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TMI Blog1984 (10) TMI 57X X X X Extracts X X X X X X X X Extracts X X X X ..... dissolution of the firm "the machinery were sold to the partners before 8 years and reserve is also transferred to partners' account and the conditions laid down under s. 32A(5) are not fulfilled." 3. In appeal before the CIT(A) relying on the decision of the Hon'ble Supreme court in the case of Malabar Fisheries Co. vs. CIT (1979) 12 CTR (SC) 415 : (1979) 120 ITR 49 (SC) the assessee submitted that since on the dissolution of the firm no transfer of assets had taken place, the provisions of s. 32A(5) of the Act could not be attracted. The CIT(A), 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 partner's accounts of Rs. 5,224.75 to the credit of each partners accounts. Now, sub-cl. (c) of s. 32A(5) is as under: "(c) if at any time before the expiry of the ten years aforesaid, the assessee utilises the amount credited to the reserve account u ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... stands taken on behalf of the assessee is unassailable. In order to forestall further litigation, we would reproduce below the relevant headnotes of the aforesaid cases: (1) 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 its own in of 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's rights in the partnership assets amounting to a transfer of assets with the meaning of s. 2(47) of the IT Act, 1961. There is no ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 s. 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 s. 35(11)(ii) of the 1922 Act because, in each of the two cases referred to in sub-cls. (a) and (b) of s. 35(11)(ii), the use is a voluntary use and, therefore, when it comes to sub-cl. (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 distributed amongst the partners, there is no utilisation in the voluntary sense. Therefore, the development rebate allowed at the time of the assessments in 1960-61 and 1961-62, could not be withdrawn under s. 155(5) of the IT Act, 1961, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that the amount of investment allowance is required to be utilised for the purpose of acquiring new machinery or plant before expiry of ten years. This presupposes the continuance of business of undertaking also except as provided under sub-ss. (6) and (7) governing amalgamation and succession. 1.2 Sec. 32A(5) deals with cases where rectification under s. 155(4A) 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)..........sold or otherwise transferred; (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-s. (4) for the purposes of acquiring a new ship or a new aircraft or new machinery or plant other than machinery or plant if the nature referred to in cls. (a), (b) and (d) of the proviso to sub-s. (1) for the purposes of the business of the undertaking; or (c) if at any time before the expiry of the ten years af ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ners were maintained in the books for the business continued by the two sets of the partners. On the above facts of the CIT held that the closing of the reserve account by transfer of 1/4th of the amount to each partners, account could not be said to be a purpose of the undertaking as required by sub-cl. (c) of s. 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 circumstances of the case, assessee is entitled to benefit of investment allowance?" The ld. Judicial Member held that the assessee was entitled to the allowance whereas the ld. Accountant Member held otherwise. 3. The ld. counsel for the assessee has pointed out that a proper reserve was made for the purpose. The machinery was not sold. Since the first was dissolved the assets were distributed in specie. On the other hand there is no dealing with the reserve amount. One other in the business continued by the partners, the reserve continues as such. None of the conditions laid down in s. 32A(5) is, t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not known. Sec. 32A(5) is as under: "Any allowance made under this section in respect of any ship, aircraft, machinery or plant and 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 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-s. (4) for the purpose of acquiring a new ship or a new aircraft or new machinery or plant (other than machinery or plant of the nature referred to in cls. (a), (b) and (d) of the proviso to sub-s. (1) for the purposes of the business of the undertaking; or (c) if at any time before the expiry of the ten years aforesaid, the assessee utilises the amount credited to the reserve account under sub-s. (4) for distribution by way of dividends or profits or for remittance outside India as profits or for cre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er inconsistent with the requirements of sub-cl. (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 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 a sole proprietor assets in the business 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 the reserve has been extinguished or utilised in a manner violative of the provisions of section merely because the proprietor does not draw up a balance-sheet or merges the reserve with some other account or does not maintain account at all. In other words while the manner of creating the reserve or the condition of creating the reserve can be clearly satisfied by an assessee the subsequent event where certain violations are referred to cannot be clearly identified. In my view, therefore, the only requirement which can be satisfied in practice is that on ..... X X X X Extracts X X X X X X X X Extracts X X X X
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