1996 (2) TMI 40 - HC - Income Tax

Summary

Issues Involved:
1. Whether the transfer of assets from a Hindu undivided family (HUF) to a partnership firm constitutes a "transfer" under Section 2(47) of the Income-tax Act, 1961.
2. Whether the provisions of Section 155(5) of the Income-tax Act, 1961, can be invoked to withdraw the development rebate granted earlier to the HUF.

Detailed Analysis:

Issue 1: Transfer of Assets from HUF to Partnership Firm
The primary question was whether the transfer of assets from the HUF to a partnership firm constituted a "transfer" under Section 2(47) of the Income-tax Act, 1961. The Tribunal held that there was no transfer because the property of the HUF became the property of the partnership firm consisting of the same coparceners. The Tribunal relied on several judicial precedents, including CIT v. Janab N. Hyath Batcha Sahib, D. Kanniah Pillai v. CIT, CIT v. Abdul Khader Motor and Lorry Service, and A. Subbiah Nadar v. CIT, to conclude that there was no transfer of property involved in this process.

The Department, however, argued that the HUF and the partnership firm are two different entities and that the term "otherwise transferred" should be given the widest meaning to include all kinds of ownership transfers. The Department relied on the decision in Baldevji v. CIT to support its contention that the transfer of assets from the HUF to the partnership firm constitutes a "transfer" under the Income-tax Act.

Issue 2: Invocation of Section 155(5) to Withdraw Development Rebate
The Income-tax Officer had withdrawn the development rebate granted to the HUF for the assessment year 1967-68 under Section 155(5) because the assets were transferred to the partnership firm. The Tribunal, however, allowed the appeal filed by the assessee, holding that there was no transfer and thus, the provisions of Section 155(5) could not be invoked.

The Department contended that the development rebate should be withdrawn because the assets were transferred from the HUF to the partnership firm, which constitutes a transfer under Sections 34(3)(b) and 155(5). The Department argued that the expression "otherwise transferred" should be interpreted broadly to include the transfer of assets from the HUF to the partnership firm.

The court examined various judicial precedents, including Sunil Siddharthbhai v. CIT, Baldevji v. CIT, CIT v. Suresh Chandra Jain, and S. M. Chemicals and Electronics P. Ltd. v. CIT. These cases established that the term "otherwise transferred" should be given a wide interpretation to include any parting with the asset, which would involve a breach of the statutory condition under which the development rebate was granted.

Conclusion:
The court concluded that the transfer of assets from the HUF to the partnership firm constitutes a "transfer" under Sections 34(3)(b) and 155(5) of the Income-tax Act, 1961. Consequently, the development rebate granted to the HUF was liable to be withdrawn. The court held that the Tribunal was incorrect in holding that there was no transfer when the assets of the HUF were taken over by the partnership firm. The question referred to the court was answered in the negative and in favor of the Department. No costs were awarded.