1. These two departmental appeals arise out of the common order of the Commissioner (Appeals) for the assessment years 1974-75 and 1975-76.
2. The assessee is an individual and was a proprietor of business undertaking in the manufacture and sale of photographic equipments in.
the name of Liberty Industries. He had purchased new machinery in the two accounting years relevant for the assessment years 1974-75 and 1975-76, and was allowed development rebate to the extent of Rs. 19,731 for the assessment year 1974-75 and Rs. 39,171 for the assessment year 1975-76. The total outlay of the machinery was approximately Rs. 4 lakhs in these two years. The assessee formed a partnership taking his major son Shri Sashank Jain as a partner in new partnership with effect from. 1-1-1978 by a document dated 4-1-1978. The partnership was enlarged subsequently by taking in his second son Shri Sanjay Jain by another partnership deed dated 18-12-1981 with effect from 1-1-1981.
The ITO took the view that the formation of the partnership with effect from 1-1-1978 involved a transfer of the machinery from the assessee in his capacity as an individual to the firm in which he is a partner. The ITO noticed that the firm took over the assets and the liabilities of the assessee and that the difference between assets and liabilities of the business was reflected as capital contributed by the assessee. The ITO with the view that it involved a transfer, took action under Section 155(5) of the Income-tax Act, 1961 ('the Act') so as to withdraw the development rebate.
3. The first appellate authority, however, accepted the assessee's case that there was no transfer in law. He also accepted that there was no unconditional parting of the assets by the individual assessee to the firm apparently on the basis of second partnership deed which reserved the rights of the goodwill to the assessee.
4. In the departmental appeal this inference both on facts as well as on law is questioned. It is pointed out by the learned departmental representative that the machinery appears as partnership assets and that merely because the goodwill may be reserved in favour of one partner, it does not mean that the partnership assets ceased to belong to the individual. He further argued that even reservation of goodwill was only in the second deed dated 18-12-1981 while the transfer, according to the ITO, took place on 1-1-1978. He contended that there was no reservation of any rights over these assets and, hence, the Tribunal's decision followed by the first appellate authority need not apply to the facts of the assessee's case. He claimed that the machinery appears as assets of the firm which has also been allowed depreciation. As for the law, he relied upon the decisions of the Kerala High Court in the case of A. Abdul Rahim, Travancore Confectionery Works v. CIT  110 ITR 595 (FB), the Karnataka High Court in the case of Addl. CIT v. M.A.J. Vasanaik  116 ITR 110 and the Gujarat High Court in the case of CIT v. Kartikey V. Sarabhai  131 ITR 42 besides the decision of the Special Bench of the Tribunal, Delhi Bench 'A' which preferred the view of the decision in favour of the revenue, in Mannalal Nirmal Kumar Soorana v. ITO  1 ITD 412.
5. The learned Counsel for the assessee, on the other hand, contended that there was no transfer involved both on facts and in law. He claimed that the assessee showed himself as proprietor of the assets of the firm in his wealth-tax return. Reservation of goodwill specifically mentioned in the second partnership deed was in pursuance of the understanding even earlier. He also referred to the affidavits by the assessee as well as by his sons confirming this position. Hence the decision of the Tribunal relied upon by the first appellate authority, in his opinion, would apply to the facts of this case. He, therefore, contended that there was factually no case to justify the application of Section 155. Even if his contention that the assessee continued to own the assets, is not accepted, he claimed that, still, there was no transfer. He relied upon the decisions of the Madras High Court in the cases of D. Kanniah Pillai v. CIT  104 ITR 520, CIT v. Abdul Khader Motor & Lorry Service  112 ITR 360 and CIT v. Sree Kaliswari Colour Match Works  112 ITR 346. He further argued that even if neither of the preceding assessee's contentions were found acceptable, still action under Section 155 was not sustainable inasmuch as it is attracted only where there is undisputed and non-controversial transfer of assets even as held by the Cuttack Bench of the Tribunal in T. Ch. v.. Ramaniah and T.B.V. Ramaniah v. ITO [IT Appeal No. 772 (Hyd.) of 1974-75, dated 24-3-1976].
6. We have carefully considered the records as well as the arguments, We find that all the assets and liabilities in the business undertaking in the name of Liberty Industries owned by the assessee in his individual capacity till 31-12-1977 became the assets of the partnership consisting of the assessee and his son with effect from 1-1-1978. It is true that his son was not a capitalist partner but he became a co-partner to the assessee. The machinery was shown as the asset of the new partnership as was noticed by us with reference to the balance sheets of the firm on record. The partnership deed also does not indicate any reservation of rights over machinery in favour of the assessee. Even the management and control of business vide Clause 9 of the deed vested with both the partners. The assessee would like us to believe that notwithstanding this position in the accounts and the deed, the assessee continues to be the absolute owner of the assets of the firm. It was claimed that he had shown himself to be such an absolute owner in his wealth-tax assessments. A careful reading of his statements filed along with wealth-tax returns only shows that the net worth of the business representing the difference between the assets and liabilities was computed at Rs. 773 as on 31-12-1977 and Rs. 25,123 as on 31-12-1978. But, this was shown as exempt under Section 5(1)(xxxi) of the Wealth-tax Act, 1957 in computation. There was, therefore, no inclusion of any interest in the firm. Hence, there was no room for the inference that the assessee had claimed to be the absolute owner of the net assets of this business. A careful reading of wealth-tax statements does not indicate or otherwise exhibit any such claim. It only indicated that the net assets of the firm were below the taxable limit. Hence, the only inference is that the assessee's share was, therefore, nil. As for the claim that the second partnership deed reserving the right to the goodwill with the assessee-partner reflected the assessee's intention all along to continue to be the owner of the machinery, we find that this argument also rests on a very flimsy foundation. We are only concerned with the partnership deed dated 1-1-1978 where there was no reservation over the rights to goodwill in favour of the assessee. Even if it is accepted that there has been such an oral reservation over the rights to the goodwill in favour of a partner, it does not mean that such partner not only retains the right to goodwill but also becomes an absolute owner of the entire partnership property. The only other argument to be considered is based upon the affidavits of the father and two sons. We are not in a position to accept the claim in the affidavits for more than one reason. Neither the partnership deed nor the books and the balance sheets nor the income-tax records of the individual assessee and the firm confirm any such claim. On the contrary, the firm's accounts show the machinery as property of the firm. The affidavits themselves admit that the assets were brought at book value from the proprietary books to the firm's books. But, it is stated that the other partner admitted that he will not have any rights over these assets. There is absolutely no corroboration for this claim. As stated earlier, apart from absence of any fact to corroborate this claim, the facts on record show that the machinery ceased to belong to the assessee in his individual capacity and belonged to the firm from 1-1-1978. The assessee had only right as a partner in the partnership. The assessee was given credit for value of machinery along with other assets in his capital account.
Depreciation on such machinery had been claimed and allowed to the firm. The argument based upon the decision of this Tribunal in ITO v.S. Rajamani & Thangarajan Industries  1 ITD 504 (Mad.), to which one of us was a party, can have no application inasmuch as it was found in that case that the partners who brought in the assets had specifically reserved the right over the 'transferred' assets notwithstanding their permission to the firm to use them by a specific stipulation in the partnership deed itself. It was under these circumstances that it was found in that case that the assets in question continued to belong to contributing partners. In the assessee's case the facts are that they became partnership property in every sense of the word on the constitution of the firm on 1-1-1978.
The Supreme Court in the case of Malabar Fisheries Co. v. CIT  120 ITR 49 quoted the following passages from Lindley on Partnership : In the absence of a special agreement to that effect, all the members of an ordinary partnership are interested in the whole of the partnership property, but it is not quite clear whether they are interested therein as tenants-in-common, or as joint tenants without benefit of survivorship, if indeed there is any difference between the two. It follows from this community of interest that no partner has a right to take any portion of the partnership property and to say that it is his exclusively. No partner has any such right, either during the existence of the partnership or after it has been dissolved.
It then proceeded to observe that the law in the Indian Partnership Act, 1932, is almost the same. Hence, 'in the absence of special agreement' to the contrary, all the members are interested in the whole of the partnership property. There is a written partnership agreement in the assessee's case and there is no clause therein even to indicate any such special agreement while the value of the machinery is represented by the capital contributed by the assessee-partner and the machinery appears as an asset of the firm which claimed depreciation thereon and was allowed. The existence of any alleged 'oral' agreement as against these documentary and other evidence cannot, therefore, be believed and even otherwise legally countenanced. Hence, this part of the argument on behalf of the assessee has to fail and the finding of the first appellate authority in this regard has to be upset.
7. As for the further question whether there is a transfer involved when the individual brings certain assets as part of the share capital at the inception of the firm in which he is a, partner, the issue is highly controversial. There are decisions of the High Courts in support of both the views. A Special Bench of the Tribunal Delhi Bench 'A' had accepted the view favourable to the revenue in Mannalal Nirmal Kumar Soorana's case (supra) for capital gains purposes. The matter is under adjudication before the Supreme Court. There is no decision of the Andnra Pradesh High Court on this point. If the issue had arisen in the case of computation of capital gains, we would have followed the decision of the Special Bench in favour of the revenue because the Special Bench was dealing with the case where the issue related to the question of capital gains. The Special Bench following the decision of the Gujarat High Court in Kartikey v. Sarabhai's case (supra) found that Section 2(47) of the Act in its definition of 'transfer in relation to a capital asset' comprehended both 'relinquishment' and 'extinguishment'. The High Court in this case again was dealing with the question only for purposes of capital gains. It did not have to deal with the argument that the expression 'transfer' embodied in Section 2(47) was only for the purposes of Section 45 of the Act in the context of chargeability of surplus in a transfer of capital asset for purposes of capital gains tax. No doubt the Karnataka High Court in M.A.J. Vasanaik's case (supra) had held that there was 'transfer' even for withdrawal of development rebate under Section 34(3)(b) of the Act, but it was because it took the view that even without recourse to Section 2(47), there was transfer because Section 34(3)(b) uses the words 'otherwise transferred', words which were considered to be broad enough to cover the transaction. The Gujarat High Court specifically referred to this aspect of the matter at page 56 of Kartikey V.Sarabhai's case (supra) but it did not choose to follow this reasoning apparently for the reason that it was not concerned with Section 34(3)(b). The Karnataka High Court, considered that the decision of the Supreme Court in CIT v. Hind Construction Ltd.  83 ITR 211 could not help the taxpayer in view of the words 'or otherwise transferred'.
The Full Bench of the Kerala High Court in the case of A. Abdul Rahim, Travan-core Confectionery Works (supra) in favour of the revenue had no occasion to consider in its decision either the decision of Hind Construction Ltd.'s case (supra), since it was not cited before it or the argument that the definition of transfer of capital asset in Section 2(47) had no application, since such an argument was not raised before it. On the contrary, the Full Bench of the Kerala High Court specifically observed in A. Abdul Rahim, Travancore Confectionery Works, case (supra) : ...It is not contended before us that the machinery brought in by Abdul Rahim for the formation of the partnership is not 'capital asset' ...
The Madras High Court in Abdul Khader Motor & Lorry Service's case (supra) had to deal both with the concept of transfer within the meaning of Explanation 2 to Section 32(1)(iii) of the Act for the purpose of taxing terminal profits on depreciable assets under Section 41(2) of the Act on the one hand and the concept of transfer under Section 2(47) for purposes of capital gains under Section 45 on the other hand. Only for the latter, the definition under Section 2(47) was sought to be relied upon by the revenue. The Madras High Court held that even this extended definition under Section 2(47) would not help the revenue as 'extinguishment' involved 'complete divestiture' which was not present when a partner pooled his individual assets as his capital in the assets of the partnership in which he became a partner.
This view was reiterated by the same High Court in Sree Kaliswari Colour Match Works' case (supra).
8. Concept of transfer has been defined differently in three places under the Act--sections 2(47), 34(3)(b) and Explanation 2 to Section 32(1)(iii) for purposes of capital gains, withdrawal of development rebate and terminal allowance or profits, respectively. Section 2(47) reads as under : '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; Capital asset itself has been defined under Section 2(14). Section 45, which is the charging section for capital gains, charges 'any profits and gains arising from transfer of a capital asset'. The words 'capital asset' is not used either with reference to allowance of either development rebate or depreciation. It, therefore, stands to reasons that this extended definition is intended to cover transfer only for capital gains purposes. Legislative history also seems to confirm this position. Section 45 of the 1961 Act is corresponding to Section 12B of the Indian Income-tax Act, 1922 ('the 1922 Act') which incorporated the definition of transfer in itself as 'sale, exchange, relinquishment or transfer of a capital asset'. The 1961 Act extended the concept by inclusion of 'the extinguishment of any rights therein or the compulsory acquisition thereof under any law. The object of this extension was to plug certain loopholes in the pre-existing law noticed from certain judicial decisions. The Bombay High Court in CIT v.Asiatic Textiles Co. Ltd.  27 ITR 315 and Provident Investment Co. Ltd. v. CIT  24 ITR 33 [later confirmed by the Supreme Court in CIT v. Provident Investment Co. Ltd.  32 ITR 190] had found that compensation received for surrender of managing agency was not taxable as capital gains as it was a case of 'extinguishment of right' and, therefore, outside the ambit of Section 12B. Similar is the decision of the Calcutta High Court in the case of Calcutta Electric Supply Corpn. Ltd. v. CIT  19 ITR 406 which pointed out that terminal profits under Section 10(2)(vii) of the 1922 Act [corresponding to Section 42(1) of the 1961 Act] did not include 'profits' on compulsory acquisition of plant and machinery under Defense of India Rules. It was subsequent to these decisions that the present definition to include 'extinguishment' and 'compulsory acquisition' came to be made in Section 2(47) and 'compulsory acquisition' in Explanation 2 to Section 32(1)(iii) alone for purposes of terminal allowance under Section 32(1)(iii) and terminal profits under Section 42(1). The word 'extinguishment' is even now conspicuously absent even in Explanation 2 to Section 32(1)(iii). As for Section 34(3)(b) dealing with withdrawal of development rebate, it is corresponding to Section 10(2)(vi)(b) of the 1922 Act. Both the Acts deal with the concept of transfer in the simple phrase 'sold or otherwise transferred'. While extension was made to the concept of transfer in Section 2(47) and Explanation 2 to Section 32(1)(iii) in the 1961 Act wider as they were even earlier for capital gains purposes. The words 'sold or otherwise transferred' remained the same under both the Acts. It is in this context of legislative history, the doubt in the interpretation of the words 'or otherwise transferred' as is evident from the conflict of judicial decisions has to be resolved.
Legislative history shows that the concept of transfer had not been extended for purposes of withdrawal of development rebate. While there are three definitions for 'transfer' in the statute itself, there could never be any dispute that in the general sense (in the sense of law relating to transfer of property), the pooling of individual assets of a partner as capital with partnership property of the firm in which such individual joins as partner could not be treated as transfer. The Supreme Court in the case of Hind Construction Ltd. (supra) has settled the issue holding that there is no transfer in the general sense.
9. The indication that the extended definition of 'transfer' in Section 2(47) is intended to apply for capital gains purposes only is available from the qualifying words 'in relation to capital assets' in Section 2(47) itself. Besides, the definition of 'capital asset' in Section 2(14) has undergone amendment about half a dozen times to exclude certain assets from its purview whenever exemption from capital gains tax was sought to be given as in the case of gold bonds, etc. This again shows that the definition of 'capital asset' or 'transfer in relation to capital asset' are to be applied only in the context of computation of capital gains. The definition of transfer in Explanation 2 to Section 32(1)(iii) in relation to terminal charge or allowance or the concept of transfer under Section 34(3)(b) cannot obviously apply to computation of capital gains in view of the special definition for the same in Section 2(47). It, therefore, stands to reason that the definition under Section 2(47) cannot be invoked for purposes of withdrawal of development rebate as there has been no capital gains impact in this 'transaction' even on the widest meaning being assigned to the definition under Section 2(47) in favour of the revenue in this case.
10. In the view we have taken, the only further question that would arise is whether 'sold or otherwise transferred' would include the pooling of individual assets by an individual in formation of partnership. The Karnataka High Court in M.A.J. Vasanaik's case (supra) has undoubtedly held so. Before the Full Bench of the Kerala High Court in A. Abdul Rahim, Travancore Confectionery Works' case (supra), it was not argued ('not contended before us') that the asset was not a 'capital asset' within the meaning of Section 2(47) and the decision, therefore, rested practically on a concession by the assessee that Section 2(47) applied. The assessee's only argument was that it was not 'extinguishment'. There was no finding that it was 'otherwise transferred' a finding which, in our opinion, is necessary for withdrawing development rebate under Section 34(3)(b) read with Section 155(5). On the other hand, the Madras High Court decisions in the cases of Abdul Khader Motor & Lorry Service (supra) and Sree Kaliswari Colour Match Works (supra), found in favour of the taxpayer, by holding that the transaction did not involve a case of either 'otherwise transferred' or 'extinguishment' without a finding that Section 2(47), can have no application for purposes of Section 34(3)(b). We, however, found that the Gujarat High Court in the cases of Bharat Petroleums v.CIT  116 ITR 75, Abdul Rehman Haji Miya v. V.P. Minocha, ITO  106 ITR 821 and Laxmi Wvg. Factory v. Addl. CIT  116 ITR 80 judged the facts in each case relating to withdrawal of development rebate only in the context of the words 'otherwise transferred'. But the first of the three cases dealt with certain reorganisation of business from one firm to different firms while the other two dealt with distribution of assets on dissolution, an issue now covered by the decision of the Supreme Court in the case of Malabar Fisheries Co.
(supra). However, the case of Laxmi Wvg. Factory (supra) referred to the Supreme Court decision in Hind Construction Ltd.'s case (supra) among others for its conclusion that there was no transfer or use 'otherwise'. We, therefore, find that the preponderant view (Kerala and Karnataka) that an arrangement as the one we have encountered here is 'extinguishment' for the purposes of capital gains and, therefore, followed by the Special Bench of the Tribunal Delhi Bench 'A' also for capital gains purposes in Mannalal Nirmal Kumar Soorand's case (supra) cannot apply automatically for purposes of withdrawal of development rebate. Even if we were to approach the Madras High Court view that even if the definition of transfer in Section 2(47) applied for purposes of withdrawal of development rebate, there can be no such withdrawal in the view that there is no extinguishment cautiously, we find it difficult to accept that the phrase 'sold or otherwise transferred' would comprehend the arrangement we have encountered here.
Since the words 'or otherwise transferred' immediately follows 'sold', the principle of ejusdem generis should be applied in interpreting the phrase. The Kerala High Court based its decision with reference to the definition in Section 2(47) practically without a contention, as we have pointed out earlier, that it had no application. Earlier the Gujarat High Court decisions indicated that earlier decisions of the Supreme Court (regarding pooling at the time of formation and distribution at the time of dissolution) were to be treated on par for purposes of withdrawal of development rebate, though it was dealing with dissolution cases. Even the later decision in Kartikey V.Sarabhai's case (supra) pointed out to the argument that definition under Section 2(47) would have application only for purposes of capital gains, though it did not deal with this argument as it followed 'somewhat different' approach and was not, at any rate, concerned with this issue in the matter before it. It is under these circumstances that we prefer the conclusion of the Madras High Court for purposes of Section 34(3)(b). The decision of the Special Bench of the Tribunal Delhi Bench 'A' in Mannalal Nirmal Kumar Soorand's case (supra) also dealt with capital gains only. We, therefore, hold that there is no case for withdrawal of development rebate when a partner pools his individual assets as part of his capital with firm's property and that it is neither sale nor a transfer 'otherwise'. It is also well established that a benefit of doubt in interpretation of law should go to the taxpayer, even as pointed out by the Supreme Court in CIT v.Vegetable Products Ltd.  88 ITR 192. Conflicting judicial opinion as regards this issue, which is now pending adjudication before the Supreme Court, certainly points out to the existence of such doubt.
Even for this reason, the assessee's contention in this regard has to be accepted. It is needless to point out that the new firm to which the machinery has passed is expected to adhere to the conditions under which the assessee was granted development rebate.
11. There is yet another argument questioning the jurisdiction of the ITO to proceed under Section 155(5). It was argued on behalf of the revenue that Section 155(5) is not on par with Section 154 of the Act in the sense that it is not a case of a mistake apparent from record so as to shut out altogether debatable issues from its scope. All the same, this Tribunal found that reference to Section 154 in Section 155 would rule out application of Section 155(5) to debatable issues. This Tribunal observed in T. Ch. V. Ramanaiah and T.B.V. Ramanaiah's case (supra) as under : There is another reason why we are of opinion that the provisions of Section 155(5) of the Act were not applicable to the facts of this case. Section 155(5) of the Act says that on the happening of a certain event, the development rebate originally allowed would be deemed to have been wrongly allowed and the Income-tax Officer, by applying the provisions of Section 154 of the Act so far as they may be applicable thereto may recompute the total income of the assessee by withdrawing the development rebate originally granted. Section 154 of the Act speaks of 'with a view to rectifying any mistake apparent from the record'. It is well settled that a highly debatable point of law cannot be said to be a 'mistake within the meaning of Section 154 of the Act' vide decision in the case of T.S. Balaram, ITO v. Volkart Bros.  82 ITR 50 (SC). It is obvious that the provisions of Section 155(5) of the Act can be invoked only where the plant or machinery were clearly sold or transferred. In other words, Section 155(5) of the Act read with Section 154 of the Act cannot be invoked in a case where a certain event can be held to be a 'sale' or 'transfer' only after taking recourse to long drawn process of reasoning involving debatable points of law as in the instant case before us. Unless the event envisaged in Section 155 of the Act is self-evident and unambiguous, we think that section cannot be invoked.
The facts in the case before us and the other case, i.e., in T. Ch. V.Ramanaiah and T.B.V. Ramanaiah's case (supra), are identical. In the view we have taken, it is not necessary for us to deal with this contention, since the assessee is entitled to succeed on the legal ground conceded in the immediately preceding paragraph. If it were, however, necessary to decide this issue as well, we could have followed the decision of the Tribunal cited herein and upheld the order of the first appellate authority even on this ground.