1999 (2) TMI 108 - AT - Income Tax

Summary

Issues Involved:
1. Rectification under section 155(4A) of the Income-tax Act, 1961.
2. Withdrawal of investment allowance granted in previous years.
3. Definition and implications of "transfer" under section 32A(5).
4. Creation of trust and its impact on tax allowances.
5. Compliance with conditions for investment allowance.

Detailed Analysis:

1. Rectification under section 155(4A) of the Income-tax Act, 1961:
The appeals were directed against the rectification made under section 155(4A) for withdrawing the investment allowance granted in earlier years. The Income-tax Officer (ITO) issued notices under section 154 to rectify the assessments and withdraw the investment allowance, citing the conversion of the business from Hindu Undivided Family (HUF) property to trust property as a transfer that violated section 32A(5).

2. Withdrawal of investment allowance granted in previous years:
The ITO withdrew the investment allowance for the assessment years 1978-79, 1979-80, 1980-81, and 1981-82. The contention was that the declaration of trust amounted to a transfer, thus necessitating the withdrawal of the investment allowance under section 32A(5). The assessee argued that the conversion did not amount to a transfer and that the conditions for the investment allowance had been fulfilled.

3. Definition and implications of "transfer" under section 32A(5):
The primary issue was whether the conversion of HUF property into trust property constituted a "transfer" under section 32A(5). The Judicial Member argued that the expression "sold or otherwise transferred" should be interpreted narrowly, focusing on the continuous use of the machinery in the business. The Accountant Member, however, contended that the creation of the trust amounted to a transfer, as it involved a change in ownership, thus violating the conditions for the investment allowance.

4. Creation of trust and its impact on tax allowances:
The creation of the trust by the Karta of the HUF was seen by the ITO as a transfer of the business assets to the trust. The Judicial Member argued that the trust's creation did not constitute a transfer within the meaning of section 32A(5), as the business continued to be operated by the same person, albeit in a different capacity. The Accountant Member disagreed, stating that the trust's creation involved a transfer of ownership, thus necessitating the withdrawal of the investment allowance.

5. Compliance with conditions for investment allowance:
The Judicial Member emphasized that the conditions for the investment allowance had been met, as the machinery continued to be used in the business. The Accountant Member, however, highlighted that the trust's creation violated the ownership condition, as the assessee was no longer the owner of the business assets. The Third Member agreed with the Accountant Member, stating that the creation of the trust constituted a transfer, thus justifying the withdrawal of the investment allowance.

Conclusion:
The majority opinion upheld the withdrawal of the investment allowance, agreeing that the creation of the trust amounted to a transfer under section 32A(5). Consequently, the appeals filed by the assessee were dismissed, and the orders of the lower authorities were upheld. The decision emphasized the importance of maintaining ownership and fulfilling all conditions for the investment allowance to be valid.