1976 (8) TMI 14 - HC - Income Tax

Summary

Issues Involved:
1. Nature of the transaction between the assessee-family and the company (sale or transfer).
2. Validity of action under Section 147(b) for the assessment year 1961-62.
3. Taxability of the transaction under the Gift-tax Act.
4. Validity of the order of rectification for the assessment year 1959-60.

Issue-wise Detailed Analysis:

1. Nature of the Transaction:
The primary issue was whether the transaction between the assessee-family and the company was a sale or a transfer. The court noted that the limited company is an independent legal entity. Referring to the Supreme Court's decision in CIT v. B. M. Kharwar, the court concluded that the transfer of buses from the assessee-family to the company constituted a sale. The court stated, "The company was a legal entity distinct from the partnership under the general law. Transfer of the machinery was by the firm to the company; and the legal effect of the transaction was to convey for consideration the rights of the firm in the machinery to the company." Therefore, the transaction was a sale, and the first question was answered in the affirmative and against the assessee.

2. Validity of Action under Section 147(b):
The second issue was whether the action under Section 147(b) for the assessment year 1961-62 was valid. The ITO had received an audit note indicating that depreciation was wrongly allowed and profits under the second proviso to Section 10(2)(vii) were not assessed. The court held that the audit note constituted information, which justified the reopening of the assessment under Section 147(b). The court stated, "In view of the audit note, it is clear that the ITO had information which came into his possession subsequent to the assessment as a result of which he could have reason to believe that the income had escaped assessment." Thus, the second question was answered in the affirmative and against the assessee.

3. Taxability under the Gift-tax Act:
The third issue was whether the transaction was taxable under the Gift-tax Act. The court observed that the route rights attached to the buses had a value, and no specific amount was ascribed to these rights in the transaction. Citing previous decisions, the court emphasized that route rights have a pecuniary value. The court noted, "Buses have little value shorn of their permits to ply on particular routes. It is an open secret that when buses are transferred the consideration paid by the purchaser of the vehicles is only commensurate with their earning capacity which is intimately connected with the routes on which they operate." Consequently, the court concluded that there was an element of gift in the transaction, and the third question was answered in the affirmative and against the assessee.

4. Validity of the Order of Rectification:
The fourth issue was the validity of the rectification order for the assessment year 1959-60. The ITO had allowed development rebate, which was later withdrawn under Section 154 of the Income-tax Act, 1961, after realizing the buses were sold within the stipulated period. The court held that the ITO was justified in withdrawing the rebate, stating, "The withdrawal of the development rebate became obligatory on the part of the ITO having regard to the provisions of s. 35(11) or s. 155(5), as the case may be." The court further noted that the mistake was apparent from the record and liable to be rectified. Therefore, the fourth question was answered in the affirmative and against the assessee.

Conclusion:
The court answered all four questions in the affirmative and against the assessee, concluding that the transactions constituted a sale, the action under Section 147(b) was valid, the transaction was taxable under the Gift-tax Act, and the rectification order was lawful. The Commissioner was entitled to costs, with counsel's fee fixed at Rs. 500.