C.S.P. Singh, J.
1. The Tribunal has referred the following question of law for opinion of this court:
'Whether, on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal is legally justified in allowing a development rebate of Rs. 8,574 for the assessment year 1972-73 ?'
2. The assessee-company came into existence on 31st August, 1971, by taking over the assets and liabilities of a partnership firm, M/s. U.P. Shoe Industries, Kanpur. The company was incorporated by all the persons, who were partners of the erstwhile firm, as shareholders. It appears that the firm had installed some machinery a few months before the company took over the assets of the firm. The company claimed development rebate on this machinery to the extent of Rs. 8,574. The ITO disallowed the claim on the view that the machinery was not new and had been previously used by the firm. The matter was taken up in appeal before the AAC who allowed the assessee's appeal on the view that all the conditions of Section 33(4) of the Act were fulfilled and as such development rebate as claimed by the assessee was allowable. The revenue appealed to the Tribunal.
3. One of the contentions raised before the Tribunal was that, as shortly after the company had taken over the assets of the firm, the erstwhile partners who had become the shareholders, had walked out by selling their shares to Ss. L.P. Agrawal, M.P. Agarwal, P.D. Agarwal and R.K. Agarwal, the assessee did not fulfil the requirements of Clause (iii) of the Explanation to Section 33(4) and as such was not entitled to any development rebate. The Tribunal has found that the company took over the assets ofthe firm on 31st August; 1971, and in pursuance of an agreement dated 10th August, 1971, the shares were sold to the group of Agarwals later on, and were registered in the books of the company on April 18, 1972. Thus, it will be seen that the erstwhile partners of the firm, all of whom had become shareholders in the company transferred their shares after a considerable gap of time. In view of this finding, it is not possible to hold, as contended by the counsel for the department, that the requirements of Clause (iii) of the Explanation to Section 33(4) are not satisfied. We may extract this Explanation here.
' Explanation.--The provisions of this clause shall apply only where--...
(iii) all the shareholders of the company were partners of the firm immediately before the succession.'
4. So far as Clause (iii) of the Explanation is concerned all that is required is that all the shareholders of the company were partners of the firm immediately before the succession. In the present case, it is not disputed that this was so. All that had been contended is that these shareholders did not continue as such, but transferred their shares to other persons. But, inasmuch as Clause (iii) does not impose any fetter on the shareholders transferring their shares subsequent to the succession, the fact that they had done so, would not bring the case within the mischief of Clause (iii) of the Explanation.
5. It was next contended that before relief under Section 33(4) could be given a finding should have been recorded by the Tribunal that the firm had been allowed development rebate in respect of the machineries. In order to appreciate this contention it is necessary to extract the opening part of Section 33(4) and the whole of Section 33(3) :
'33(3). Where, in a scheme of amalgamation, the amalgamating company sells or otherwise transfers to the amalgamated company any ship, machinery or plant in respect of which development rebate has been allowed to the amalgamating company under Sub-section (1) or Sub-section (1A),--
(a) the amalgamated company shall continue to fulfil the conditions mentioned in Sub-section (3) of Section 34 in respect of the reserve created by the amalgamating company and in respect of the period within which such ship, machinery or plant shall not be sold or otherwise transferred and in default of any of those conditions, the provisions of Sub-section (5) of Section 155 shall apply to the amalgamated company as they would have applied to the amalgamating company had it committed the default; and
(b) the balance of development rebate, if any, still outstanding to the amalgamating company in respect of such ship, machinery or plant shall be allowed to the amalgamated company in accordance with the provisionsof Sub-section (2), so, however, that the total period for which the balance of development rebate shall be carried forward in the assessments of the amalgamating company and the amalgamated company shall not exceed the period of eight years specified in Sub-section (2) and the amalgamated company shall be treated as the assessee in respect of such ship, machinery or plant for the purposes of this section and Section 34.
(4) Where a firm is succeeded to by a company in the business carried on by it as a result of which the firm sells or otherwise transfers to the company any ship, machinery or plant, the provisions of Clauses (a) and (b) of Sub-section (3) shall, so far as may be, apply to the firm and the company....'
6. It will be seen that in case of a company succeeding to the business of a firm, the provisions of Clauses (a) and (b) of Sub-section (3) of Section 33 had been made applicable in so far as may be. This means that Section 33(3) has to be read with necessary modifications so as to apply to the case of a firm succeeded by a company. Thus, in the opening part of Section 33(3), we have to read for the words 'amalgamating company', the word 'company' and for the words 'amalgamated company' the word 'firm'. Section 33(3), without these substitutions, requires that development rebate should have been allowed to the amalgamating company before advantage of it can be taken by the amalgamated company. With the substitution indicated above, it would require that the firm should have been allowed development rebate before the claim of the succeeding company for it could be allowed. Unfortunately, the Tribunal has not gone into this aspect of the matter. Counsel for the assessee contended that it has never been the department's case at any stage that the development rebate had not been allowed to the firm in respect of the machineries and, as such, it is not open for counsel for the department to take up this stand. There would have been some force in this contention but it appears that the ITO had not allowed development rebate on these machineries as he treated these machineries as old machineries having been used by the firm at the time of succession. This apart, before the benefit of development rebate under Section 33(4) can be given to the company, it should have been allowed to the firm and as neither the ITO - nor the AAC have examined this aspect in detail, the Tribunal should have considered as to whether this requirement was fulfilled or not before granting relief.
7. We, accordingly, answer the question in the negative, in favour of the department and against the assessee. The Tribunal should now dispose of the appeal in the light of the observations made in the judgment. In the circumstances, there will be no order as to costs.