Chandra Reddy, C.J.
(1) The interpretation and the validity of Sec. 10 (2) (vi) (b) of the Indian Income-Tax Act, (XI) of 1922) are involved in this Writ Petition .
(2) This is how the two questions arise in this enquiry. One C. P. Sarathy and his two sons owned all the shares in a private limited company carrying on business in Motor Transport Co. (Private) Ltd. , Chittoor by its Director, C. P. Doraiswamy. This company obtained a development rebate for the assessment year 1959-1960 in a sum of Rs. 48,600/-. In the course of that year, the three share-holders entered into a partnership on 27-5-1959 to take over certain assets of the company. Recognition to this partnership was accorded by the Department under Sec. 26-A of the Indian Income-Tax Act. Pursuant to the terms of the partnership, some of the transport vehicles in regard to which rebate was granted were transferred by the company to the partnership for a consideration of Rs. 2,52,000/-. This led the proper Income-Tax Officer to act under Sec. 35 (11) of the Income Tax Act to recompute the total income of the company, i.e. , the petitioner before us, by way of rectification of mistake apparent from the record within the meaning of that Section read with Sec. 10 (2) (vi) (b) . The Income-tax Officer called upon the assessee to show cause why the development rebate allowed to the company should not be included in a computation of the income of the assessee for the assessment year. Having failed in its attempt to induce the Department to withdraw that notice, the company invoked the jurisdiction of this Court under Art. 226 of the Constitution .
(3) The action of the Department is assailed by the petitioner on two grounds ; (1) that in the instant case there was no sale or transfer within the contemplation of the proviso to Sec. 10 (2) (vi) (b) and (ii) that the proviso is violative of the equality clause enshrined in Art. 14 of the Constitution .
(4) On the first limb of the argument, the contention raised by the learned counsel for the petitioner is that the share-holders of the company and the partners are not different entities and as such there could be no sale or transfer within the purview of the proviso. It is only in cases where a sale or transfer is effected in favour of third parties that the proviso is attracted, continues the learned counsel .
(5) Before we deal with this argument, it is convenient to read the statutory provisions pursuant to which the notice that is sought to be quashed, was issued. Section 10, which lays down the rules governing the computation of the income that is subject to tax, in so far as it is of immediate relevancy here, postulates :
'(1) The tax shall be payable by an assessee under the head 'Profits and gains of business, profession or vocation' in respect of the profits and gains of any business, profession or vocation carried on by him.
(2) Such profits or gains shall be computed after making the following allowances, namely : -
x x x x x x (vi) in respect of depreciation of such buildings, machinery, plant, or furniture being the property of the assessee, a sum equivalent where the assets are ships other than ships ordinarily plying on Inland waters, to such percentage on the original cost thereof to the assessee as may in any case or class of cases be prescribed and in any other case, to such percentage on the written down value thereof as may in any case or class of cases be prescribed :
x x x x x x (vi-b) In respect of a new acquired or new machinery or plant installed after the 31st day of March, 1954, which is wholly used for the purposes of the business carried on by the assessee, a sum by way of development rebate in respect of the year of acquisition of the ship or of the installation of the machinery or plant, equivalent to, - - - - - - - - - - - - - - -- -- - - -- - - - - - -
(i) in the case of a ship acquired before the 1st day of January, 1957, forty per cent of the actual cost of the ship to the assessee ; and
(ii) in the case of a ship acquired before the 1st day of January, 1958, and in the case of any machinery or plant, twenty five per cent of the actual cost of the ship or machinery or plant to the assessee .'
We are here concerned with sub clause (ii) of (vi-b).
(6) We will now look at the proviso which imposes certain conditions relating to the grant of the development rebate. That recites.
'Provided that no allowance under this clause shall be made unless ...............................
xx xx xx x x x x x x and if any such ship, machinery or plant is sold or otherwise transferred by the assessee to any person other than the Government at any time before the expiry of ten years from the end of the year in which it was acquired or installed, any allowance made under this clause shall be deemed to have been wrongly allowed for the purposes of this Act.'
(7) The expressions 'sale' and 'transfer' are not defined in the Income Tax Act, XI of 1922. We have, therefore, to turn to the definitions of sale and transfer as contained in the other enactments. The term 'transfer' is defined in the new Income Tax Act (XLIII of 1961). We will pause here to read that definition, as it is contended by Sri Srinivasamurthy, learned counsel for the petitioner, that in the absence of a definition in the old Act which governs the present case, it is quite legitimate for this Court to rely upon the definition as contained in the new Act. Section 2. cl. 47 says : -
'transfer in relation to a capital asset, includes the sale, exchange or relinquishment of the asset or the extinguishment of any rights therein or the compulsory acquisition thereof under any law.'
(8) The argument of the learned counsel for the petitioner is that the definition as contained in this Act restricts the connotation of transfer and it does not apply to transfers of the present kind. We are not inclined to assent to this view. We do not find anything in the language of that section to enable us to subscribe to the view pressed upon us to subscribe to the view pressed upon us by the learned counsel . On the other hand, in a way, it enlarges the scope of that word, since it brings in even an extinction of the rights. Nor does it exclude the sale or transfer of property to one-self.
(9) It is profitable to quote here Sec. 5 of the Transfer of Property Act, which defines 'transfer' thus :
'In the following sections 'transfer of property' means an act by which a living person conveys property, in present or in future, to one or more other living persons, or to himself, or to himself and one or more other living persons ; and 'to transfer property' is to perform such act.'
(10) It is not disputed by Sri Srinivasamurthy, learned counsel for the petitioner, that the transfer involved in this case comes within the mischief of this section. But he invites us to hold that Sec. 5 of the Transfer of Property Act does not govern the present situation and we have to solve the question with reference to the definition of 'transfer' in the present Income Tax Act, 1961. We have already stated that the definition as contained in the new Act (XLIII of 1961) does not render any service to the petitioner, as it does not in any way exclude transfers of this type. Further, that definition denotes that the sale, exchange etc. , should constitute a 'transfer' under any law. Indisputably, it is the Transfer of Property Act that is concerned with transfers.
(11) The learned counsel cited to us two decisions of the Bombay High Court and another of the Calcutta High Court as substantiating the proposition that there could be no sale of property to one-self and that, consequently, such a sale falls outside the contemplation of the Indian Income-tax Act. We are not persuaded that these rulings are authority for the position contended for by the learned counsel . On the other hand, they establish that the firm and the limited concern are two different legal entities and there could be a sale or transfer by one entity to the other.
(12) We will now consider the three rulings and see how far they are relevant in the present enquiry. In Commissioner of Income-tax v. Sir Homi Mehta Executors of his Estate, Bombay : AIR1956Bom415 what happened was this. Sir Homi Mehta held large blocks of shares in twenty six joint stock companies. He floated a private limited company and to this he transferred several businesses in which he had a share and interest and also shares of 20 joint stock companies. The value of the shares in the joint stock companies was Rs. 40,97,000/-, the market value on the date of transfer. It appears that the cost price of these shares was Rs. 30,45,017/-. The question that called for decision there was whether the difference between the market price and the cost price constituted income which was subject to tax. The Bombay High Court, on a reference under Sec. 66 (1) of the Indian Income-tax Act, held that it was not liable to tax as it could not be registered as income for purposes of Sec. 10(2) of the Income-tax Act .
(13) Chagla C. J. , in the course of judgment, observed that though it was a sale in form, in substance and in reality it was not one since the sale was by the vendor to himself, and in spite of Sri Homi Mehta and his sons who were selling the shares to themselves constituted a different legal entity and taking the form of a limited company. There was no profit subject to tax as there was a sale by the Vendors to themselves and a vendor could not make a profit out of himself and consequently the transaction in question was not capable of resulting in any profits. He also opined that the transaction was not a sale but merely a transfer of shares by Sir Homi Mehta to the limited company and that in the second place the transfer was solely for the purpose of bringing about a re-adjustment of their position as the holder of those shares. The learned Judge added :
'It can surely not be said that by acquiring the shares of the new company Sir Homi Mehta got an interest in an entirely different undertaking. The undertaking of the new company was the same as the undertaking which Sir Homi Mehta was himself carrying on as an individual.'
(14) This principle was adopted by another Division Bench of the same Court consisting of Chagla C. J. and Desai J. , in Rogers and Co. v. Commissioner of Income-tax, Bombay City II, : AIR1959Bom150 . Here, the partners of a firm, who were carrying on the business of making aerated waters, formed themselves into a private limited company, the shares allotted to each of them in the company being practically in the same proportion. The assets of the firm having a particular written down value were transferred to the company at the original cost, which was higher. The problem that presented itself for solution before the Division Bench was whether the difference between the original cost and the written down value was subject to income-tax under the second proviso to Sec. 10 (2) (vii) of the Income-tax Act . This question was answered against the Department and in favour of the assessee for reasons similar to those contained in the judgment in : AIR1956Bom415 . In this case, the learned Judges observed though the partnership and the limited concern were different, yet the transfer of the shares by the firm to the limited company did not bring anything which could be brought to tax and that there was no sale as envisaged by Sec. 10 (2) (vii) of the Income-tax Act .
(15) In the same trend of thought is Commissioner of Income-tax v. Mugneeram Bangur and Company, : 47ITR565(Cal) . As the doctrine of this ruling is in consonance with the principle enunciated above, it need not detain us any further here. Suffice it to say that this does not advance the position of the petitioner.
(16) Thus, the three decisions relied on by the learned counsel for the petitioner do not afford any analogy to the present case. It is also pertinent to note that the language of the proviso we are called upon to interpret here is more comprehensive than that dealt with by the learned Judges in the cited cases because it takes in not only a sale but also a transfer in any form or shape.
(17) Stress is to be laid on the expression 'sold or otherwise transferred'. This, in our opinion, was intended to cover all situations and not to be confined to sales. Even if the word 'transferred' was not there, the present case would come within the ambit of the clause having regard to the fact that there was a sale by one entity to another. We cannot also overlook the fact here that the limited concern and the partnership were simultaneously carrying on the business of plying transport vehicles. This is not a case of the company transferring the whole of its assets to the partnership and thereafter ceasing to exist, tough, even that, does not make any difference for the purpose of construction of the proviso. It follows that the argument of the learned counsel based on Section 10 (2) (vi) (b) of the Income-tax Act lacks substance and has to be negatived.
(18) We next pass on the contention founded on Art. 14 of the Constitution. The argument presented by Sri Srinivasamurthy is that the proviso has discriminated against the assessee who sell the plaint to persons other than Government and that this discrimination is not based on an intelligible differentia. The learned counsel urges that there is no nexus between the differentiation and the object sought to be achieved by the meted out to person who offer their machinery or plant to Government. Thus, persons similarly situated are treated differently by this proviso. This argument is the result of misconception of the scope and ambit of the proviso.
(19) As repeatedly pointed out by the Supreme Court and the various High Courts, Art. 14 interdicts only class legislation but not legislation based upon reasonable classification. The permissible classification should be conditioned by its being based upon an intelligible differentia which distinguishes persons or things that are grouped together from others left out of the group and this differentia must have a rational relation to the object sought to be achieved by the enactment.
(20) What we have to see in the present case is whether these two conditions are satisfied by the impugned proviso. We have no doubt in predicating that the legislation in question survives both the tests. At the outset, it should be borne in mind that the very idea underlying this particular provision is to afford an incentive for industrial development. The Parliament thought that such a rebate would enable the industrialists to invest money in the purchase of new machinery which would be conducive to the growth of industry and to effectuate that intention enacted clause (vi). At the same time, the Parliament did not want that this concession should be abused. As disclosed in the main clause, it wanted that the machinery or plant should be wholly used for the purpose of business but this clause, by itself, would not prevent the assessee who derives some benefit from it, from misusing it. It is to prevent an abuse of the concession and to remove the temptation to make an improper use of the concession by selling the machinery or plaint to third parties and making a profit out of it at the expense of the general tax-payers that condition for the grant of allowance were tightened. So, the conditions were imposed to discourage the sale of machinery or plant in regard to which rebate was obtained. A question may be asked as to why the sale in favour of the Government was permitted. The obvious answer is that the assessee would not get any advantage out of the sale to Government because he would be forced to sell it at the written down value.
(21) We cannot forget that it is open to the Parliament to give certain concessions to an assessee subject to certain conditions. The effect of the impugned provision is only grant a concession subject to the conditions contemplated by the proviso. This provision does not discriminate between one set of assessees rebate are placed on an equal footing. No one is prevented from making a sale of the plaint or machinery to Government. The assessees similarly situated are similarly treated by this clause. Moreover, it is open to the legislature to put the Government and the ordinary assessees in two different groups and that would be a reasonable classification. The nexus between the two is the desire of the Parliament to prevent the abuse of this concession.
(22) This particular proviso was attacked as being in contravention of Art. 14 of the Constitution in Southern Roadways (Private) Ltd., v. Union of India, : 44ITR708(SC) . Of course, the challenge came in a different shape, namely, that there was a discrimination between one class of machinery and another. The Supreme Court overruled the objection that the proviso offends Art. 14 in that it discriminates between machinery which is office appliance or road transport vehicles and other kind of machinery, observing that there was nothing in the Constitution which prevented the legislature from choosing the object of taxation from amongst various classes of machinery for the purpose of giving development rebate. We feel that this pronouncement lends some support to our conclusion. That apart, we are satisfied that the complaint of discrimination in favour of the Government is ill-founded.
(23) We do not think that S. C. Prashar v. Vasantsen, : 49ITR1(SC) is in any way helpful to the petitioner. In that case, the second proviso to sub-sec. (3) of the Sec. 34 of the Indian Income-tax Act was assailed infringing Art. 14 of the Constitution. The challenge to that proviso was accepted by the Supreme Court. The ratio decidendi is contained in the following passage :
'I am in agreement with the view expressed by the learned Chief Justice that no rational basis has been made out of the distinction between the two classes of people referred to above, who really fall in the same category and with regard to whom there was no difficulty in having a uniform provision of law.'
(24) The learned Judge observed that the principle laid down by the Supreme Court in Suraj Mal Mohta and Co. v. A. V. Viswanatha Sastri, : 26ITR1(SC) applied to the case before them. We do not think that the situation there is analogous to the one here. As we have already stated, there is no discrimination between set of assessees and another set, the purpose of the sub clause being only to tighten the conditions for allowing the rabate. We, therefore, feel that the instant case is not governed by the principle enunciated in : 49ITR1(SC) .
(25) In this context, we cannot forget that there is always a presumption in favour of the constitutionality of an enactment and the burden is on the person who challenges it to establish that there has been a clear transgression of the constitutional limits.
(26) On this discussion, it follows that the assessment proceedings cannot be seriously impeached.
(27) In the result, the Writ Petition falls and is dismissed with costs. Advocate fee Rs. 150/- (One hundred and fifty).
(28) Petition dismissed.