TMI Blog1988 (3) TMI 6X X X X Extracts X X X X X X X X Extracts X X X X ..... In the income-tax assessments for the years 1974-75 and 1975-76 of the assessee, development rebate was allowed under section 33 of the Act in the computation of the total income. Section 34 sets out the conditions governing the grant of development rebate. According to section 34(3)(b) of the Act, if the machinery or plant in respect of which development rebate was allowed 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 made under section 33 of the Act shall be deemed to have been wrongly made for the purposes of the Act and the provisions of section 155(5) come into operation. In the present case, it appears, the assets in respect of which development rebate was allowed for the years 1974-75 and 1975-76 were transferred to a partnership firm known as "Liberty Industries" consisting of the assessee to whom development rebate was originally granted and another person. The assets in respect of which development rebate was allowed were thrown into the partnership stock, so that those assets were henceforth regarded as partnership property ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ent rebate when a partner pools his individual assets as part of his capital with the firm's property. Such a transaction is neither a "sale" nor a "transfer otherwise". The Tribunal noticed that there is a conflict of judicial opinion and felt that the benefit of doubtful interpretation should go in favour of the assessee, as pointed out by the Supreme Court in the case of CIT v. Vegetable Products Ltd. [1973] 88 ITR 192. The Tribunal also examined the further question raised by the assessee that although the Income-tax Officer purported to have passed the order under section 155(5), the provisions of section 154 should also be simultaneously satisfied, as indicated in section 155(5) itself. The Tribunal held that not only the provisions of section 155(5) should be satisfied but the provisions of section 154 of the Act should also be simultaneously satisfied so that if there is any debatable point of law, it cannot be said to be a mistake which could be rectified under section 154 of the Act as held by the Supreme Court in T. S. Balaram, ITO v. Volkart Brothers [1971] 82 ITR 50. The Tribunal finally held that unless "the event envisaged in section 155 of the Act is self-evident an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er otherwise, of the machinery by the formation of the partnership, for the principles of the said decisions which held that there was no transfer of assets on the dissolution of a partnership and distribution of assets, must apply with equal force to the formation of a partnership. As there was no transfer of the machinery, the development rebate allowed could not be withdrawn under section 155(5) of the Income-tax Act, 1961." (emphasis supplied). It is obvious that the Kerala High Court had considered the question not only from the point of view of sale but also from the point of view of "transfer otherwise", as the expression used in section 34(3)(b) of the Act was "sold or otherwise transferred". The Kerala High Court came to the conclusion that when an individual throws the assets in respect of which development rebate was originally allowed, there is neither a sale nor a transfer otherwise and, consequently, there is no contravention of the provisions contained in section 34(3)(b) of the Act. In that view, section 155 (5) was held to be inapplicable for the purpose of withdrawing the rebate originally granted. We may refer to the decision of the Calcutta High Court in C ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... belonging to him individually into the common stock of a partnership firm. The following observations of the Supreme Court are relevant (at p. 214): "The finding of the Tribunal was that there was no sale either at the time when the assessee inflated the price of the machinery which fell to its share at the time of the division or at the time when the new partnership was created. Same is the finding of the High Court. We agree with these findings The machinery that fell to the share of the assessee was never sold. Therefore, there was no question of the assessee making any profit out of them. No one can sell his goods to himself. A sale contemplates seller and a purchaser. If a person revalues his goods and shows a higher value for them in his books, he cannot be considered as having sold these goods and made profits therefrom. Nor can a person by handing over his goods to a partnership of which he is a partner and that as his share of capital be considered as having sold the goods to the partnership. It is difficult to appreciate the arguments advanced on behalf of the Department that there was a sale either at the time when the assessee showed an inflated price of the machiner ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... A, as an individual, hands over his property to A and B constituting a firm of partnership, there is no transfer of property involved." The Madras High Court further observed at pages 533-534: "Section 14 of the Indian Partnership Act shows the different processes or methods by which a firm or partnership may come to possess property. The section says 'the property of the firm includes all property and rights and interests in property originally brought into the stock of the firm or acquired, by purchase or otherwise, by or for the firm'. This is, of course, subject to the contract between the parties. When a partnership is formed for the first time and one of the members of the partnership brings into the firm assets, they become the property of the firm, not by any transfer, but by the very intention of the parties evinced in the agreement between them to treat such property belonging to one or more of the members of the partnership as that of the firm. This view receives support from Firm Ram Sahay v. Bishwanath, AIR 1963 Pat 221, Prem Raj Brahmin v. Bhani Ram Brahmin, ILR 1946 1 Cal 191 and CIT v. Dewas Cine Corporation [1968] 68 ITR 240, 243 (SC). In the last of these case ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ench ruling, therefore, we should express our preference, as we must abide by the decision of the Supreme Court rather than be led by the observations contained in the judgment of this court." It would, therefore, be seen that while the view that the impugned transaction was not a sale was held to be correct, the decision in Baldevji's case [1985] 156 ITR 776 (Mad) recognised that there is a "transfer otherwise" within the meaning of section 34(3)(b) of the Act and, consequently, section 155(5) of the Act becomes applicable. The Bench held that when an individual throws his individual assets into the common stock of a partnership firm of which he becomes a partner, there is no sale ; never the less, there is a transfer otherwise. The learned judges deciding Baldevji's case [1985] 156 ITR 776 (Mad) came to the conclusion that the expression "sold or otherwise transferred" occurring in section 34(3)(b) of the Act is fairly wide and the subject and context of section 155(5) clearly pointed out 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ndividual business being converted into partnership business there is a transfer of the assets of the individual to the partnership, it is not necessary to rely on the definition in section 2(47) at all because the said transaction amounts to a transfer in the eye of law even when the word 'transfer' is understood in the ordinary sense and not in the wider sense in which it is defined in section 2 (47) of the Act." Finally, the High Court held (at p. 125): "On the conversion of the property of an individual into property of a firm of which he is a partner, there is a transfer of interest of the individual to the partnership and section 34(3)(b) and section 155(5) of the Act are attracted where development rebate has been allowed in respect of the property which becomes partnership property." The effect of the Karnataka judgment, therefore, is that when an individual transfers assets to a partnership firm, there is a transfer under general law and, consequently, the provisions of section 34(3)(b) read with section 155(5) come into operation. The High Court did not consider that the transaction could be regarded as a transfer by applying only the extended definition in section ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... urts that the impugned transaction was not also a transfer under general law or for purposes of section 34(3)(b) of the Act. The Supreme Court did not express disapproval of the Kerala, Calcutta and Madras High Courts' views that the impugned transaction was not transfer under general law. The Supreme Court thought it fit to consider that these decisions were correct inasmuch as the impugned transactions were not sales. While stating that there is no difficulty in accepting the proposition that the impugned transaction is not one of sale, the Supreme Court considered whether the transaction can be described as "a transfer of some other kind" and also considered the impact of section 2(47) for that purpose (page 517 of the Report). It was held that when an individual threw his assets into the partnership stock of a firm of which he is a partner, his exclusive interest is reduced to a shared interest and "it would seem that there is transfer of interest". Drawing a line of distinction of cases where partnership assets are distributed on dissolution of the partnership firm (see page 519), the Supreme Court pointed out that the position is different when a partner brings his personal a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Shri Swamy, therefore, invites us to hold that the impugned transaction is not a transfer, under general law and that the extended definition of section 2(47) cannot be applied to cases where development rebate originally allowed has to be withdrawn as that extended definition, according to Shri Swamy, is applicable only to cases relating to capital gains. Logically, therefore, Shri Swamy's contention is that there is no transfer under general law and there is also no transfer under section 2(47) because this is not a case of capital gains and, consequenlty, there is no contravention of the provisions contained in section 34(3)(b) read with section 155(5) of the Act. While we see considerable force in the submission of Shri Swamy, we cannot omit to notice that the Supreme Court in Sunil Siddharthbhai's case [1985] 156 ITR 509 drew a line of distinction between cases where partnership assets are distributed on dissolution and cases where assets are transferred to partnership firm on formation. Although there is no direct disapproval, it seems to us that the Supreme Court was clearly indicating that a transaction where an exclusive interest is reduced to a shared interest, there is t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e view that we have taken it is unnecessary to deal with that question, Shri Swamy urged that for the sake of completeness, we may deal with this aspect of the matter and indicate our views. We are afraid there is not much that is left to us in view of the Supreme Court categorically approving the conclusion reached by the Kerala Full Bench in A. Abdul Rahim v. CIT [1977] 110 ITR 595. We have earlier referred to the fact that the Supreme Court in Sunil Siddharthbhai's case [1985] 156 ITR 509, clearly indicated that it is in agreement with the conclusion reached by the Kerala Full Bench in Abdul Rahim's case [1977] 110 ITR 595. We have also pointed out that the Kerala Full Bench had taken the view that in relation to the impugned transaction, the extended definition contained in section 2(47) of the Act is applicable. Apart from that, we have also referred to the enquiry by the Supreme Court at page 517 as to whether the impugned transaction can be described as a transfer of some other kind, although it may not amount to a sale. In that connection, the Supreme Court referred to the kinds of transfers provided by clause (47) of section 2. It is, therefore, clear that the Supreme Cour ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t" and "transfer" occur in section 45 of the Act relating to the assessment of capital gains. In our opinion, it is not permissible to apply the definition in section 2(47) by analogy. Merely because plant and machinery in respect of which development rebate is allowed are capital assets, it does not seem proper to apply the definition of different expressions occurring in section 2(47) of the Act. The definition of the expression "capital asset" occurring in section 2(14) as well as the extended definition occurring in section 2(47) have, in our opinion, reference only to the assessment of capital gains arising on the transfer of capital assets. If the extended definition in section 2(47) is intended to be applied to transfer of plant and machinery constituting business assets, the Legislature could have easily expressed itself to that effect. In the absence of any positive indication to that effect, there is nothing in the terms of section 2(47) to indicate that the Legislature intended to apply that expression to situations totally different from the transfer of capital assets. The Madras High Court observed at page 789 of 156 ITR : "Having regard to the water-tight compartmen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... case, there is no dispute regarding the transfer of machinery, etc., such a case is governed by section 155(5) read with section 154. According to Shri Swamy, if the application of section 155(5) based on the question of transfer of assets to partnership firm is itself doubtful, then section 154 ousts the jurisdiction to rectify the assessment. The language employed in section 155(5) is categorically to the effect that in the event of a transfer of the asset in respect of which development rebate was originally granted, it shall be deemed to have been wrongly allowed and the Income-tax Officer may, notwithstanding anything contained in the Act, recompute the total income of the assessee for the relevant assessment year. This confers an unfettered power on the Income-tax Officer to withdraw the development rebate originally allowed. All that the latter portion of section 155(5) says is that the provisions of section 154 shall, so far as may be, apply thereto. In our opinion, the effect of this provision is that once there is a transfer of asset in the circumstances specified in the first part, then the provisions of section 154 of the Act, without anything more, shall apply. We cann ..... X X X X Extracts X X X X X X X X Extracts X X X X
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