (1970) Sixth Edition. at page 223, the following is what is held: "Where a transfer of property is made to a person in such a manner or in such circumstances that he is thereby constituted, not the absolute owner, but a trustee thereof for disposer, the disposer may at any time afterwards declare a specific trust of the property." Therefore, the terms of the trust deed made it very clear that Shri Ganapathy Chettiar was conducting the business as a sole trustee for each of the accounting years in question, though the trust deed was executed by him on 1-4-1981. Further, it was never the case of the assessee that the businesses were not run by the trust but represented his own businesses. Another question, which may be relevant, was whether the properties held under trust included business undertakings also. As per the following decisions of the Hon'ble ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rposes irrespective of the fact as to who is the owner of the plant and machinery, the question of adjustment of carried forward investment for 8 years would not fit into the scheme of assessment contemplated by the legislature. Therefore, the under-current argument, which permeates throughout the main discussion involving the point at issue in the Judicial Member's order, that what is essential for grant of investment allowance is continued user of plant and machinery in the business and not who is the owner of the said plant and machinery, is wrong, with due difference to my learned Brother, under law. I want to further strengthen my reasoning with reference to sub-section (5) of section 32A. So far as it is relevant for my purpose, the said sub-section reads as follows: "(5) Any allowance made under this section in respect of any ship, aircraft, machinery or plant shall be deemed to have been wrongly made for the purposes of this Act- (a) if the ship, aircraft, 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; or (b) if at an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e ld. Departmental Representative and the same can be usefully referred to here. In my humble opinion, what is held good for development rebate equally holds good even while considering the investment allowance. If really the grant of development rebate depends only upon the continued user of plant and machinery in the business without concern as to who is the owner of such plant and machinery and such a view represents the correct law, the Hon'ble Supreme Court would not have upheld the revisionary order passed under section 263 in the facts of that case before them. In CIT v. Shaan Finance (P.) Ltd. [1998] 231 ITR 308/97 Taxman 435, the Hon'ble Supreme Court, inter alia, considered the legality and correctness of First Leasing Co. of India Ltd.'s case . At pages 311 and 312, the following pre-conditions are to be fulfilled by any assessee before being entitled to investment allowance: "(1) the machinery should be owned by the assessee, (2) it should be wholly used for the purposes of the business carried on by the assessee, and (3) the machinery must come under any of the categories specified in sub-section (2) of section 32A." Therefore, it can be seen that the pre-condi ..... 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