1. The petitioner in this case was, prior to its dissolution on August 31, 1963, a partnership firm registered under the provisions of the Indian Partnership Act. Though the firm has been dissolved with effect from August 31, 1963, as the subject-matter of the writ petition is pending, the said firm is deemed to continue in connection with that subject-matter. All the partners of the petitioner-firm are citizens of India having their domicile in India. The business of the petitioner-firm was to manufacture hosiery goods and sell the same. In the financial years 1959-60 and 1960-61, corresponding to the assessment years 1960-61 and 1961-62, the petitioner-firm had purchased some new machinery for purpose of its business. The Income-tax Officer, while assessing the petitioner-firm for those assessment years, had allowed development rebate to the extent of Rs. 4,006 for assessment year 1960-61 and Rs. 7,382 for assessment year 1961-62. This was done under the provisions of section 10(2)(vib) of the Indian Income-tax Act, 1922 (hereinafter referred to as 'the Act of 1922').
2. By a deed of dissolution executed by the partners of the petitioner-firm on August 31, 1963, the petitioner-firm was dissolved and under the terms of the deed of dissolution, the partners distributed amongst themselves the machinery which had been purchased by the firm in assessment years 1960-61 and 1961-62. These items of machinery, along with several other items of machinery, were thus distributed amongst the partners on dissolution. Respondent No. 1, who is the Income-tax Officer in charge of the case of the petitioner-firm, assessed the petitioner-firm for assessment year 1964-65 after the petitioner-firm was dissolved. During the course of the assessment proceedings for that year, respondent No 1 held that the petitioner had otherwise transferred' the machinery acquired by it in assessment years 1960-61 and 1961-62 before the expiry of the statutory period of eight years prescribed under section 34(3)(b) of the Income-tax Act, 1961 (hereinafter referred to as 'the Act of 1961'). Respondent No. 1, thereupon, passed orders under section 155(5) of the Act of 1961 withdrawing the development rebate granted to the petitioner-firm in the assessment years 1960-61 and 1961-62. These orders were passed by respondent No. 1 on November 8, 1965. The petitioner-firm contends that even though the machinery was distributed amongst the partners on the dissolution of the firm, as stated above, the first respondent has wrongly treated the machinery which had been the subject-matter of development rebate as 'otherwise transferred'.
3. Against the decision of the first respondent, the Income-tax Officer, the petitioner-firm filed appeals before the Appellate Assistant Commissioner who, by his orders passed on May 4, 1967, dismissed the appeals and confirmed the orders passed by the first respondent, Income-tax Officer. The petitioner-firm filed appeals before the Income-tax Appellate Tribunal but it was held by the Tribunal that though the orders withdrawing the rebate were purporting to have been passed under section 155(5) of the Act of 1961, in reality and substance, they were orders passed under section 35(11) of the Act of 1922 and under the provisions of section 30 of the Act of 1922, no appeals could lie against the orders withdrawing the development rebate since the orders were passed as and by way of rectification. This contention urged on behalf of the revenue was upheld by the Income-tax Appellate Tribunal and the Tribunal held that no appeal lay against the orders passed by the Income-tax Officer withdrawing the development rebate. Thereafter, the petitioner-firm approached the Income-tax Appellate Tribunal for referring certain question of law to the High Court. However, subsequently, those reference applications were withdrawn by the petitioner-firm with the permission granted by the Tribunal. Subsequently, however, the first respondent there in, the Income-tax Officer filed Special Civil Application No. 29 of 1971 [V. P. Minocha, Income-tax Officer v. Income-tax Appellate Tribunal : 106ITR691(Guj) ] under articles 226 and 227 of the Constitution praying for calling the record and proceedings of the orders and setting aside the same and for restoring the order annexure 'A-3' to the petition. This petition was allowed by this High Court by its judgment and order dated October 15, 1973, and the order, annexure 'A-4', to the petition was set aside and the order, annexure 'A-3', was restored. Thereafter, the petitioner has filed this special civil application praying for a declaration that the provisions of clauses (i) and (ii) of section 35(11) and section 30 of the Act of 1922 in so far as the same relate to withdrawal of development rebate and so far as they provide for non-maintainability of appeal against the order of withdrawal of development rebate under section 10(2)(vib) are ultra vires the Constitution as being violative of articles 14, 19(1)(f), 31(1) and 19(1)(g) of the Constitution. He has also prayed for a declaration that the order, annexure 'A-1', passed by the first respondent and the order, annexure 'A-2', passed by the 2nd respondent are ultra vires the Constitution being violative of articles 14, 19(1)(f) 31(1) and 19(1)(g) of the Constitution and are also illegal even if they are not ultra vires. He has prayed for the appropriate orders, writs or directions against the Income-tax Officer and the Appellate Assistant Commissioner may be issued quashing and setting aside the order passed respectively by them in the case of the petitioner and he has prayed for appropriate directions or orders directing the two respective respondents to refund to the petitioner and its partners the amount of the orders passed by respondents Nos. 1 and 2.
4. It must be borne in mind that the partnership firm was dissolved with effect from August 31, 1963, and apart from working out the legal consequences on dissolution, nothing else has been done by the partners of the firm indicating that the plant or machinery in respect of which the development rebate has been allowed in the past has been transferred. As to what is the effect of dissolution of the firm has been analysed by the Supreme Court in Commissioner of Income-tax v. Dewas Cine Corporation : 68ITR240(SC) . In that particular case before the Supreme Court, S. G. Sanghi and Hari Prasad, each of whom owned a cinema theatre, formed a partnership to carry on business in partnership as exhibitors of cinematograph films, bringing the theatres into the books of the partnership as its assets. For the assessment years 1950-51 to 1952-53 the Income-tax Officer allowed depreciation aggregating to Rs. 44,380 in the assessment of the partnership in respect of the two theatres. On the dissolution of the partnership on September 30, 1951, it was agreed between Sanghi and Hari Prasad that the theatres should be returned to their original owners. In the books of account of the partnership the assets were shown as taken over at the original price less the depreciation allowed, the depreciation being equally divided between Sanghi and Hari Prasad. The Tribunal held the by restoring the theatres to the original owners there was a transfer by the partnership and the entries adjusting the depreciation and writing off the assets of the original value amounted to total recoupment of the entire depreciation by the partnership and on that account the second proviso to section 10(2)(vii) of the 1922 Act applied. On these facts the Supreme Court held that, on the dissolution of the partnership, each theatre had to be deemed to be returned to the original owner in satisfaction partially or wholly of his claim to a share in the residue of the assets after discharging the debts and other obligations. But, thereby, the theatres were not in law sold by the partnership to the individual partners in consideration of their respective shares in the residue, and, therefore, the amount of Rs. 44,380 could not be included in the total income of the partnership under the second proviso to section 10(2)(vii).
5. At page 242 of the report, Shah J., as he then was, delivering the judgment of the Supreme Court observed :
'Under the Partnership Act, 1932, property which is brought into the partnership by the partners when it is formed or which may be acquired in the course of the business becomes the property of the partnership and a partner is subject to any special agreement between the partners entitled upon dissolution to a share in the money representing the value of the property. When the two partners brought in the theatres of their respective ownership into the partnership, the theatres must be deemed to have become the property of the partnership. Under section 46 of the Partnership Act, 1932, on the dissolution of the firm every partner or his representative is entitled, as against all the other partners or their representatives, to have the property of the firm applied in payment of the debts and liabilities of the firm, and to have the surplus distributed among the partners or their representatives according to their rights. Section 48 of the partnership Act provides for the mode settlement of accounts between the partners. It prescribes the sequence in which the various outgoings are to be applied and the residue remaining is to be divided between the partners. The distribution of surplus is for the purpose of adjustment of the rights of the partners in the assets of the partnership : it does not amount to transfer of assets.
On dissolution of the partnership, each theatre must be deemed to be returned to the original owner, in satisfaction partially or wholly of his claim to a share in the residue of the assets after discharging the debts and other obligations. But thereby the theatres were not in law sold by the partnership to the individual partners in consideration of their respective shares in the residue. The expressions 'sale', are not defined in the Income-tax Act : those expressions are used in section 10(2)(vii) in their ordinary meaning. 'Sale', according to its ordinary meaning, is a transfer of property for a price, and adjustment of the rights of the partners in a dissolved firm is not a transfer, nor it is for a price.'.
6. It is, therefore, clear that the distribution of the surplus of the assets of a partnership on its dissolution does not amount to transfer of the assets of the firm. That being the case it is obvious that the machinery in respect of which development rebate had been allowed in the assessment years 1960-61 and 1961-62 cannot be said to have been transferred to the partners of the firm on the dissolution as of August 31, 1963.
7. To the similar effect is the decision of the Supreme Court in Commissioner of Income-tax v. Hind Construction Ltd. : 83ITR211(SC) . In that case, the assessee acquired a half interest in a joint venture for the purchase and sale of machinery. Unsold machinery remaining after the venture was divided and the assessee received machinery valued at Rs. 2,06,372 as its share. In its account books the assessee wrote up the value of the machinery by Rs. 4 lakhs. Thereafter, a partnership was formed in which the assessee had a half share. To the new firm the assessee transferred its stock of machinery at the book value of Rs. 6,06,372 as its share of the capital. It was held that neither when the assessee wrote up the value of the machinery in its books in its books nor when handed over its machinery to the partnership was there a sale and the assessee did not derive any income. The Supreme Court held that a sale contemplates a seller and a purchaser. If a person revalues his goods and shows a higher value for them in his books, he cannot be considered as having sold those goods and made profit therefrom. Nor can a person by handing over his goods to a partnership, of which he is a partner, as his share of the capital be considered as having sold the goods to the partnership. The case of Hind Construction Ltd. : 83ITR211(SC) is in connection with the formation of a partnership rather than of dissolution but the principle underlying is the same, namely, that when some persons come together to carry on business in partnership there is no sale of the property of the firm nor is there any sale or transfer as was held in Dewas Cine Corporation's case : 68ITR240(SC) when the partnership is dissolved.
8. In Commissioner of Income-tax v. Bankey Lal Vaidya : 79ITR594(SC) the Supreme Court followed its earlier decision in Dewas Cine Corporation's case : 68ITR240(SC) . In Bankey Lal Vaidya's case : 79ITR594(SC) the respondent, who was the Karta of a Hindu undivided family, entered into a partnership with Devi Sharan to carry on the business of manufacturing and selling pharmaceutical products and literature relating thereto. On the dissolution of the partnership, its assets, which included goodwill, machinery, furniture, medicines, library and copyright in respect of certain publications, were valued at Rs. 2,50,000. Since a large majority of the assets was incapable of physical division, it was agreed that the assets be taken over by Devi Sharan and the respondent be paid his share of the value of the assets in money and accordingly the respondent was paid Rs. 1,25,000. The question was whether the sum of Rs. 65,000 being part of the amount received by the respondent could be brought to tax as capital gains under section 12B(1) of the 1922 Act and the Supreme Court held that the arrangement between the partners of the firm amounted to a distribution of the assets of the firm on dissolution. There was no sale or exchange of the respondent's share in the capital assets. The Supreme Court further held that, in the course of dissolution, the assets of a firm may be valued and the assets divided between the partners according to their respective shares by allotting the individual assets or paying the money value equivalent thereof. This is a recognized method of making up the accounts of a dissolved firm. In that case the receipt of money by a partner is nothing but a receipt of his share in the distributed assets of the firm. It was held that the respondent before the Supreme Court received the money value of his share in the assets of the firm. He did not agree to sell, exchange or transfer his share in the assets of the firm and the payment of the amount agreed to be paid to the respondent under the arrangement of his share was, therefore, not in consequence of any sale, exchange or transfer of assets.
9. In view of these three decisions of the Supreme Court it is obvious that the contention so far urged on behalf of the respondents as the various levels that there was a transfer of the machinery in respect of which development rebate had been allowed, cannot be sustained and on this particular aspect of the matter the stand taken up by the respondents was not in accordance with law.
10. However, Mr. Kaji for the respondents contended that, in any event, though there may not have been a transfer of the machinery or plant in respect of which development rebate had been allowed in the past, in the light of the provisions of section 35(11) of the Act of 1922 and section 155(5) of the Act of 1961, there was utilisation of the amount credited to the reserve amount for a purpose which was not a purpose of the business of the undertaking. It was contended that under the positive provision to be found in section 10(2)(vib), proviso to Explanation 2, a reserve account had to be maintained equivalent to the amount mentioned in clause (b) of the proviso and that amount credited to the reserve account shall be utilized by the assessee during the period of ten years next following for the purpose of the business of the undertaking except, (i) for distribution by way of dividends of profits, or (ii) for remittance outside India as profits or for the creation of any set outside India. Mr. Kaji emphasized that reflecting these positive provisions set out in section 10(2)(vib), proviso to Explanation 2, the legislature has also provided under section 35(11) the negative, namely, that if the assessee utilized the amount credited to the reserve account under section 10(2)(vib) for distribution by way of dividends or profits, or for remittance outside India as profits or for the creation of any asset outside India or for any other purpose which was not a purpose of the business of the undertaking, the development rebate originally allowed was to be deemed to have been wrongly allowed and consequential rectification could follow. Similar is the provision in almost identical terms under section 155(5)(ii)(c) of the 1961 Act read with section 34(3)(a) of the Act of 1961. We are unable to accept this contention of Mr. Kaji because when one examines the provisions of section 35(11) of the Act of 1922, one finds that each one of the modes of utilisation referred to in clauses (a) and (b) of clause (ii) of section 35(11) refers to voluntary utilisation of the amount credited to the reserve account. The three modes of utilisation which are prohibited are : (i) for distribution by way of dividends or profits; or (b) for remittance outside India as profits or for the creation of any assets outside India; or (c) for any other purpose which is not a purpose of the business of the undertaking. It must be borne in mind that a distinction has been made in section 35(11)(ii) between the assessee and the undertaking or the business of the undertaking in respect of which the development rebate has been allowed. The assessee may be the same but he may have different undertaking; for example, the assessee may be running an ice factory and a textile factory and in respect of the ice factory machinery, he may have been allowed development rebate. He may also have been allowed development rebate in respect of the machinery installed for its textile factory. But the business of each of these two undertaking is distinct and separate and, therefore, the development rebate allowed in respect of the ice factory machinery cannot be permitted to be used for the other undertaking of the assessee, namely, the textile factory. This illustration clearly explains what the legislature has meant to emphasize by the use of the words 'business of the undertaking'. However, the main ground for rejecting this particular contention on behalf of the revenue is that in each of the two cases referred to in sub-clauses (a) and (b) section 35(11)(ii), the use is a voluntary use and, therefore, when it comes to clause (c), on the principles of ejusdem generis, the utilisation for any other purpose which is not a purpose of the business of the undertaking must be also 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. In the first place, 'utilisation', according to its dictionary meaning, means, converting to use or turning to account as shown by the Oxford English Dictionary. Applying that meaning to the facts of the case before us, when the partnership was dissolved with effect from August 31, 1963, and the surplus assets were distributed amongst the partners, there was no conversion to use or turning to account of this machinery by the different partners. As the legal position has been explained by the Supreme Court in Dewas Cine Corporation's case : 68ITR240(SC) , Bankey Lal Vaidya's case : 79ITR594(SC) and Hind Construction Ltd.'s case : 83ITR211(SC) , there is no transfer of any asset not is it possible for us to say that there is any utilisation of the machinery. Each partner gets that which was his own in which he along with the 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 utilisation of the machinery in the sense in which the word 'utilised' has been used in section 35(11)(ii)(c) of the Act of 1922. Therefore, this contention urged on behalf of the revenue must also fail.
11. These were the only two contentions which could possibly be urged on behalf of the respondents in support of the orders for rectification which have been passed in this case. Since both these ground fail, it must be held that the orders of rectification disallowing the development rebate allowed in the assessment years 1960-61 and 1961-62 were contrary to the provisions of law and must, therefore, be quashed and set aside. This special civil application is, therefore, allowed and the orders passed by the Income-tax Officer and by the Appellate Assistant Commissioner are hereby quashed and set aside. There is no reason why the normal rule of costs following the event should be departed from. The respondents must, therefore, pay the costs of this special civil application to the petitioner. Rule made absolute accordingly. The amount of tax recovered from the petitioner on the basis of the rectification orders is directed to be refunded to the petitioner-firm.