2001 (1) TMI 4 - HC - Income Tax

Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the assessee was entitled to the benefits of investment allowance? - The reference is, answered in the negative, i.e., in favour of the Revenue and against the assessee.

Issues Involved:
1. Entitlement to investment allowance upon dissolution of a firm.
2. Interpretation of "otherwise transferred" under Section 32A(5) of the Income-tax Act, 1961.
3. Application of precedents from Supreme Court decisions.

Detailed Analysis:

Entitlement to Investment Allowance Upon Dissolution of a Firm:

The primary issue was whether the assessee was entitled to the benefits of investment allowance after the firm's dissolution and distribution of assets among partners. The Income-tax Officer withdrew the investment allowance, arguing that the dissolution and subsequent distribution of machinery and reserve among partners constituted a transfer within the meaning of Section 32A(5) of the Act.

The Commissioner of Income-tax (Appeals) upheld this withdrawal, but the Tribunal, relying on the Supreme Court's decision in Malabar Fisheries Co. v. CIT and the Gujarat High Court's decision in Abdul Rehman Haji Miya v. V.P. Minocha, ITO, found that no transfer of assets occurred upon dissolution. The Tribunal concluded that the reserve and assets continued to be used in the business, and therefore, the investment allowance should not be withdrawn.

Interpretation of "Otherwise Transferred" Under Section 32A(5):

The court examined whether the distribution of assets upon dissolution could be considered an "otherwise transferred" situation under Section 32A(5). The Revenue argued that the machinery was "otherwise transferred" as the firm disabled itself from the continued exclusive use of the machinery for its business, emphasizing that the reserve must be used for ten years by the assessee who obtained the investment allowance.

The court noted that Section 32A allows investment allowance for machinery used exclusively for business purposes. If the machinery is transferred or not used exclusively by the assessee for the specified period, the investment allowance can be withdrawn. The court referenced the inclusive definition of "transfer" under Section 2(47) and the contextual meaning of "otherwise transferred" in Section 32A(5)(a).

Application of Precedents from Supreme Court Decisions:

The court considered several Supreme Court decisions to interpret the relevant provisions:

1. Malabar Fisheries Co. v. CIT: The Supreme Court held that upon dissolution, the firm's rights in partnership assets are not extinguished, and distribution among partners is a mutual adjustment of rights, not a transfer.

2. CIT v. Narang Dairy Products: The Supreme Court held that leasing machinery within eight years of acquiring it constituted an "otherwise transferred" situation, justifying the withdrawal of development rebate.

3. South India Steel Rolling Mills v. CIT: The Supreme Court held that if a firm ceases to exist before the expiry of eight years, the development rebate must be withdrawn, as the condition for exclusive use by the assessee is not met.

The court concluded that the principles from Narang Dairy Products and South India Steel Rolling Mills, which dealt with development rebate, applied to investment allowance under Section 32A. The court found that the Tribunal's reliance on Malabar Fisheries was misplaced due to the later Supreme Court decisions.

Conclusion:

The court held that the Tribunal was not correct in law in holding that the assessee was entitled to the benefit of investment allowance. The distribution of assets and reserve upon dissolution constituted an "otherwise transferred" situation under Section 32A(5), justifying the withdrawal of the investment allowance. The reference was answered in the negative, in favor of the Revenue and against the assessee, with no order as to costs.

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