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Commissioner of Income-tax, Andhra Pradesh Vs. S. Krishna Rao - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtAndhra Pradesh High Court
Decided On
Case NumberCase Referred No. 245 of 1978
Judge
Reported in[1985]154ITR643(AP)
ActsIncome Tax Act, 1961 - Sections 34(3) and 155(5)
AppellantCommissioner of Income-tax, Andhra Pradesh
RespondentS. Krishna Rao
Appellant AdvocateM.S.N. Murthy, Adv.
Respondent AdvocateM.J. Swamy, Adv.
Excerpt:
direct taxation - development rebate - sections 34 (3) and 155 (5) of income tax act, 1961 - joint family purchased machinery and secured development rebate -partition in joint family - coparceners constituted themselves into partnership and threw common stock into partnership and carried the same business as before - development rebate withdrawn on ground that partition of joint family assets amounted to transfer of so section 34 (3) (b) was violated - partition of joint family assets does not amount to transfer at all so no question of violation of section 34 (3) (b) - section 34 (3) (b) can be said to be violated only if 'transfer' was made by assessee - after partition joint family is no more in existence so there can not be said to any assessee in existence affecting transfer - held,..........34(3)(b) ?' 2. the reference relates to the assessment year 1970-71. the assessee was a hindu joint family consisting of the 'karta' and three major sons. during the accounting year relevant to the assessment year 1970-71, the family purchased new machinery of the value of rs. 1,38,977 and secured deduction on account of development rebate to the extent of rs. 48,648. on may 10, 1972, there was a partition of the joint family assets including the business of the family. after the partition, it appears, the four coparcener of the erstwhile joint family constituted themselves into the partnership and carried on the business which was previously carried on by the joint family. the ito held the view that, by reason of the partition of the joint family assets including the properties,.....
Judgment:

Anjaneyulu, J.

1. The following two question of law a refereed to this court for its opinion under s. 256(1) of the I.T. Act, 1961 :

'(1) Whether, on the facts and in the circumstances of the case, the Appellate Tribunal is justified in holding that development rebate cannot be withdrawn by applying the provisions of Section 155(5)

(2) Whether, on the facts and in the circumstances of the case, the Appellate Tribunal is justified in holding that there is not transfer or sale within the meaning of section 34(3)(b) ?'

2. The reference relates to the assessment year 1970-71. The assessee was a Hindu joint family consisting of the 'karta' and three major sons. During the accounting year relevant to the assessment year 1970-71, the family purchased new machinery of the value of Rs. 1,38,977 and secured deduction on account of development rebate to the extent of Rs. 48,648. On May 10, 1972, there was a partition of the joint family assets including the business of the family. After the partition, it appears, the four coparcener of the erstwhile joint family constituted themselves into the partnership and carried on the business which was previously carried on by the joint family. The ITO held the view that, by reason of the partition of the joint family assets including the properties, there was a violation of the conditions of s. 34(3)(b) of the I.T. Act, 1961 (hereinafter referred to as 'the Act'), governing the grant of development rebate and consequently applied the provisions of s. 155(5) of the Act and rectified the assessment of the joint family for the year 1970-71. In the order rectification, the ITO withdrawn the development rebate originally granted. The assessee appealed to the AAC challenging the correctness of the withdrawn of the development rebate under s. 155(5) of the Act. The limited plea taken before the AAC was that the partition of the assets of the joint family did not amount to transfer under the law and, consequently, there was neither a sale nor a transfer within the meaning of s. 34(3)(b) of the Act. The AAC accepted the above contention and held that, inasmuch as the machinery, in respect of which development rebate was allowed, was not the subject-matter of either a sale or a transfer, the ITO was in error in withdrawing the development rebate initially allowed. The AAC accordingly allowed the appeal. Against the order of the AAC, the Revenue filed an appeal before the Income-tax Appellate Tribunal. It was urged before the Tribunal that, in any event, when the machinery in respect of which development rebate was initially allowed, was thrown into the common stock of the partnership consisting of the four coparcener of the erstwhile joint family, there was a transfer and, consequently, there was a violation of the conditions of s. 34(3)(b) of the Act. The Tribunal rejected the contention of the Revenue and held that the partition of property by metes and bounds among the members of the joint family did not involve any transfer of property. The Tribunal did not specifically deal with the contention that there was a transfer of the assets to the partnership firm. The Tribunal dismissed the appeal filed by the Department. The Commissioner of Income-tax applied for a reference under s. 256(1) of the Act and the Tribunal referred the abovementioned question for the opinion of this court.

3. It is settled law that, so far as partition of a joint family assets is a concerned, it does not amount to a transfer at all. Reference may be invited to the decision of the Supreme Court in CIT v. Stremann : [1965]56ITR62(SC) where the Supreme Court clearly held that the partition of the assets of a joint family does not amount to a transfer in the eye of law. The same view was taken in a number of other cases and it is not necessary to multiply authorities for this purpose. It, therefore, follows that, when the machinery, in respect of which development debate was allowed, was partitioned between the coparcener of the joint family, there was in law no transfer. As regards the contention that, in any event, there was a transfer when the divided coparceners threw the same machinery again into the common stock of the partnership, the position here again is fairly settled. When a person throws his individual property into the common stock of partnership abandoning his separate rights over the same with the intention of treating such property as the property of the partnership firm under s. 14 of the Indian Partnership Act, there is no transfer by the partner to the partnership firm. This proposition flows directly from the judgment of the Supreme Court in Narayanappa v. Bhaskara Krishnappa, : [1966]3SCR400 . References may also be invited to the decision of this court in CIT v Bhanoji Rao : [1983]142ITR706(AP) , wherein this court has taken the same view that when a partner impresses his individual property with the character of partnership property, there is in law on transfer and much less a sale. It must, therefore, be said that, even when the divided coparcener threw the machinery which fell to their respective shares, into the common stock of partnership, there is neither a sale nor a transfer within the meaning of s. 34(3)(b) of the Act, and consequently the provisions of s. 155(5) of the Act have no application.

4. There is also another difficulty in accepting the Revenue's contention regarding the application of s. 155(5) of the Act. Before s. 155(5) of the Act could be applied, the transfer or sale has to be effected by the assessee to whom development rebate was initially allowed and not by any other person. Section 155(5) does not comprehend cases where the transfer is not effected by the assessee to who development rebate was allowed, but by some other person to whom the assets have been allotted, as in the present case, by partition. When a partition is effected between the members of a joint family, the joint family having gone out of existence as far as the assets in question was concerned, there could not be any sale or transfer of the asset by the joint family. Consequently, the assessee-family in the present case could be subject to an order under s. 155(5) of the Act, inasmuch as the transfer by the divided members, assuming that there is a tranfer, did not attract the provisions of s. 155(5). The above view finds support in the decision of the Supreme Court in Malabar Fisheries Co. v. CIT : [1979]120ITR49(SC) and also the decision of the Madras High Court in CIT v. Balasubramanian : [1982]138ITR815(Mad) .

5. For the aforesaid reasons. We hold that the Tribunal was correct in coming to the conclusion that the order passed by the ITO under s. 155(5) is erroneous. We answer the question referred to us in the affirmative, i.e., in favour of the assessee and against the Revenue. There shall be no order as to costs.


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