1982 (10) TMI 1 - HC - Income Tax

Summary

Issues Involved:
1. Applicability of section 155(5) of the Income-tax Act, 1961, regarding the forfeiture of development rebate.
2. Whether the conversion of a proprietary business into a partnership constitutes a "transfer" under section 155(5).
3. Whether a partnership firm can be considered a "person" under section 155(5).

Detailed Analysis:

1. Applicability of Section 155(5) of the Income-tax Act, 1961:
The primary issue was whether the assessee was liable for forfeiture of the development rebate under section 155(5) of the Income-tax Act, 1961. The court noted that development rebate, unlike depreciation allowance, is a one-time capital allowance granted in the year of installation of plant and machinery. The statute requires the assessee to retain ownership of the machinery for at least eight years following installation. If the machinery is transferred within this period, the development rebate is forfeited. The Income-tax Officer had withdrawn the development rebate granted to the assessee, arguing that the machinery had been "transferred" to a newly formed partnership, thus triggering section 155(5).

2. Conversion of Proprietary Business into Partnership as "Transfer":
The court examined whether the conversion of the assessee's proprietary business into a partnership with his son constituted a "transfer" of the machinery. The assessee argued that no transfer occurred as it was merely an "adjustment of the rights of partners inter se." However, the court disagreed, stating that forming a partnership involves a change in ownership. The court explained that when separate properties are brought into a partnership, they become the property of the partnership firm, indicating a transfer of ownership. The term "transfer" in section 155(5) was interpreted in its broadest sense, encompassing any process by which property changes hands from one owner to another. The court cited the Transfer of Property Act, 1882, which defines "transfer" as any act by which property is conveyed from one person to another.

3. Partnership Firm as a "Person":
The assessee contended that even if a transfer occurred, a partnership firm could not be considered a "person" under section 155(5). The court rejected this argument, highlighting that under the Income-tax Act, a partnership firm is an assessable entity distinct from its partners. The court referred to various provisions and precedents, including CIT v. A.W. Figgies & Co. and Bist & Sons v. CIT, which affirm that a firm is a distinct assessable entity under the Income-tax Act. The court also cited section 2(31)(iv) of the Income-tax Act, which defines "person" to include a firm. Therefore, the transfer of machinery to the partnership firm constituted a transfer to a "person" under section 155(5).

Conclusion:
The court concluded that the conversion of the proprietary business into a partnership involved a transfer of the machinery, triggering the forfeiture of the development rebate under section 155(5). The court affirmed the Tribunal's decision, although it disagreed with the Tribunal's reasoning, which had incorrectly relied on the definition of "transfer" in section 2(47) of the Act. The court clarified that section 2(47) pertains exclusively to capital gains and is not relevant for interpreting section 155(5). The court's answer to the question of law was in the affirmative, confirming the disallowance of development rebate for the assessment years 1965-66, 1966-67, and 1967-68. The Department was awarded costs of Rs. 500.