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TMI Blog1984 (10) TMI 56X X X X Extracts X X X X X X X X Extracts X X X X ..... he Income-tax Act, 1961 (' the Act '), withdrew the investment allowance of Rs. 20,899 allowed to the assessee, on the ground that on the dissolution of the firm, " the machinery was sold to the partners before 8 years and reserve is also transferred to partners, accounts and the conditions laid down under section 32A(5) are not fulfilled ". 3. In appeal before the Commissioner (Appeals), relying on the decision of the Hon'ble Supreme Court in the case of Malabar Fisheries Co. v. CIT [1979] 120 ITR 49, the assessee submitted that since on the dissolution of the firm no transfer of assets had taken place, the provisions of section 32A(5) of the Act could not be attracted. The AAC, however, upheld the action of the ITO in the following manner : " I, however, find that it is not a question of transfer of assets, but the question is regarding the utilisation of the reserve. When the assessee claimed investment allowance of Rs. 20,899, it also created a reserve of Rs. 20,899. At the time of dissolution of the reserve, account was closed by transfer of the reserve to partners' accounts at Rs. 5,224.75 to the credit of each partner's account. Now, sub-clause (c) of section 32A(5) is a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 43 of the aforesaid decision. 5. We have considered the rival submissions of the parties and in view of the aforesaid decisions, the stand taken on behalf of the assessee is unassailable. In order to forestall further litigation, we would reproduce below the relevant head-notes of the aforesaid cases : Malabar Fisheries Co.'s case -- "A partnership firm under the Indian Partnership Act, 1932, is not a distinct legal entity apart from the partners constituting it and equally in law the firm as such has no separate rights of its own in the partnership assets and when one talks of the firm's property or the firm's assets all that is meant is property or assets in which all partners have a joint or common interest. It cannot, therefore, be said that, upon dissolution, the firm's rights in the partnership assets are extinguished. It is the partners who own jointly or in common the assets of the partnership and, therefore, the consequence of the distribution, division or allotment of assets to the partners which flows upon dissolution after discharge of liabilities is nothing but a mutual adjustment of rights between partners and there is no question of any extinguishment of the firm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ngst the partners of the firm at the time of its dissolution on August 31, 1963, there was no ' transfer ' of any asset. Each partner gets that which was his own in which he along with his other partners was a joint owner during the subsistence of the partnership and under the scheme of the Partnership Act, when the assets are distributed among the partners at the time of dissolution, it cannot be said to amount to ' transfer ' of the machinery in the sense in which the word has been used in section 34(3)(b) of the Act of 1961. It cannot also be said that in such a case there is utilisation of the amount credited to the development rebate reserve for a purpose which was not a purpose of the business of the undertaking under section 35(11)(ii) of the 1922 Act because, in each of the two cases referred to in sub-clauses (a) and (b) of section 35(11)(ii), the use is a voluntary use and, therefore, when it comes to sub-clause (c), on the principle of ejusdem generis, the utilisation for any other purpose which is not a purpose of the business of the undertaking must be a voluntary utilisation. When, on the distribution of the assets of the partnership, the surplus assets are distribute ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... are modified. Therefore, ratio of the decision in the case of Abdul Rehman Haji Miya cannot be straightaway applied on aspect of utilisation of reserve. 2. Section 32A(4) prescribes conditions for allowance. One of the conditions, inter alia, is that the amount of investment allowance is required to be utilised for the purpose of acquiring new machinery or plant before the expiry of ten years. This presupposes the continuance of business of undertaking also except as provided under sub-sections (6) and (7) governing amalgamation and succession. 3. Section 32A(5) deals with cases where rectification under section 155(4A) of the Act shall be carried out. It reads as under : " (5) Any allowance made under this section in respect of any ship, aircraft, machinery or plant shall be deemed to have been wrongly made for the purposes of this Act--- (a) (b) if at any time before the expiry of ten years from the end of the previous year in which the ship or aircraft was acquired or the machinery or plant was installed, the assessee does not utilise the amount credited to the reserve account under sub-section (4) for the purposes of acquiring a new ship or a new aircraft or new mach ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on 30-6-1980 and the assets were distributed among the erstwhile partners. Of the four partners, two joined together for doing business and the other two for doing a separate business. The investment allowance reserve of Rs. 20,899 standing in the books was divided equally among the partners. The amounts relating to the respective partners were maintained in the books for the business continued by the two sets of partners. On the above facts, the Commissioner held that the closing of the reserve account by transfer of one-fourth of the amount to each partner's account could not be said to be a purpose of the undertaking, as required by clause (c) of section 32A(5). He confirmed the order of the ITO. 2. Before the Tribunal, the two members having differed on the question of the allowability of the investment allowance, the following point of difference has been referred to me as Third Member : " Whether, on the facts and in the circumstances of the case, the assessee is entitled to benefit of investment allowance ?" The learned Judicial Member held that the assessee was entitled to the allowance, whereas the learned Accountant Member held otherwise. 3. The learned counsel ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the allowance an idle formality, the claim was rejected. 6. Even though we are concerned with the assessment year 1979-80 in the present case, the allowance is not granted because of what happened in a subsequent year, viz., the previous year relevant to the assessment year 1981-82. Apart from the other points dealt with by the two learned members, what happened during the previous year relevant to the intervening assessment year 1980-81 is not known. Section 32A(5) is as under : " (5) Any allowance made under this section in respect of any ship, aircraft, machinery or plant shall be deemed to have been wrongly made for the purposes of this Act--- (a) if the ship, aircraft, machinery or plant is sold or otherwise transferred by the assessee to any person at any time before the expiry of eight years from the end of the previous year in which it was acquired or installed ; or (b) if at any time before the expiry of ten years from the end of the previous year in which the ship or aircraft was acquired or the machinery or plant was installed, the assessee does not utilise the amount credited to the reserve account under sub-section (4) for the purposes of acquiring a new ship ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s something which happens and is for reasons beyond the assessee's control. This section provides for dealing with the reserve created but how under normal principles of accountancy the reserve can be treated as extinguished, is not clear. For instance, if the assessee who maintains books of account retains the reserve in the books for one, two or three or four years but in the fifth year of account does not maintain books of account at all or does not draw up a balance sheet, could it be stated that the reserve is utilised in any manner inconsistent with the requirements of sub-section (5) ? Or again if the reserve amount is merged with the general reserve or any other capital or other account of the assessee, are the conditions of this section violated ? In the typical case of a sole proprietor, the assessee could create a reserve against investment allowance granted. The reserve, however, would represent only assets in the business. In the case of sole proprietary assets in the business, those could as well be treated as assets belonging to the proprietor. In other words, so long as the proprietor has got some assets equivalent to the reserve created, it cannot be stated that th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... essee is compelled to deal with the reserve in a manner not contemplated under this section, he cannot be stated to have utilised the reserve. Though the Gujarat High Court decision in Abdul Rehman Haji Miya's case referred to deals with the subject of development rebate rather than investment allowance, a comparison of the provisions relating to these allowances indicates the question of utilisation to have the same meaning for both purposes. When a firm is dissolved and that results in a particular movement of the development rebate or investment allowance reserve consequent to the dissolution, it is certainly not a voluntary utilisation of the reserve. 10. Summarising the position, therefore, I hold that it cannot be stated as a matter of fact that the amount covered by the reserve has not been utilised in the intervening year for purchase of machinery ; on a rational interpretation of the provisions, all that this section requires is sufficient retention of the reserve amount for purchase of machinery, etc., by the erstwhile owners of the business and, lastly, any forced dealing with the reserve other than voluntarily cannot call forth the application of the violative parts ..... X X X X Extracts X X X X X X X X Extracts X X X X
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