1994 (12) TMI 13 - HC - Income Tax

Summary

Issues:
1. Interpretation of 'transfer' of assets under section 34(3)(b) of the Income-tax Act, 1961.

Analysis:
The case involved a reference made under section 256(1) of the Income-tax Act, 1961, regarding the interpretation of whether there was a 'transfer' of assets within the meaning of section 34(3)(b) of the Act. The assessee-firm, initially constituted under a partnership deed, later formed a new partnership firm named "Asmaco Plastic Industries" where all assets and liabilities were transferred. The dispute arose when the Income-tax Officer withdrew the development rebate granted to the assessee-firm on certain machineries, as they were transferred to the new firm within eight years of installation, contrary to the provisions of section 34(3)(b).

The key contention raised by the assessee-firm was that the transfer of machineries to the new firm did not constitute a 'sale or transfer' within the meaning of section 34(3)(b) of the Act. The assessee argued that the new firm was merely an extension of the original firm with an additional partner and that the development rebate withdrawal was unjustified.

The court analyzed the relevant provisions of section 34(3)(b) which required that assets should not be sold or transferred within eight years from acquisition or installation. The court interpreted the term 'transfer' in light of the legal definitions provided in the Transfer of Property Act, 1882, and section 2(47) of the Income-tax Act, 1961. It was noted that the transfer of assets to the new firm, as per the partnership deed, constituted a valid transfer within the meaning of the Act, extinguishing the rights of the assessee-firm and vesting them in the new firm.

The court emphasized that the new firm, "Asmaco Plastic Industries," was a separate legal entity registered under the Indian Partnership Act, distinct from the assessee-firm. Despite common partners, the new firm was considered a different entity, and the transfer of assets was deemed to have occurred within the specified period under section 34(3)(b). Consequently, the court upheld the withdrawal of the development rebate by the Income-tax Officer and affirmed the Tribunal's decision in favor of the Revenue.

In conclusion, the court ruled in favor of the Revenue, holding that the transfer of assets to the new firm constituted a valid transfer within the meaning of section 34(3)(b) of the Income-tax Act, 1961. The development rebate withdrawal was deemed justified, and no costs were awarded in the case.