2004 (12) TMI 42 - HC - Income Tax

Investment allowance - Assessing Officer acting under the provisions of section 155(4A) withdrew the investment allowance originally granted on the ground that as the firm was dissolved on March 31 1978 the assets in question had been transferred to the partner who had taken over the same from the assessee-firm; and the second ground was that u/s 32A(5)(b) it was not possible for the assessee-firm to utilise the reserve within the statutory period of ten years for purchasing new machinery or plant as required by the section - Tribunal has taken cognizance of the fact that the reserve pertaining to the assessment year 1977-78 was utilised for purchase of machinery in the immediate succeeding accounting period when the assessee was in existence; and the reserve relating to the AY 1978-79 was utilised by the partner who took over the business for purchasing machinery in the immediate succeeding year. -Tribunal was right holding that investment allowance could not be withdrawn u/s 155(4A)

Issues Involved:
1. Whether the Tribunal was right in confirming the decision of the Commissioner of Income-tax (Appeals) that investment allowance could not be withdrawn under section 155(4A) in the case of the assessee.
2. Interpretation and application of section 32A(5)(a) and 32A(5)(b) of the Income-tax Act, 1961.
3. Applicability of the Supreme Court decisions in similar cases.

Issue-wise Detailed Analysis:

1. Confirmation of the Tribunal's Decision:
The primary issue was whether the Tribunal was correct in upholding the Commissioner of Income-tax (Appeals)' decision that investment allowance could not be withdrawn under section 155(4A) for the assessee. The Tribunal upheld the Commissioner's decision, finding no justification for withdrawing the investment allowance initially granted to the assessee.

2. Interpretation and Application of Section 32A(5)(a) and 32A(5)(b):
The Revenue argued that upon the dissolution of the firm, the assets were transferred to the partners, invoking section 32A(5)(a), which necessitates the withdrawal of investment allowance if assets are sold or transferred within eight years of installation. Additionally, the Revenue contended that under section 32A(5)(b), the assessee could not utilize the reserve within the statutory period of ten years due to dissolution, warranting the withdrawal of the allowance.

3. Applicability of Supreme Court Decisions:
The court referred to several Supreme Court decisions to address the issues:

- Malabar Fisheries Co. v. CIT [1979] 120 ITR 49: The court held that a partnership firm is not a distinct legal entity separate from its partners. Upon dissolution, the distribution of assets among partners is not considered a transfer under section 2(47) of the Act. This decision was pivotal in concluding that the dissolution of the firm did not constitute a transfer of assets.

- CIT v. Vijaya Production P. Ltd. [2000] 243 ITR 181: This case involved the conversion of a proprietary business into a partnership, leading to the withdrawal of development rebate. The Supreme Court reversed the Madras High Court's decision, emphasizing that there was no transfer of assets in such conversions.

- South India Steel Rolling Mills v. CIT [1997] 224 ITR 654: The court upheld the withdrawal of development rebate under section 263, emphasizing the necessity for the reserve to be utilized for business purposes within the statutory period. However, this decision was distinguished as it did not directly address the issue of dissolution and transfer.

- CIT v. S. Balasubramanian [1998] 230 ITR 934: The court reiterated that there is no transfer of assets upon partition of a Hindu undivided family, drawing parallels with the dissolution of a partnership firm. The court held that the provisions of section 155(5) were rightly invoked as the coparceners sold the machinery, failing to fulfill the conditions of section 33.

- CIT v. Dalmia Magnesite Corporation [1999] 236 ITR 46: The court reaffirmed that section 155(5) could not be invoked in the case of a firm's dissolution as there was no transfer of plant.

Conclusion:
The court concluded that the Tribunal's decision was correct. The dissolution of the firm did not constitute a transfer of assets under section 32A(5)(a) or (b). The legislative intent requires the existence of the assessee to invoke these provisions, which was not the case here. Additionally, the Tribunal noted that the reserve was utilized for purchasing machinery in the immediate succeeding year by the partner who took over the business, satisfying the conditions of section 32A(5)(b).

Final Judgment:
The court answered the question in the affirmative, in favor of the assessee and against the Revenue, confirming that the investment allowance could not be withdrawn under section 155(4A). The reference was disposed of with no order as to costs.

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