1990 (12) TMI 114 - AT - Income Tax

Summary

Issues Involved:
1. Withdrawal of investment allowance under section 155(4A) r.w.s. 32A(4)(ii)(a) and/or (b) of the IT Act.
2. Interpretation of "transfer" in the context of dissolution of a partnership firm.
3. Utilization of investment allowance reserve post-dissolution of the firm.

Detailed Analysis:

1. Withdrawal of Investment Allowance:
The revenue contended that the CIT(A) erred in allowing the investment allowance, which the ITO had correctly withdrawn under section 155(4A) of the IT Act. The ITO's decision was based on the fact that the firm was dissolved within the statutory period of ten years, and there was no possibility of utilizing the investment allowance reserve for the purchase of new machinery. The ITO argued that the conditions prescribed under section 155(4A) were violated as the plant and machinery were sold or transferred before the expiry of eight years, and the investment allowance reserve was not utilized within ten years for acquiring new machinery.

2. Interpretation of "Transfer":
The CIT(A) held that the allotment of assets and liabilities upon the dissolution of the firm does not amount to a "transfer" within the meaning of sections 155(4A) and 32A(4). The CIT(A) relied on the judgment of the Hon'ble Supreme Court in Malabar Fisheries Co. v. CIT, which held that there is no transfer of assets involved when the assets are allotted to one or more partners upon the dissolution of the firm. The Supreme Court observed that a partnership firm is not a distinct legal entity apart from its partners, and the distribution of assets upon dissolution is merely a mutual adjustment of rights between the partners, not a transfer of assets.

3. Utilization of Investment Allowance Reserve:
The assessee argued that the investment allowance reserve created in the assessment year 1977-78 was utilized in the next year by purchasing machinery worth Rs. 3,24,000. Similarly, the investment allowance reserve created in the assessment year 1978-79 was utilized by the partner who took over the assets and liabilities by purchasing machinery worth Rs. 1,74,917 in the subsequent year. The CIT(A) supported this view, stating that the condition regarding the utilization of the investment allowance reserve for purchasing new machinery applies only if the assessee who was granted the investment allowance continues to exist. The Madras High Court in CIT v. S. Balasubramanian held that if the assessee who got the rebate ceases to exist, there is no scope for invoking section 155(5) for withdrawal of the rebate.

Judgment:
The Tribunal, after considering the rival submissions and various judicial precedents, upheld the CIT(A)'s decision. The Tribunal noted that the conditions prescribed under section 155(4A) r.w.s. 32A(4) about the non-utilization of the investment allowance reserve could not be fulfilled due to the dissolution of the firm. The Tribunal also observed that the investment allowance reserve was utilized for purchasing new machinery in subsequent years, fulfilling the purpose of promoting industrial growth. The Tribunal concluded that the CIT(A) rightly held that there was no justification in withdrawing the investment allowance granted to the assessee.

Conclusion:
The Tribunal dismissed the revenue's appeals, affirming that the CIT(A) was correct in allowing the investment allowance and that the dissolution of the firm did not constitute a transfer of assets within the meaning of the relevant sections of the IT Act.