1998 (3) TMI 4 - SC - Income Tax

Assessee at the material time, was a Hindu undivided family of which one Srinivasa Iyer was the karta and his son, the respondent, was a coparcener - on partition of family development rebate allowed for assessment years 1960-61 to 1965-66 was withdrawn by the ITO - held that action of ITO is not justified - since new machinery is wholly used by the assessee for the purpose of his business, Development rebate should be granted - section 155(5) is invokable

Issues Involved:
1. Applicability of Section 155(5) of the Income-tax Act, 1961.
2. Validity of development rebate withdrawal by the Income-tax Officer.
3. Interpretation of "transfer" under Section 2(47) of the Income-tax Act, 1961.
4. Impact of partial partition of a Hindu undivided family on development rebate.
5. Compliance with conditions under Sections 33, 34, and 155(5) of the Income-tax Act, 1961.

Issue-wise Detailed Analysis:

1. Applicability of Section 155(5) of the Income-tax Act, 1961:
The primary issue was whether the provisions of Section 155(5) applied to the facts of the case, specifically concerning the withdrawal of development rebate allowed to the Hindu undivided family (HUF) for the assessment years 1960-61 to 1965-66. The Income-tax Officer sought to withdraw the development rebate on the grounds that the machinery had been sold within the statutory period of eight years.

2. Validity of Development Rebate Withdrawal by the Income-tax Officer:
The Income-tax Officer proposed to withdraw the development rebate granted to the assessee because the machinery was sold within eight years of installation. The respondent contended that the development rebate was allowed to the HUF, which did not sell or transfer the machinery, and hence, Section 155(5) was not applicable. Both the Tribunal and the High Court upheld this contention, stating that the HUF had neither sold the machinery nor ceased to utilize the reserve fund as contemplated by Section 34(3). Therefore, the withdrawal of the development rebate was deemed incorrect.

3. Interpretation of "Transfer" under Section 2(47) of the Income-tax Act, 1961:
The term "transfer" is defined broadly under Section 2(47) to include not just sale or exchange but also the extinguishment of any right in the capital assets. The court examined whether the partial partition of the HUF, resulting in the allotment of machinery to coparceners, constituted a transfer. Referring to the case of Malabar Fisheries Co. v. CIT, it was held that the dissolution of a partnership firm did not amount to a transfer of assets to the partners. Similarly, the partition of the HUF was viewed as a mutual adjustment of rights rather than a transfer of assets.

4. Impact of Partial Partition of a Hindu Undivided Family on Development Rebate:
The court noted that the partial partition of the HUF resulted in the machinery being allotted to the coparceners, who subsequently sold it to a third party within eight years. The High Court held that this did not fulfill the condition of the machinery being sold or transferred by the assessee (HUF) to a third party, as required by Section 34(3)(b). The reasoning from Malabar Fisheries Co. was applied, where the distribution of assets upon dissolution was not considered a transfer by the assessee.

5. Compliance with Conditions under Sections 33, 34, and 155(5) of the Income-tax Act, 1961:
The court emphasized that Sections 33, 34, and 155(5) must be read together. Development rebate is granted when new machinery is wholly used by the assessee for business purposes and is not sold or otherwise transferred within eight years. In this case, although the partial partition did not result in a transfer, the subsequent sale of machinery by the coparceners within eight years indicated non-compliance with the conditions. Therefore, Section 155(5) was rightly invoked.

Conclusion:
The appeals were allowed, and the question was answered in the negative, in favor of the Revenue. The court held that the development rebate was rightly withdrawn under Section 155(5) due to the sale of machinery within eight years, violating the conditions set out in Sections 33, 34, and 155(5) of the Income-tax Act, 1961.

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