1979 (7) TMI 11 - HC - Income Tax

Summary

Issues Involved:
1. Whether the transactions under Exs. P-2 and P-3 constituted a transfer of assets and liabilities by the petitioner-firm to the trustees.
2. The constitutional validity of sections 33(3) and (4) and 155(5) of the Income Tax Act, 1961.
3. The correctness of the Income Tax Officer's order withdrawing the development rebate granted to the petitioner-firm.

Issue-wise Detailed Analysis:

1. Transfer of Assets and Liabilities:
The primary issue was whether the transactions under Exs. P-2 and P-3 involved a transfer of assets and liabilities by the petitioner-firm to the trustees. The court found that the firm changed hands from the partners to the trustees as a going concern. This was not a case of a declaration of trust by will, nor one where the author of the trust is himself the trustee. The trust deed (Ex. P-2) and the separate deed (Ex. P-3) indicated that the assets and liabilities were transferred to the trustees. The court relied on the Supreme Court's decision in Tulsidas Kilachand v. CIT [1961] 42 ITR 1, which stated that even if the declarer of the trust is also the trustee, the law implies a transfer of property to himself as trustee. Thus, the court concluded that there was a valid transfer of assets and liabilities.

2. Constitutional Validity of Sections 33(3) and (4) and 155(5):
The petitioner contended that sections 33(3) and (4) and 155(5) of the Income Tax Act were unconstitutional. However, the court noted that the bar on transfer was by section 34(3)(b), which was not impugned. Section 34(3)(b) states that if machinery is transferred within eight years, any allowance made under section 33 shall be deemed to have been wrongly made, and section 155(5) allows for recomputation of total income. The court found no merit in the argument that striking down sections 33(3) and (4) would advance the petitioner's case, as section 34(3)(b) would still stand. The court also referenced the principle that in tax matters, the state has wide latitude in classification for taxation, as recognized by the Supreme Court of India and the Supreme Court of America.

3. Correctness of the Income Tax Officer's Order:
The court agreed with the Income Tax Officer's order withdrawing the development rebate granted to the petitioner-firm under section 33(1) of the Income Tax Act, 1961. The withdrawal was based on the transfer of assets and liabilities to "N.R. Trust," which warranted recomputation of income under sections 34(3)(b) and 155(5). The court examined the trust deed (Ex. P-2) and the assignment deed (Ex. P-3) and concluded that the transactions constituted a transfer within the meaning of section 34(3)(b). The court also referenced the Supreme Court's decision in CIT v. R.M. Chidambaram Pillai [1977] 106 ITR 292, which clarified that a partnership is a plurality of persons and not a single person. Therefore, the transfer by the firm was valid.

Conclusion:
The court dismissed the petition, upholding the Income Tax Officer's order and confirming that the transactions under Exs. P-2 and P-3 constituted a valid transfer of assets and liabilities. The constitutional validity of sections 33(3) and (4) and 155(5) was not in question, and the withdrawal of the development rebate was justified. The appeal was dismissed with no order as to costs.