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Nipa Twisting Works Vs. Income-tax Officer - Court Judgment

LegalCrystal Citation
CourtIncome Tax Appellate Tribunal ITAT Ahmedabad
Decided On
Judge
Reported in(1985)11ITR387(Ahd.)
AppellantNipa Twisting Works
Respondentincome-tax Officer
Excerpt:
.....rights of its own in the partnership assets and when one talks of the firm's property or the firm's assets all that is meant is property or assets in which all partners have a joint or common interest. it cannot, therefore, be said that, upon dissolution, the firm's rights in the partnership assets are extinguished. it is the partners who own jointly or in common the assets of the partnership and, therefore, the consequence of the distribution, division or allotment of assets to the partners which flows upon dissolution after discharge of liabilities is nothing but a mutual adjustment of rights between partners and there is no question of any extinguishment of the firm's rights in the partnership assets amounting to a transfer of assets within the meaning of section 2(47) of the.....
Judgment:
1. There was a delay of 35 days in filing the appeal before the Tribunal. The assessee has made an application for the condonation of the delay supported by an affidavit. After hearing both the parties on the said application, we have condoned the delay and requested both the parties to make their submissions on the point involved in the appeal.

2. The only point involved in this appeal pertains to the withdrawal of the investment allowance of Rs. 20,899, which was granted to the assessee in the year in which the plant and machinery was installed.

The assessee is a firm. The assessment year is 1979-80 and the relevant previous year ended on 30-6-1978. During the relevant previous year for the assessment year 1981-82 on 30-6-1980, the firm was dissolved and its assets were distributed amongst the partners. The ITO, while framing the assessment under Section 143(3) of the Income-tax Act, 1961 ('the Act'), withdrew the investment allowance of Rs. 20,899 allowed to the assessee, on the ground that on the dissolution of the firm, "the machinery was sold to the partners before 8 years and reserve is also transferred to partners, accounts and the conditions laid down under Section 32A(5) are not fulfilled".

3. In appeal before the Commissioner (Appeals), relying on the decision of the Hon'ble Supreme Court in the case of Malabar Fisheries Co. v.CIT [1979] 120 ITR 49, the assessee submitted that since on the dissolution of the firm no transfer of assets had taken place, the provisions of Section 32A(5) of the Act could not be attracted. The AAC, however, upheld the action of the ITO in the following manner: I, however, find that it is not a question of transfer of assets, but the question is regarding the utilisation of the reserve. When the assessee claimed investment allowance of Rs. 20,899, it also created a reserve of Rs. 20,899. At the time of dissolution of the reserve, account was closed by transfer of the reserve to partners' accounts at Rs. 5,224.75 to the credit of each partner's account.

Now, Sub-clause (c) of Section 32A(5) is as under: (c) if at any time before the expiry of the ten years aforesaid, the assessee utilises the amount credited to the reserve account under Sub-section (4) for distribution by way of dividends or profits or for remittance outside India as profits or for the creation of any assets outside India or for any other purpose which is not a purpose of the business of the undertaking, . . .' The closing of the reserve account by transfer of one-fourth of the amount to each partner's account cannot be said to be a purpose of the undertaking. Shri Shah states that two of the partners have formed one new firm and two others have formed another new firm, and the reserve stands in the balance sheet of those firms. This fact has not been verified by the ITO and the relevant balance sheets have not been filed before me also. Even assuming that the requisite amount stands as reserves in two newly created firms, still the maintenance of a reserve account by some other firms in their own business cannot amount to a utilisation of the reserve of the assessee-firm for the undertaking of the assessee. The provisions of Section 32A(5)(c) are, therefore, clearly attracted and in these circumstances, the ITO was justified in not allowing deduction for investment allowance.

4. Being aggrieved by the order of the Commissioner (Appeals), the assessee has come up in appeal before the Tribunal. Relying on the decision of the Hon'ble Supreme Court in the aforesaid case as well as of the Hon'ble Gujarat High Court in the case of Abdul Rehman Haji Miya v. V.P. Minocha, ITO [1977] 106 ITR 821, the learned Counsel for the assessee vehemently argued that the Commissioner (Appeals) was not justified in deciding the appeal in the manner he did without properly appreciating the reported cases on the point at issue. He, therefore, urged that the action of the income-tax authorities should be reversed.

The learned representative for the department, on the other hand, supported the action of the income-tax authorities by relying on the decision of the Hon'ble Gujarat High Court in the case of CIT v.Kartikey V. Sarabhai [1981] 131 ITR 42. The learned Counsel for the assessee, in his reply, submitted that the decision in the case of Kartikey v. Sarabhai (supra) has no applicability to the facts and circumstances obtaining in the instant case. In this connection, he invited our attention to first paragraph of the head-notes appearing at page 43 of the aforesaid decision.

5. We have considered the rival submissions of the parties and in view of the aforesaid decisions, the stand taken on behalf of the assessee is unassailable. In order to forestall further litigation, we would reproduce below the relevant head-notes of the aforesaid cases: Malabar Fisheries Co.'s case (supra) - "A partnership firm under the Indian Partnership Act, 1932, is not a distinct legal entity apart from the partners constituting it and equally in law the firm as such has no separate rights of its own in the partnership assets and when one talks of the firm's property or the firm's assets all that is meant is property or assets in which all partners have a joint or common interest. It cannot, therefore, be said that, upon dissolution, the firm's rights in the partnership assets are extinguished. It is the partners who own jointly or in common the assets of the partnership and, therefore, the consequence of the distribution, division or allotment of assets to the partners which flows upon dissolution after discharge of liabilities is nothing but a mutual adjustment of rights between partners and there is no question of any extinguishment of the firm's rights in the partnership assets amounting to a transfer of assets within the meaning of Section 2(47) of the Income-tax Act, 1961. There is no transfer of assets involved even in the sense of any extinguishment of the firm's rights in the partnership assets when distribution takes place upon dissolution.

In order to attract Section 34(3)(b) it is necessary that the sale of transfer of assets must be by the assessee to a person.

Dissolution of a firm must, in point of time, be anterior to the actual distribution, division or allotment of the assets that takes place after making accounts and discharging the debts and liabilities due by the firm. Upon dissolution the firm ceases to exist: then follows the making up of accounts, then the discharge of debts and liabilities and thereupon distribution, division or allotment of assets takes place inter se between the erstwhile partners by way of mutual adjustment of rights between them. The distribution, division or allotment of assets to the erstwhile partners, is not done by the dissolved firm. In this sense there is no transfer of assets by the assessee (dissolved firm) to any person. It is not correct to say that the distribution of assets takes place eo instanti with the dissolution of firm or that it is effected by dissolved firm.

A firm consisting of four partners carried on six different businesses. During the accounting periods relevant to the assessment years 1960-61 to 1963-64 it installed various items of machinery in respect of which development rebate was allowed to it under Section 33. The firm was dissolved on March 31, 1963, and under the deed of dissolution one of the firm's businesses was taken over by one of the partners and the remaining five by two of the other partners, and the fourth partner received a sum of Rs. 3,81,082 in lieu of his share in the assets of the firm. The question was whether the rebate allowed to the firm could be withdrawn on the ground that there was a sale or transfer of the machinery within the meaning of Section 34(3)(b) read with Section 2(47): Held, that Section 34(3)(b) was not applicable to the case and the development rebate allowed to the firm could not be withdrawn. (p.

49) Abdul Rehtnan Haji Miya's case (supra) - "Held, that where machinery in respect of which development rebate was allowed to a firm for the assessment years 1960-61 and 1961-62 was divided amongst the partners of the firm at the time of its dissolution on August 31, 1963, there was no 'transfer' of any asset. Each partner gets that which was his own in which he along with his other partners was a joint owner during the subsistence of the partnership and under the scheme of the Partnership Act, when the assets are distributed among the partners at the time of dissolution, it cannot be said to amount to 'transfer' of the machinery in the sense in which the word has been used in Section 34(3)(b) of the Act of 1961. It cannot also be said that in such a case there is utilisation of the amount credited to the development rebate reserve for a purpose which was not a purpose of the business of the undertaking under Section 35(11)(ii) of the 1922 Act because, in each of the two cases referred to in Sub-clauses (a) and (b) of Section 35(11)(ii). the use is a voluntary use and, therefore, when it comes to Sub-clause (c), on the principle of ejusdem generis, the utilisation for any other purpose which is not a purpose of the business of the undertaking must be a voluntary utilisation. When, on the distribution of the assets of the partnership, the surplus assets are distributed amongst the partners, there is no utilisation in the voluntary sense. Therefore, the development rebate allowed at the time of the assessments in 1960-61 and 1961-62, could not be withdrawn under Section 155(5) of the Income-tax Act, 1961, as a result of the dissolution of the firm in 1963." (p. 821) Kartikey v. Sarabhai's case (supra) - "The legal rights of partners at the point of time of dissolution of a firm, can have little bearing in regard to the question as to the legal effect of a transaction resulting from the introduction of a capital asset at the time of the formation of the partnership or subsequent thereto.

There is no question of any transfer at the stage of the dissolution of the partnership. At the stage of dissolution there is no extinguishment of the right of any partner in any particular property which can be said to belong to him exclusively. In fact, it cannot be said that he has any particular interest in any particular property, his right being no more than the right to share in the surplus after the sale of the assets and payment of the debts and liabilities in case there is a surplus. Again, there may be no surplus. There may even be a deficit. Therefore, there is no question of any transfer. But at the stage of introduction of the capital asset of the partner into the firm in which he is a partner the rights of the partner in the property are extinguished." (p. 43) 6. It would appear from the above that the stand taken on behalf of the assessee is not only concluded by the highest Court of the land but in the case of Kartikey v. Sarabhai (supra), the Hon'ble Gujarat High Court itself has noted the distinction between the introduction of capital asset and assets taken over by the partners on dissolution of a firm. We would, therefore, direct the ITO not to withdraw the investment allowance of Rs. 20,899 and modify the assessment, accordingly.

1. I have gone through the order of my learned brother and have discussed the same. I have not been able to convince myself as to the decision and, therefore, with respect, I disagree. The reasons are as follows: 1. Section 32A deals with investment allowance. The provisions regarding conditions and withdrawal of allowance are not identical with those found earlier in those concerning development rebate. To some extent, they are modified. Therefore, ratio of the decision in the case of Abdul Rehman Haji Miya (supra) cannot be straightaway applied on aspect of utilisation of reserve.

2. Section 32A(4) prescribes conditions for allowance. One of the conditions, inter alia, is that the amount of investment allowance is required to be utilised for the purpose of acquiring new machinery or plant before the expiry of ten years. This presupposes the continuance of business of undertaking also except as provided under Sub-sections (6) and (7) governing amalgamation and succession.

3. Section 32A(5) deals with cases where rectification under Section 155(4A) of the Act shall be carried out. It reads as under: (5) Any allowance made under this section in respect of any ship, aircraft, machinery or plant shall be deemed to have been wrongly made for the purposes of this Act-- (b) if at any time before the expiry of ten years from the end of the previous year in which the ship or aircraft was acquired or the machinery or plant was installed, the assessee does not utilise the amount credited to the reserve account under Sub-section (4) for the purposes of acquiring a new ship or a new aircraft or new machinery or plant [other than machinery or plant of the nature referred to in Clauses (a), (b) and (d) of the proviso to Sub-section (1)] for the purposes of the business of the undertaking; or (c) if at any time before the expiry of the ten years aforesaid, the assessee utilises the amount credited to the reserve account under Sub-section (4) for distribution by way of dividends or profits or for remittance outside India as profits or for the creation of any assets outside India or for any other purpose which is not a purpose of the business of the undertaking, and the provisions of Sub-section (4A) of Section 155 shall apply accordingly: Provided that nothing in Clause (a) shall apply-- (ii) where the sale or transfer of the ship, aircraft, machinery or plant is made in connection with the amalgamation or succession, referred to in Sub-section (6) or Sub-section (7).

purpose...undertaking' did not exist in the provisions governing development rebate. Therefore, the ratio of the Gujarat High Court decision in Abdul Rehman Haji Miya's case (supra), relied upon, cannot be applied to the present case. Besides non-utilisation of reserve (acquiring of new machinery out of such reserve) as per Clause (b) to Sub-section (5) of Section 32A gets attracted to the facts under consideration, according to which also the assessee's claim must fail.

Order under Section 255(4) of the income-tax act, 1961 - Because of difference of opinion between the two Members, the following question is referred for the opinion of the Third Member: Whether, on the facts and in the circumstances of the case, the assessee is entitled to benefit of investment allowance 1. The assessee-registered firm does majoori work in connection with twisting of yarn. Its previous year ended for the assessment year under appeal on 30-6-1978. The assessee claimed a sum of Rs. 20,899 by way of investment allowance on machineries purchased and brought into use during the year. The ITO rejected the claim on the ground that "the machinery was sold to partners before eight years and reserve is also transferred to partners' account and conditions laid down under Section 32A(5) are not fulfilled". It would appear that the firm was dissolved on 30-6-1980 and the assets were distributed among the erstwhile partners. Of the four partners, two joined together for doing business and the other two for doing a separate business. The investment allowance reserve of Rs. 20,899 standing in the books was divided equally among the partners. The amounts relating to the respective partners were maintained in the books for the business continued by the two sets of partners. On the above facts, the Commissioner held that the closing of the reserve account by transfer of one-fourth of the amount to each partner's account could not be said to be a purpose of the undertaking, as required by Clause (c) of Section 32A(5). He confirmed the order of the ITO.2. Before the Tribunal, the two members having differed on the question of the allowability of the investment allowance, the following point of difference has been referred to me as Third Member: Whether, on the facts and in the circumstances of the case, the assessee is entitled to benefit of investment allowance The learned Judicial Member held that the assessee was entitled to the allowance, whereas the learned Accountant Member held otherwise.

3. The learned Counsel for the assessee has pointed out that a proper reserve was made for the purpose. The machinery was not sold. Since the firm was dissolved, the assets were distributed in specie. On the one hand, there is no dealing with the reserve amount. On the other, in the business continued by the partners, the reserve continues as such. None of the conditions laid down in Section 32A(5) is, therefore, violated.

In the case of a dissolution of the firm, there was no voluntary utilisation of the reserve fund for non-statutorily laid down purposes.

This was held so in the binding decision of the Gujarat High Court in Abdul Rehman Haji Miya's case (supra). The learned Counsel has referred, in this connection, to certain observations at page 828 of the decision. The decisions of the Gujarat High Court in Bharat Petroleums v. CIT [1979] 116 ITR 75 and in Laxmi Wvg. Factory v. Addl.

CIT [1979] 116 ITR 80 are relevant. Reference is made also to the decision in Loksatta Karyalaya v. T.K. Jorge Kutty 1979 TLR 1208. There was neither any transfer of the assets nor disposal of the reserve as hinted at by the ITO.4. For the department, stress is laid on the orders of the authorities below. The decisions referred to for the assessee, which deal with the matter of development rebate, are not applicable to the present case.

Abdul Rehman Haji Miya's case (supra) dealt with a transfer and utilisation of the plant or asset and not that of the reserve.

According to the learned Counsel, the stress is on the non-utilisation of the reserve for other purposes. It is also pointed out that though the ITO was concerned with the allowance of the investment allowance during the year when it was claimed, it was clear to him that the conditions of Section 32A(5) not being satisfied, the allowance, even if granted, would have to be withdrawn. The non-allowance, therefore, was fully justified.

5. The matter lies within a small compass. Undoubtedly, the assessee has acquired machinery during the year. This justifies the grant of investment allowance for the year under appeal. The claim for the allowance is rejected by the ITO for the reason that in a subsequent year, the conditions specified in Section 32A(5) not being satisfied, the provisions of Section 155(11) dealing with withdrawal of the allowance would apply. Since granting an allowance and, subsequently, withdrawing it under Section 155(11) would render the allowance an idle formality, the claim was rejected.

6. Even though we are concerned with the assessment year 1979-80 in the present case, the allowance is not granted because of what happened in a subsequent year, viz., the previous year relevant to the assessment year 1981-82. Apart from the other points dealt with by the two learned members, what happened during the previous year relevant to the intervening assessment year 1980-81 is not known. Section 32A(5) is as under: (5) Any allowance made under this section in respect of any ship, aircraft, machinery or plant shall be deemed to have been wrongly made for the purposes of this Act-- (a) if the ship, aircraft, machinery or plant is sold or otherwise transferred by the assessee 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; or (b) if at any time before the expiry of ten years from the end of the previous year in which the ship or aircraft was acquired or the machinery or plant was installed, the assessee does not utilise the amount credited to the reserve account under Sub-section (4) for the purposes of acquiring a new ship or a new aircraft or new machinery or plant [other than machinery or plant of the nature referred to in Clauses (a), (b) and (d) of the proviso to Sub-section (1)] for the purposes of the business of the undertaking; or (c) if at any time before the expiry of the ten years aforesaid, the assessee utilises the amount credited to the reserve account under Sub-section (4) for distribution by way of dividends or profits or for remittance outside India as profits or for the creation of any assets outside India or for any other purpose which is not a purpose of the business of the undertaking, and the provisions of Sub-section (4A) of Section 155 shall apply accordingly: (i) where the ship, aircraft, machinery or plant is sold or otherwise transferred by the assessee to the Government, a local authority, a corporation established by a Central, State or Provincial Act or a Government company as defined in Section 617 of the Companies Act, 1956 (1 of 1956); or (ii) where the sale or transfer of the ship, aircraft, machinery or plant is made in connection with the amalgamation or succession, referred to in Sub-section (6) or Sub-section (7).

The allowance is deemed to have been wrongly made under Clause (b) if the assessee does not utilise the reserve amount before the expiry of ten years for acquiring a new machinery, plant, etc. If, therefore, the assessee has acquired some new machinery or plant covering the investment allowance of Rs. 20,899 during the year relevant to the assessment year 1980-81, the allowance, if granted in 1979-80, cannot be withdrawn even under Section 155(11). Since this information is not available, the mere fact that the firm was dissolved--even assuming the view of the department on this is accepted for argument's sake--would not disentitle the assessee to the allowance. The ITO, however, can check up this matter and decide the applicability of Clause (b) of Section 32A(5).

7. Irrespective of what is mentioned in the previous paragraph, in my view, the assessee cannot be said to have used the reserve for any other purpose 'which is not a purpose for the business of the undertaking' in the present case. Section 32A provides for granting investment allowance. While this section requires the creation of a reserve, there is no provision in this section for a contingency such as something which happens and is for reasons beyond the assessee's control. This section provides for dealing with the reserve created but how under normal principles of accountancy the reserve can be treated as extinguished, is not clear. For instance, if the assessee who maintains books of account retains the reserve in the books for one, two or three or four years but in the fifth year of account does not maintain books of account at all or does not draw up a balance sheet, could it be stated that the reserve is utilised in any manner inconsistent with the requirements of Sub-section (5) Or again if the reserve amount is merged with the general reserve or any other capital or other account of the assessee, are the conditions of this section violated In the typical case of a sole proprietor, the assessee could create a reserve against investment allowance granted. The reserve, however, would represent only assets in the business. In the case of sole proprietary assets in the business, those could as well be treated as assets belonging to the proprietor. In other words, so long as the proprietor has got some assets equivalent to the reserve created, it cannot be stated that the reserve has been extinguished or utilised in a manner violative of the provisions of section merely because the proprietor does not draw up a balance sheet or merges the reserve with some other account or does not maintain accounts at all. In other words, while the manner of creating the reserve or the condition of creating the reserve can be clearly satisfied by an assessee, the subsequent event where certain violations are referred to cannot be clearly identified. In my view, therefore, the only requirement which can be satisfied in practice is that one can identify sufficient amount equal to the reserve created, if necessary, for purchase of machinery at any time during the period of ten years stipulated. Any other interpretation of this section, especially a meaning to be given to reserve, would lead to difficulties if not clear absurdity. Whether an assessee has satisfied the requirements of this section, therefore, or whether the allowance granted is to be taken back, has to be decided on these broad principles.

8. Considered in the above light where the business assets and liabilities are separately identifiable but the assessee does not transfer this including the investment allowance reserve to another person, clearly the conditions of this section are satisfied. In the present case, the two branches into which the partners have separated, continue the business. The assets of the business which they jointly owned, had been only distributed among them in specie. The reserve also has been so distributed. In the continued business, the reserve continues as such. It cannot, therefore, as a matter of fact, be stated that the assessee has allowed the reserve to disappear in such a way as not to be available for the purchase of machinery. Apart, therefore, from the question of whether distribution of assets on the dissolution of a firm constitutes a transfer or not, in the present case, the conditions of the section cannot be said to have been violated for this reason also.

9. There is also sufficient authority to hold that when partners on dissolution of a firm distribute the assets, there is no transfer. The Gujarat High Court decision in Abdul Rehman Haji Miya's case (supra) has also made it clear that what is contemplated under Section 32A(5) is a voluntary utilisation of the reserve for non-statutory purposes.

Where for reasons beyond his control an assessee is compelled to deal with the reserve in a manner not contemplated under this section, he cannot be stated to have utilised the reserve. Though the Gujarat High Court decision in Abdul Rehman Haji Miya's case (supra) referred to deals with the subject of development rebate rather than investment allowance, a comparison of the provisions relating to these allowances indicates the question of utilisation to have the same meaning for both purposes. When a firm is dissolved and that results in a particular movement of the development rebate or investment allowance reserve consequent to the dissolution, it is certainly not a voluntary utilisation of the reserve.

10. Summarising the position, therefore, I hold that it cannot be stated as a matter of fact that the amount covered by the reserve has not been utilised in the intervening year for purchase of machinery; on a rational interpretation of the provisions, all that this section requires is sufficient retention of the reserve amount for purchase of machinery, etc., by the erstwhile owners of the business and, lastly, any forced dealing with the reserve other than voluntarily cannot call forth the application of the violative parts of the section. In the result, I agree with the view of the learned Judicial Member that investment allowance cannot be denied to the assessee for the year under appeal. The matter will go back to the Bench, which heard the appeal for proper disposal.


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