1. Because common questions of law and fact arise for consideration in these two cases, they are disposed of by this common order.
2. The assesses in these two cases is a firm known as 'M/s. Meghdoot Electrical Corporation' which was dissolved on January 17, 1968. The assessment years are 1967-68 and 1968-69. Before it was dissolved, the assesses firm was engaged in the business of manufacture of electrical components. During the assessment years 1967-68 and 1968-69, it had been allowed certain development rebate under s. 33 of the I. T. Act, 1961 (hereinafter referred to as 'the Act'). On its dissolution on January 17, 1968, the assets of the firm were distributed amongst the four partners of that firm. The assets in respect of which development rebate had been allowed were, however, allotted to the share of K. N. Narayan, one of the erstwhile partners. On February 1, 1968, K. N. Narayan entered into a new partnership agreement with G. N. Lakshmipathy, who was also an erstwhile partner of the assesses firm and commenced business of manufacture of electrical components with the aid of the machinery and plant which were allotted to his share at the time of the dissolution of the assesses firm. Thereafter, the ITO (Collection), Circle-II, Bangalore, initiated action under ss. 154 and 155 of the Act for withdrawing the development rebate which had been allowed in favour of the assesses firm during the assessment years in question and to rectify the orders of assessment passed in respect of those years on the ground that the machinery and plant in question having been transferred within the period of 8 years, s. 34(3)(b) became applicable to the assesses. After hearing the assesses, he passed orders of rectification withdrawing the development rebate and adding the development rebate allowed in the two years to the taxable profits. Aggrieved by the orders passed by the ITO, the assesses firm filed appeals before the AAC of Income-tax. Those appeals were dismissed. The second appeals filed before the Tribunal, Bangalore Bench, were also dismissed.
3. At the instance of the assesses, the Tribunal has referred, under s. 256(1) of the Act, a common question of law to this court, which reads :
'Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that on the formation of the new partnership on February 1, 1968, there was a transfer involved which would attract the provisions of s. 34(3)(b) and s. 155(5) of the Act and, therefore, the development rebate granted to the assesses firm of four partners was rightly withdrawn ?'
4. It has to be mentioned at this stage that the Tribunal, as a matter of fact, found in the course of its order that there was no transfer of machinery and plant in question on the dissolution of the firm which took place on January 17, 1968. But it upheld the order passed by the ITO on the ground that after such dissolution, the erstwhile partner to whom the machinery and plant had been allotted, had formed a new partnership along with another erstwhile partner and made use of the machinery and plant for the purpose of carrying on the business of the new firm. The Tribunal, however, lost sight of the fact that action under s. 155(5) of the Act could be taken only in respect of an order of assessment passed in the case of an assesses who had transferred before the expiry of eight years from the end of the previous year in which it was acquired on installed, the machinery and plant in respect of which development rebate had been allowed earlier. In the instant case, the assesses is a firm which is for the purpose of the Act an independent entity. S. 2(31) of the Act defines 'person' as including an individual, a firm and other entities referred to therein. The expression 'assesses' is defined in s. 2(7) of the Act as a person by whom any tax or any other sum of money is payable under the Act. It is, therefore, clear that a firm which consist of several partners is an entity under the Act different from its individual partners. S. 34(3)(b) of the Act says that if any machinery or plant in respect of which development rebate had been allowed 'is sold or otherwise transferred by the assesses' 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, any allowance made under s. 33 or under the corresponding provisions of the Indian I. T. Act, 1922, in respect of such machinery or plant, shall be deemed to have been wrongly made for the purposes of the Act and the provisions of sub-s. (5) of s. 155 shall apply accordingly.
5. In CIT v. Dewas Cine Corporation : 68ITR240(SC) , the Supreme Court has laid down that on the dissolution of a partnership where certain assets belonging to the said partnership are allotted in favour of individual partners, no transfer of property takes place. In the said case, certain theatres which belonged to a firm had on its dissolution been distributed amongst its partners. The question was whether there had been a transfer of the said theatres by the firm to the individual partners. The Supreme Court held (p. 243) :
'On dissolution of the partnership, each theatre must be deemed to be returned to the original owner, in satisfaction partially or wholly of his claim to a share in the residue of the assets after discharging the debts and other obligations. But thereby the theatres were not in law sold by the partnership to the individual partners in consideration of their respective shares in the residue. The expression 'sale' and 'sold' are not defined in the Income-tax Act : those expressions are used in section 10(2)(vii) in their ordinary meaning. 'Sale', according to its ordinary meaning, is a transfer of property for a price, and adjustment of the rights of the partners in a dissolved firm is not a transfer, nor it is for a price.'
6. When once any property of a firm in respect of which development rebate has been allowed is allotted on its dissolution in favour of any of its partners, it is open to him to deal with the said property in any manner he likes and if he transfers the said property in favour of any other person, s. 34(3)(b) of the Act would not be attracted, because such transfer by the erstwhile partner is not a transfer made by the firm. S. 34(3)(b) applies only when the assesses in whose favour development rebate is allowed transfers the property in question. Since we are of the view that the assesses firm in this case has not transferred any machinery or plant in respect of which development rebate had been allowed, the question of rectifying the orders of assessment passed in its case, under s. 155(5) read with s. 34(3)(b), would not arise at all. The Tribunal was, therefore, in error in upholding the orders of rectification passed by the ITO.
7. We, thereafter, answer the question referred to us in the negative and in favour of the assesses in each of the above cases.
8. The assesses is entitled to costs. Advocate's fee Rs. 250 (one set).