1. This is a combined reference under the Income-tax Act as well as the Gift-tax Act. The assessment years involved are 1959-60 and 1961-62. Even at the outset we may mention that it would be highly desirable if the Tribunal made a reference under the distinct Acts separately. In this reference four questions have been referred to this court for its opinion. They are :
'(1) Whether, on the facts and in the circumstances of the case, the Tribunal is right in taking the view that the transaction between the asssessee-family and the company was in the nature of a sale or a transfer ?
(2) Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the action under Section 147(b) in respect of 1961-62 was valid in law ?
(3) Whether, on the facts and in the circumstances of the case, the Tribunal was Tight in its view that there was a gift which was taxable according to the provisions of the Gift-tax Act and
(4) Whether, on the facts and in the circumstances of the case, the Tribunal was right in its view that the order of rectification in respect of the assessment to income-tax for 1959-60 was valid in law ?'
2. We shall take up the fourth question first for disposal as it relates to the earlier of the two years under consideration. The assessee is a HUF of which one Ramaswami Udayar was the karta. He had a wife by name Vridhambal and a son, R. Prabhakaran. Among other sources for deriving income, the assessee-family had a business of plying motor buses in the name of A.M.S. Roadways. The books were closed for each year as on 31st March and the books had been closed for the assessment year 1959-60 on March 31, 1959. The assessee claimed depreciation and development rebate referable to the cost of the motor buses and this was also allowed in the assessment for this year. On 7th May, 1959, Messrs. Bharani Roadways (P.) Ltd. was incorporated as a private company with the object of carrying on the business of plying motor buses. The subscribed capital of the company was 200 shares of Rs. 100 each out of which Rs. 50 per share was called up and paid. The shareholders, in the first instance, were (1) N. Ramaswami Udayar, (2) A. Mariappan, (3) P. Kanda-swami and (4) S. V. Chinnathambi Udayar. Fifty shares were taken by Ramaswami Udayar and the sum of Rs. 2,500 at the rate of Rs. 50 per share was contributed out of the funds of the HUF. The other three persons contributed to the share capital out of their own respective resources. The 150 shares held by the three persons other than Ramaswami Udayar were transferred as below : 50 shares of Rs. 50 each to N. Ramaswami Udayar, 50 shares of Rs. 50 each to Vridhambal and 50 shares of Rs. 50 each to R. Prabhakaran. One Vaidyalingam was the brother of Ramaswami Udayar and the sums of Rs. 2,500 each representing the cost of the blocks of fifty shares each had been received by Vridhambal and Prabhakaran, from Vaidyalingam. Vaidyalingam had made gifts of Rs. 2,500 each to Vridhambal and Prabhakaran and these sums were utilised by them for purchase of these shares. As a result of the transfers mentioned above, Ramaswami Udayar came to hold 100 shares, Vridhambal 50 shares and Prabhakaran 50 shares. The shares had been allotted for cash consideration before 31st March, 1960.
3. The value of the motor buses held by the family in the name of A. M. S. Roadways was displayed in the accounts of the business at the written down value which happened to correspond to the written down value arrived at for the purpose of assessment to income-tax up to the year ended 31st March, 1960. Bharani Roadways (P.) Ltd., which would hereinafter be referred to as 'the company', did not carry on any business up to 11th July, 1960. In the accounts drawn up to 31st March, 1960, it had sustained a loss of Rs. 814 made up of preliminary expenses. From 1st August, 1960, to 26th March, 1961, nine buses in all were transferred from the HUF to the company. Five buses were transferred cm 1st August, 1960, three more buses were transferred on 24th November, 1960, and one bus on 26th March, 1961. The assessee had permits to ply these buses on particular routes in the then Madras State and those were also transferred to the company. The total consideration for the transfer of the buses was Rs. 1,72,500 as against the total written down value in the books of the assessee of Rs. 1,53,858. The Tribunal has noticed from the entries in the books of accounts that the consideration of Rs. 1,72,500 was adjusted by means, of book entries in the respective accounts. The permits were also transferred with the consent of the Regional Transport Authority concerned. The assessee did not include in its assets the nine buses from thestage they were transferred to the limited company. Correspondingly, the company showed these nine buses as its assets from the time of transfer and the consideration paid to the assessee was taken as the cost of the buses and the depreciation was written off in the books of the company on the basis of this cost.
4. The assessee claimed deduction on account of development rebate on the cost of these buses and a sum of Rs. 31,972 was allowed in the assessment for the assessment year 1959-60 made on 31st October, 1963. When the assessee filed its returns for the assessment year 1961-62 on 1st June, 1962, it sent a letter stating, inter alia, as follows:
'During the year, the assessee has given all his buses to a limited company--Bharani Roadways Private Limited, Salem--the family members being its shareholders. It is claimed that this giving away of the buses to this family company does not amount to a sale and, therefore, depreciation on buses up to the date of transfer to the company is claimed. For the same reason, it is claimed that Section 10(2)(vii) does not apply.'
5. For the assessment year 1961-62, the assessment was made on 3Ist March, 1964, and depreciation on the written down value referable, to the 9 buses was allowed. However, the profits taxable in the light of the second prov. to Section 10(2)(vii) was not brought to tax in the assessment. The assessment order does not contain anything to show how the ITO had looked at the relevant transactions. It may be mentioned here that the ITO had allowed depreciation in proportion to the period up to 31st July, 1960, that is, in the year of sale.
6. Subsequently, the ITO received a note or an objection from the Government auditors dated 10th February, 1965, raising a point that depreciation was not admissible as a deduction in the assessment year 1961-62 as the relevant assets had been sold in the course of that year and adjustment for the loss or profit from the transactions had to be considered in the light of the provisions of Section 10(2)(vii) and the second proviso thereto. The ITO, on receipt of this audit note, left a note in his own file under date 25th March, 1965, which is as follows :
'I have gone through the file of Sri N. Ramaswami Udayar. The audit objection pointed out that the profit assessable under Section 10(2)(vii) of the 1922 Act an4 also capital gains was omitted to be assessed. In this connection, I have gone through the case of R.B. Lachmandas Mohanlal & Sons v. Commissioner of Income-tax : 54ITR315(All) . The High Court there has held that the transfer of the business by a firm of six partners to a private limited company whose shareholders were substantially the same persons cannot be considered as a transfer not resulting in profit but Was only a sale. In the instant case also, the shareholders are not only the coparceners of the family but also others. Similarly, the entire authorised share capital has not been contributed by the family but there is still some portion to be called and subscribed which may or may not be subscribed by the family. Reading the decision in the above case along with the decision in the case of Maharajadhiraj Sir Kameshwar Singh v. Commissioner of Income-tax : 48ITR483(Patna) and also the fact that the decision in the case of Commissioner of Income-tax v. Morning Star Bus Service : 49ITR927(Ker) has not been accepted by the department, there is a strong case for reopening the assessment already made. The decision reported in page : 54ITR315(All) referred to above is subsequent to the date of completion of the assessment. Further, it is also seen that the company, on the date of incorporation, had four shareholders who were not the members of the same family. It is also seen that the share capital contributed by the lady and one of the members of the family was not from the family funds but from out of the gifts received from one N. Vaidyalingam. In the circumstances, it cannot be said that there is a complete identity between the family and the company even assuming that the transfer was by a family to a company whose shareholders were substantially the members of the family.
Office: Please issue notice under Section 147 for the assessment year 1961-62 in the file of N. R. Udayar.'
7. The assessment of the family for 1961-62 was reopened accordingly and reassessment was made under Section 147(b) of the I.T. Act, 1961, by an order passed on 30th October, 1965. We shall come to this reassessment separately a little later.
8. As already stated, in the assessment made on 31st October, 1963, for the assessment year 1959-60, the ITO had allowed development rebate of Rs. 31,972 referable to the cost of three buses which were sold to the company within a period of ten years referred to in Clause (b) of the prov. to Expl. 2 to Section 10(2)(vii) of the Indian I.T. Act, 1922. Under that provision, if the asset with reference to which development rebate had been granted was sold within a period of ten years, then the development rebate allowed would be deemed to have teen wrongly allowed for the purposes of the Act. Section 35(11) of the Indian I.T. Act, 1922, provided for the withdrawal of the development rebate and passing of an order for rectification of the assessment. In this case, obviously because the assessment had been made under the provisions of the I.T. Act, 1961, the ITO referred not only to the provision of Section 35(11) of the 1922 Act but also to Section 154 of the new Act and issued a notice for the purpose of rectifying the assessment made on 31st October, 1963. He invited the assessee's objection to the rectification of the mistake in the giving of deduction for a sum of Rs. 31,972 on development rebate. In the order passed for rectifying the mistake in the assessment, the ITO stated that long before the assessment in question was completed the buses had been sold and that there was no question of allowing deduction for development rebate. He further stated that he had given an opportunity to the assessee as required by the provisions of Section 154 to put forth objections, if any, to the rectification of the mistake which would result in enhancement of the assessment. The assessee objected to the proceedings before the ITO by contending that there was neither a sale nor a transfer because the members of the family and the shareholders of the company were the same. The ITO overruled this objection and passed the rectification order resulting in the withdrawal of the development rebate of Rs. 31,972. The assessee's appeal to the AAC as well as to the Tribunal was unsuccessful. The assessee, therefore, sought reference of the fourth question, mentioned already, with reference to the withdrawal of the development rebate.
9. The short point for consideration is whether this rectification is proper or not. In view of the fact that the assessment itself was made under Section 143, the ITO has taken proceedings under the provisions of the 1961 Act in addition to referring to the provisions of s. 35 of the old Act. However, it is the assessee's own case that the order has been passed under Section 154 of the I.T. Act, 1961, as, otherwise, the assessee could not have filed an appeal to the AAC and then to the Tribunal and, thereafter, brought the matter under reference.
10. The provisions of Section 35(11) of the old Act and Section 155(5) of the new Act are clear to the effect that, where, if any machinery with reference to which development rebate had been granted is sold within the period of ten years under Section 35(11) of the old Act or eight years under Section 155(5) of the new Act, specified in the respective provisions, then the grant of development rebate would be deemed to be a mistake which was liable to be rectified by recourse to either Section 35(1) of the old Act or Section 154 of the new Act. In the present case, even at the time when the assessment came to be made on 31st October, 1963, the transfer of the nine buses had already been effected. Therefore, the ITO could not have granted development rebate under the provisions of Section 10(2)(vib) of the 1922 Act or Section 33 of the 1961 Act. As the assets had been sold within the period of eight years specified in Section 155(5) or ten years specified in s. 35(11), the withdrawal of the development rebate became obligatory on the part of the ITO having regard to the provisions of Section 35(11) or Section 155(5), as the case may be. Therefore, in the present case, the ITO, as soon as he came to know that the development rebate had been wrongly allowed in the assessment made on the 31st October, 1963, was entitled to proceed under the provisions of Section 154 and withdraw the development rebate. On the ditte the ITO passed the order on October 31, 1963, the transfer having already taken place within the period of ten years as contemplated under Section 35(11) or eight years as contemplated under Section 155(5), the ITO should not have granted the rebate and having wrongly allowed development rebate, it constituted a mistake apparent from the record, liable to be rectified under Section 154 of the Act. It was not even necessary for the ITO first to grant rebate and then to withdraw the same under Section 35(11) of the old Act or the corresponding provisions of the new Act, because the scheme of the provisions relating to the grant of development rebate makes it clear that an assessee would be entitled to such development rebate only if the assets concerned remained unsold for the period of ten years under the old Act or for the period of eight years under the new Act, as the case may be. It is this aspect which has been emphasised in two decisions. The first of them is CIT v. Sayaji Mills Ltd. : 94ITR26(Guj) . In that case, for the assessment years 1959-60 and 1960-61, the ITO found that the assessee would be entitled to development rebate of certain amounts in respect of certain machinery, but in the assessment order he did not allow deduction of those amounts for the reason that the machinery was sold in 1961, before the end of ten years from the end of the year in which it was acquired and consequently the assessee was not entitled to the deduction by virtue of prov. (b) to Expln. 2 to Section 10(2)(vib) of the Indian I.T. Act, 1922. The contention taken by the assessee was that it was necessary for him to allow development rebate in the first instance and then alone rectify the mistake. The Gujarat High Court pointed out that a combined reading of the relevant part of the prov. to Expln. 2 to Clause (vib) of Section 10(2) and Section 35(11) showed that the legislature clearly intended that no allowance by way of development rebate would be available if the machinery or plant, in respect of which it was claimed, was 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. The learned judges held that the assessee's claim for development rebate was rightly disallowed even in the first instance. To the same effect is the other decision of the Punjab High Court in CIT v. Indian Motor Transport Co. (P.) Ltd. . Hence, the action of the ITO in withdrawing the development rebate in the present case by resorting to the provisions of Section 154 cannot be open to question. The fourth question is, therefore, answered in the affirmative and against the assessee.'
11. We now turn to the assessment year 1961-62. We have already pointed out that the assessee-family transferred nine buses to the limited company. In making the original assessment for this year, the ITO granted depreciation referable to the written down value of the nine buses. He did not also bring to assessment the profits assessable in the light of the 2nd prov. to Section 10(2)(vii) of the 1922 Act. Subsequently, as a result of the audit note to which we have already made reference, the ITO took proceedings under Section 147(b) and he passed an order on 30th October, 1965, in which he held that buses had been sold to the company for a sum of Rs. 1,72,500 and that an addition of Rs. 19,131 was called for as relating to the depreciation which had been wrongly allowed and further that a separate addition of Rs. 18,685 was called for as the profits taxable under the 2nd prov. to Section 10(2)(vii). There was an appeal against this reassessment to the AAC, who allowed the appeal holding that the action under Section 147(b) of the I.T. Act, 1961, was without jurisdiction. Thereafter, there was an appeal by the ITO to the Tribunal contesting the conclusion of the AAC regarding the applicability of Section 147(b). The Tribunal accepted the department's appeal and held that the reassessment under Section 147(b) was proper. It further held that there was a sale of the buses to the limited company by the assessee-family which brought the case within the scope of the second prov. to Section 10(2)(vii). The assessee seeks to challenge these conclusions of the Tribunal by raising the first two questions as far as the assessment order for 1961-62 is concerned.
12. With reference to the first question, the short point for consideration is whether there was any sale of the buses by the assessee-family to the limited company. Even though the question as framed by the Tribunal refers to a transfer of the buses, still the question of transfer is not germane to the point in dispute between the assessee and the department because it is admitted that there was a transfer of the buses and the only case of the assessee was that the transfer did not amount to a sale. Therefore, the question narrows down to this, viz., whether there was a sale by the assessee-family to the limited company. That the limited company is an independent legal entity is not and cannot be in dispute. The Supreme Court had occasion to examine this question as to whether there was a sale in similar circumstances in CIT v. B.M. Kharwar : 72ITR603(SC) . In that case, a firm carrying on business of manufacturing and trading in cloth, closed its manufacturing side of the business and transferred the machinery to a private limited company, in the share capital of which the partners of the firm had the same interest as they had in the assets and profits of the partnership. In the assessment made on the firm for the assessment year 1959-60, the ITO brought to tax under the second prov. to Section 10(2)(vii) a sum of Rs. 40,743 being the excess realised over the written down value of the machinery. The question for consideration by the Supreme Court was whether the said sum of Rs. 40,743 was assessable to tax by applying the second prov. to Section 10(2)(vii) of the Indian I.T. Act, 1922. In other words, the question was whether there was a sale of the machinery by the firm in favour of the limited company. At page 608, the Supreme Court observed:
'In the present case the machinery of the factory belonging to the firm was transferred to the private limited company. Assuming that thereby readjustment of the business relationship was intended, the liability to be taxed in respect of the readjustment had to be determined according to the strict legal form of the transaction. The company was a legal entity distinct from the partnership under the general law. Transfer of the machinery was by the firm to the company ; and the legal effect of the transaction was to convey for consideration the rights of the firm in the machinery to the company. The transaction resulted in excess realization over the written down value of the machinery to the firm, and the liability to tax, if any, arising under the Act could not be avoided merely because in consequence of the transfer the interest of the partners in the machinery was substituted by an interest in the shares of the company which owned the machinery.'
13. Though this decision of the Supreme Court related to a firm, still the legal position with respect to a HUF transferring buses to a limited company cannot, in any manner, be different. Applying the decision of the Supreme Court, it would follow that in the present case there was a sale of the buses by the family to the limited company resulting in the application of the second prov. to Section 10(2)(vii). It was not disputed that depreciation granted originally can be withdrawn in the present case because the assets had been sold during the course of the year. The first question has, therefore, to be answered in the affirmative and against the assessee.
14. The next question for consideration for the assessment year 1961-62 is whether the Tribunal was right in upholding the action of the ITO under Section 147(b) of the Act. We have already pointed out that the ITO received an audit note saying that the depreciation had been wrongly allowed and that the profits assessable to tax under the second prov. to Section 10(2)(vii) had not been assessed. In view of the audit note, it is clear that the ITO had information which came into his possession subsequent to the assessment as a result of which he could have reason to believe that the income had escaped assessment. The language of Section 147(b) is clearly satisfied in the present case. Learned counsel for the assessee attempted to argue that there is some difference of opinion as to whether an audit note can be said to be an information on the basis of which the ITO could start proceedings under Section 147(b). For our present purpose, it is unnecessary to go into such difference of opinion because in the cases cited, in which it is stated there is a difference, the information that was passed on to the ITO related to the construction of the relevant provisions of the Act and the question arose whether that would constitute information as to the correct position of the law. In the present case, the question is one of fact, viz., as to whether there was a proper allowance of depreciation oromission to bring to tax the profits assessable under the second prov. to Section 10(2)(vii) of the Indian I.T. Act, 1922, on account of a sale of the assets. On this question of fact, there can be no doubt that the audit note could constitute information. Therefore, the second question has also to be answered in the affirmative and against the assessee.
15. We now come to the third question which arises under the G. T. Act. The assessee, as observed already, was the owner of nine buses. These buses were sold for a consideration of Rs. 1,72,500. There was no specific amount ascribed for the route rights, which the buses had. The transaction between the parties proceeded as if the sum of Rs. 1,72,500 represented the consideration for the sale of the buses alone. Before the GTO too, the assessee raised an objection that there was only a rearrangement of the ownership of the buses and that this did not amount to a transfer so as to constitute a gift. There was also an objection on the part of the assessee that there was no value for the route rights and, therefore, there was no question of any gift in respect of the route rights. The GTO overruled these objections and held that there was a gift because the assessee had not transferred the route rights for any consideration. The GTO worked out the route rights taking a value of Rs. 10,000 per route. The assessment to gift-tax so made was subjected to an appeal to the AAC. He allowed the appeal taking the view that the buses had been transferred for shares of the value of Rs. 1,72,500 and shares of the limited company held by the assessee would cover the value of the route rights also. The GTO challenged this conclusion of the AAC before the Tribunal and the Tribunal, reversing the decision of the AAC, held that there was a gift within the meaning of the G.T. Act, since no value was paid by the company to the assessee in respect of the route rights. The Tribunal also pointed out that only the buses were sold for Rs. 1,72,500 and no part of that amount constituted consideration for the transfer of the route value and even the shares were allotted only for cash and the shares as such were not allotted to the shareholders in exchange for their rights in the buses as well as the route value which was the assumption erroneously made by the AAC. It is against the conclusion of the Tribunal that the third question has been raised for reference.
16. That the route rights attached to buses have a value has been decided in more than one case which arose for consideration in this court. In G. Vijayaranga Mudaliar v. CIT : 47ITR853(Mad) this court pointed out as follows (p. 858):
'Neither the provisions of the statute (Motor Vehicles Act) nor the rules framed thereunder actually prohibit the receipt of consideration for a transfer of permit. It may be that the competent authorities under the Motor Vehicles Act may not allow a permit to be transferred for value lestit should encourage trafficking in permits. Buses have little value shorn of their permits to ply on particular routes. It is an open secret that when buses are transferred the consideration paid by the purchaser of the vehicles is only commensurate with their earning capacity which is intimately connected with the routes on which they operate. But nevertheless no transferor admits having received any consideration for transfer of the permits and the transferee also never acknowledges that he paid any amount for annexing the routes along with the buses. We must observe that this pretence of non-payment of consideration for transfer of permits is nothing short of sheer hypocrisy. We can almost take judicial notice of the fact that whenever a bus with a permit is transferred, a fair portion of the consideration would represent the value attributable to the pecuniary gain derived by operating on the route.'
17. This decision along with several others and the provisions of the Motor Vehicles Act came to be considered in C. S. No. 46 of 1961 of this court (Judgment dated December 12, 1962--N. Krishnaswami Reddiar v. T. Sivagnanam Pillai). In that case, the point put in issue was that the transfer of route rights for a value would be opposed to public policy and that a contract therefor could not be enforced. This court negatived this objection and applied the aforesaid decision. Subsequently, a Bench of this court in A. Vimalan v. CGT : 94ITR21(Mad) applied this decision to a similar case arising under the G.T. Act itself. That was also a case where buses with route rights had been transferred and the value for the route rights had not been described in the transaction between the parties. The GTO estimated the value of the route rights at Rs. 31,688 and computed the gift-tax payable. It is this assessment which was ultimately upheld by this court in that case. Therefore, having regard to these decisions, it is clear that the route rights have a value and that so long as the transaction between the parties did not ascribe a value to the route rights, there would be an element of gift. There is no dispute about the valuation as such and, in the circumstances, the third question also has to be answered in the affirmative and against the assessee. The Commissioner will be entitled to costs. Counsel's fee is fixed at Rs. 500.