"Sold or otherwise transferred" in s 34(3)(b) of the Income-tax Act, 1961. - Income Tax - 1015/CBDT

INSTRUCTION NO. 1015/CBDT Dated : October 5, 1976 Section(s) Referred: 155(5) ,34(3)(b) Statute: Income - Tax Act, 1961 Reference is invited to Board's Instruction No. 695* dated the 29th May, 1974 (F. No. 228/10/75-ITA(II) by which it was clarified that on the dissolution of a firm and formation of a new firm in its place, the benefit of development rebate allowed to the earlier firm is liable to be withdrawn as the case would be covered by the expression "sold or otherwise transferred" occurring in Section 34(3)(b) of the Income-tax Act, 1961. 2. The above instructions have been re-examined in the context of judicial pronouncements. The Board is of the view that in the case of the dissolution of a partnership firm and the division of assets of the firm amongst the partners, there is no 'transfer' of asset. In these circumstances, the question of application of the development rebate reserve for a purpose other than the purpose of business also does not arise. Thus if a firm which has been allowed development rebate is dissolved, and the development rebate reserve is distributed among the partners before the expiry of eight years, the firm does not incur a liabilty u/s 155(5) and the development rebate allowed to the dissolved firm is not to be withdrawn. Similarly, where there is a mere change in constitution of a firm, the question of withdrawal of development rebate does not arise. 3. However, when a firm is dissolved and assets are transferred to a third party, whether an individual or a firm, the development rebate allowed should be withdrawn. 4. In view of the above, Instruction No. 695 dated 29th May 1974 may be treated as modified to the extent indicated above.