1979 (4) TMI 81 - AT - Income Tax

Issues Involved:
1. Withdrawal of development rebate under Section 155(5) of the Income Tax Act.
2. Applicability of Section 33(4) of the Income Tax Act regarding the succession of business by a company.
3. Whether the transfer of assets from the firm to the company amounted to a sale or transfer under the Income Tax Act.
4. Compliance with the conditions of Section 33(4) for the succession of business.

Detailed Analysis:

Issue 1: Withdrawal of Development Rebate under Section 155(5) of the Income Tax Act

The Income Tax Officer (ITO) withdrew the development rebate granted to the assessee for the years 1966-67, 1969-70, 1971-72, and 1974-75, based on the ground that the firm had dissolved and transferred its assets to a Private Limited Company. The ITO argued that the firm could not utilize the development rebate reserve for the purposes of its business during the required period of eight years following the acquisition of the machinery, thereby invoking Section 155(5) of the Act.

Issue 2: Applicability of Section 33(4) of the Income Tax Act Regarding the Succession of Business by a Company

The assessee contended that the provisions of Section 33(4) of the Act should apply as the business was succeeded by the Private Limited Company, which was also a partner in the firm. The assessee argued that the transfer of assets to the company did not amount to a sale or transfer but was an adjustment of rights among partners upon dissolution.

Issue 3: Whether the Transfer of Assets from the Firm to the Company Amounted to a Sale or Transfer Under the Income Tax Act

The Tribunal examined whether the transaction constituted a sale or transfer. It was noted that the assets were taken over by the company, which was a partner in the firm, as part of the dissolution process. The Tribunal referred to various judgments, including those of the Supreme Court and High Courts, which established that such adjustments among partners upon dissolution do not constitute a sale or transfer.

Issue 4: Compliance with the Conditions of Section 33(4) for the Succession of Business

The Tribunal analyzed whether the conditions of Section 33(4) were met:
- All properties of the firm relating to the business became the properties of the company.
- All liabilities of the firm were taken over by the company.
- All shareholders of the company were partners of the firm immediately before the succession.

The Tribunal found that all these conditions were satisfied. The deed of dissolution and subsequent journal entries indicated that the company took over all assets and liabilities, and the shareholders of the company were indeed the partners of the firm.

Conclusion:

The Tribunal concluded that the transaction did not amount to a sale or transfer and that the assessee was entitled to rely on Section 33(4). Consequently, the withdrawal of the development rebate by the ITO was deemed improper. The Tribunal allowed the appeals of the assessee, finding that the provisions of Section 155(5) could not be invoked, as the conditions of Section 33(4) were met, signifying a succession of business rather than a sale or transfer of assets.

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