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TMI Blog1981 (11) TMI 51X X X X Extracts X X X X X X X X Extracts X X X X ..... t rebate reserve equivalent to 75 per cent. of the development rebate to be granted. That reserve must not be eroded by the assessee either for the declaration of dividends or for remittance outside India. This embargo will subsist for a continuous period of 8 years. Nor should the machinery or plant be sold or otherwise transferred by the assessee to any one else before the expiry of 8 years from the end of the year in which it was acquired or installed. To ensure that these conditions are strictly fulfilled by a person to whom the development rebate is granted, power is given to the ITO under s. 155 of the Act to take rectification proceedings, where the conditions for granting the rebate happened to be subsequently violated by the assessee within the statutory period of 8 years. In the present case, the assessee is a firm of two partners. They got development rebate for items of new machinery which they bad installed. The allowance was granted for a number of assessment years, for the corresponding previous year in which those items of machinery had been installed. The assessee-firm got the allowance in each of the assessments on the creation by them of the appropriate reserve ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... reconstituted firm with the machinery in full use and with the development rebate reserve still intact, having been carried over in the books of the new firm. But the Bench held that the presence of these factors were not enough to prevent the original grant of development rebate from being rendered invalid. The Bench observed that s. 34(3)(a) of the Act which imposed the conditions for the grant of the development rebate clearly laid down that not only should a reserve be created and credited to a separate reserve account, but it was also necessary under that provision that the amount credited to the reserve must be for the purpose of utilisation by the assessee during a period of 8 years next following for the purposes of the business of the assessee's undertaking. The learned judge emphasised that the expression " the assessee ", occurring in s. 34(3)(a), cannot mean any assessee, but only the assessee who installed the machinery and who obtained the development rebate on the basis of the creation of development rebate reserve. They observed the factual circumstances in that case under which it became impossible for the assessee-firm to have continued the development rebate for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... submitted that all that happens in such a case cannot be regarded as a transfer at all. He pointed out that the legal representatives of a deceased partner represent the dead partner's estate and in that capacity they are entitled to the interest of the deceased partner in the dissolved firm. That being so, along with the surviving partner or partners in the firm, they would be entitled to all the assets of the partnership subject to the liabilities. In such a situation, if they once again bring themselves together under a partnership agreement, that process by no means involves a transfer inter vivos of any of the existing assets of the business, either in the gross, or individually. Learned counsel submitted that precisely the same legal incidents occur when the sole proprietor of a business takes in another person and thenceforward begins to carry on business in partnership with that other. In such a case, all the assets of the sole proprietary business cannot be regarded as having been the subject of a transfer, properly so called, from the sole proprietary business to the partnership business. For the later position, learned counsel, Mr. Subramaniam, cited a decision of a Div ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he Act. While laying down the machinery for the creation of a development rebate reserve, in this fashion, this provision further requires that this reserve amount must be utilised by the assessee during a period of eight years next following for the purposes of the business of the undertaking. There is an express exclusion of two acts which are regarded by the Legislature as not for the purposes of the business of the undertaking. They are; (i) distribution by way of dividend or profits; (ii) remittance outside India either as profits or for the creation of any assets outside India. The position, therefore, can be summed up thus: As part of the fundamental requirement for the grant of development rebate, the creation of a development rebate reserve is a necessary first step. But that alone is not enough. The reserve account has got to be utilised by the assessee for the purposes of the business of the undertaking for a period of eight years running immediately following the installation of the machinery. The implications of these conditions are that where the assessee does not utilise the reserve account for the purposes of his business during a period of eight years, then ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that machinery, then the ITO would be powerless to withdraw the development rebate already granted by invoking s. 155(5). Learned counsel submitted that in a case such as the present where the period of eight years could not be gone through because of the supervening circumstance of a dissolution of the assessee-firm owing to the untimely death of a partner, it could not be said that there has been any overt act on the part of the assessee-firm which tends to violate the mandatory conditions of s. 34(1)(a) such as might enable the ITO to take appropriate rectificatory proceedings under s. 155(5) of the Act. The submissions made by Mr. Subramaniam on the scope of the ITO's rectificatory power under s. 155 and the circumstances in which alone it could be invoked do not arise in the present case. They might possibly serve as a later day criticism of the tacit assumption on which the action of the ITO under s. 155(5) was upheld by this court in the Dalmia Magnesite Corporation's case [1979] 117 ITR 930. The present case is not one of cancellation of development rebate under s. 155(5) of the Act, but a revision order passed by the Commissioner under s. 263. The scope of s. 155(5) and ..... X X X X Extracts X X X X X X X X Extracts X X X X
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