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Commissioner of Income-tax Vs. Somendra Kumar Neogi - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtKolkata High Court
Decided On
Case NumberIncome-tax Reference No. 43 of 1977
Judge
Reported in(1981)21CTR(Cal)241,[1981]131ITR592(Cal)
ActsIncome Tax Act, 1961 - Sections 33, 34(3) and 155(5)
AppellantCommissioner of Income-tax
RespondentSomendra Kumar Neogi
Appellant AdvocateAjit Kumar Sengupta, Adv.
Respondent AdvocateMeghnath Banerjee, Adv.
Excerpt:
- .....because of the conversion of the proprietary concern into a limited company. it is true that each year's assessment has to be considered separately. the consideration might have been different if the development rebate had to be allowed in this year and the rectification of assessment in subsequent years had to be made ; for rectifying the assessment for the subsequent year and withdrawing the relief granted in the earlier years, different conditions might have arisen and it might have reasonably been contended that the factum of subsequent conversion of the proprietary concern into a limited company should not be a relevant factor because it would affect the tax liability of the subsequent year and not the tax liability of the year under consideration. but, if the ito, at the time of.....
Judgment:

Sabyasachi Mukhakji, J.

1. This reference under Section 256(1) of the I.T. Act, 1961, relates to the assessment of an assessee, who is an individual, for the assessment year 1968-69, for which the previous year ended on 31st March, 1968. In the course of the assessment proceedings, the ITOtook the view that development rebate was not allowable as the assessee's business had been converted into a private limited company which was not ' succession ' within the meaning of Section 33 of the I. T. Act, 1961. He, accordingly, rejected the claim for the development rebate for 1968-69. There was an appeal before the AAC. The AAC was of the view that the ITO was right in so far as he held that the conversion of the proprietary business into a limited company could not be considered to be a succession within the meaning of Section 33 of the Act. But, having noticed that the existence of the limited company was only with effect from 1st May, 1968, which was within the accounting period relevant to the assessment year 1969-70, the AAC held that the assessee had carried on business as a proprietary concern and the claim for development rebate was made in respect of machinery purchased and installed during that year. The AAC also found that the ITO had noticed that on 1st May, 1968, the business of the assessee was converted into that of a limited company. The AAC, accordingly, held that the condition required under Section 34(3Xa) of the I.T. Act, 1961, had been complied with by the assessee inasmuch as the conversion of the proprietary business into a limited company took place only on the 1st May, 1968. The AAC came to the conclusion that the change of the constitution of the assessee's business took place during the accounting year relevant to the assessment year 1969-70. He held that the ITO should have complied with the provisions of Section 155(5) of the Act for withdrawing the development rebate in respect of the assessment year 1968-69. The assessee was entitled to development rebate which could have been withdrawn by the ITO under Section 155(5) of the Act inasmuch as the assessee should be deemed to have been allowed development rebate wrongly under Section 34(3) of the Act and that the withdrawal of such development rebate should be under Section 155(5). He, therefore, held that the ITO was not justified in refusing the allowance of the development rebate for the assessment year 1968-69.

2. The revenue went up in appeal before the Tribunal. It was contended on behalf of the revenue that, it was within the knowledge of the ITO, at the time when he made the assessment for the year 1968-69, that the assessee's business had been converted into a limited company on 1st April, 1968. Therefore, the ITO was aware that the assessee was not entitled to the development rebate in respect of the machinery purchased and installed during the previous year by virtue of the provisions contained in Section 34(3)(b) of the I.T. Act, 1961. According to the revenue, therefore, the ITO was justified in not allowing the claim of the development rebate for that year. It was also argued that the assessee was not entitled to development rebate having contravened the provisions contain-ed in Section 34(3)(b) of the Act and, therefore, the disallowance by the ITO of the development rebate was correctly done. It was also contended that the conditions required for allowing the development rebate, as provided by Section 34, had not been fully complied with by the assessee inasmuch as the proprietary concern of the assessee was converted into a limited company. This contention on behalf of the revenue was not accepted by the Appellate Tribunal. It was argued that the ITO was not justified in considering this aspect while completing the assessment for the year 1968-69, and the Tribunal, after consideration of all the relevant facts observed, inter alia, as follows :

' The records of the case indicate that the conversion of the business into a limited company took place during the accounting year relevant to the assessment year 1969-70. However, for the assessment years 1967-68 and 1968-69, the assessee continued his business as a proprietary concern and all the conditions required for the grant of development rebate under Section 34 have been fully complied with by the assessee in respect of both these years. When the ITO noticed that the business was converted into a limited company, it was his duty to apply the provisions of Section 155(5) of the Act and thereby withdraw the development rebate which was allowed during the assessment years 1967-68 and 1968-69. It will not be correct to state that the assessee-company in this case did not fully satisfy the conditions as prescribed under Section 34 of the Act for the grant of development rebate in respect of the assessment years 1967-68 and 1968-69. As correctly pointed out by the AAC, it was the duty of the ITO to have granted the development rebate for the assessment years 1967-68 and 1968-69 and subsequently withdrawn this allowance of development rebate by an order under Section 155(5) of the Act when he noticed that the business was converted into a limited company on May 1, 1968. In the facts and circumstances of this case, we are satisfied that the AAC correctly directed that the assessee-company is entitled to development rebate for the assessment years 1967-68 and 1968-69,'

3. On the aforesaid findings, the Tribunal under Section 256(1) of the I.T. Act, 1961, referred the following question to this court:

' Whether, on the facts and in the circumstances of the case and having regard to the provisions of Section 34(3) read with Section 34(3)(b) along with the provisions of Section 155(5) of the Act, the Tribunal was right in holding that the assessee is entitled to allowance of development rebate for the assessment year 1968-69 '

4. We may incidentally mention that there is no dispute that at the time of making of assessment for the relevant assessment year, that is to say, 1968-69, which was made after the filing of the return for the subsequent year, that is to say, 1969-70, the ITO was aware that the assesseehad not complied with the conditions required under Section 34(3)(b) of the Act. Section 34 of the Act deals with the condition for depreciation allowance and development rebate. Sub-section (3)(a) provides that the deduction referred to under Section 33 shall not be allowed unless an amount equivalent to 75 per cent. of the development rebate actually allowed would be debited to the profit and loss account of the relevant previous year and ' credited to a reserve account to be utilised by the assessee during a period of 8 years next following for the purpose of the business of the undertaking ' other than certain exceptions mentioned in Clauses (i) and (ii) with certain provisos with which we are not concerned. Now, admittedly, at the time when the ITO was making the assessment he was aware that though the amount equal to 75 per cent. of the development rebate actually debited for the year in question had been debited to the profit and loss account of the relevant year and had been credited to the reserve account that amount could not be utilised during the period of 8 years following, even that might have been the original intention at the time of the assessee's creation of the development fund, but it was not the purpose which could be said to exist at the time of making of the assessment. That fact was concluded by the fact of assessment for the subsequent year when the proprietary business concern was transferred or converted into a limited company and it came to the knowledge of the revenue. In these circumstances, it cannot be said that the ITO would have been justified in allowing development rebate on the ground that the amount required to be debited to the profit and loss account of the year in question had been credited to a reserve to be utilised by the assessee during a period of 8 years next following the assessment year, since the assessee by the event subsequently happening, which was to the knowledge of the ITO at the time of making the assessment, could not have utilised it for a period of 8 years because of the conversion of the proprietary concern into a limited company. It is true that each year's assessment has to be considered separately. The consideration might have been different if the development rebate had to be allowed in this year and the rectification of assessment in subsequent years had to be made ; for rectifying the assessment for the subsequent year and withdrawing the relief granted in the earlier years, different conditions might have arisen and it might have reasonably been contended that the factum of subsequent conversion of the proprietary concern into a limited company should not be a relevant factor because it would affect the tax liability of the subsequent year and not the tax liability of the year under consideration. But, if the ITO, at the time of making the assessment, was aware that the development rebate could not be allowed or the reserve fund could not be utilised by the assessee or it had to be withdrawn in view of Section 34(3)(b) of the Act by taking recourse to Section 155(5) ofthe Act of 1961, then, in our opinion, it could not be deemed to have been wrongly made for the purpose of the Act. If the purpose for which the deeming provisions are intended is to rectify, and it can be rectified having recourse to the construction of the procedural aspect of Section 34(3)(a) read with Section 34(3)(b) in conjunction with Section 155(5), then, in our opinion, recourse to the deeming provision should normally be avoided. It is true that the powers of the ITO may have to be exercised in accordance with the procedure. But, it is a fundamental rule of construction that the rules of procedure are to subserve the purpose of the Act and the rules of procedure are the handmaid of justice and should not be allowed to become the mistress to defeat the justice of the Act, and if such a construction is possible which is not destructive of the main purpose of the Act, then in our opinion, this procedure followed by the ITO, in the facts and circumstances of the case, at the time of the making the assessment for the relevant year, being aware that this amount in fact could not be credited to an account to be utilised by the assessee in 8 subsequent years, was proper. In our opinion, the ITO acted properly and the Tribunal was not justified in the conclusion to which it came.

5. Before we conclude we must refer to a decision of the Gujarat High Court in the case of Bharat Petroleums v. CIT : [1979]116ITR75(Guj) . There, actually, the point with which we are concerned in this reference was not posed, because the question was decided on a different aspect. Furthermore, in that decision it is not apparent whether at the time of making the assessment for the year under consideration the facts, which had happened in the subsequent years justifying the withdrawal of the development fund created in the previous year or simultaneously or before the making of the original assessment, were on the record. In that view of the matter, we are of the opinion that the observations made in the said decision would not be of much relevance in deciding the controversy before us. In the premises, we would answer the question referred to us in the negative and in favour of the revenue. Each party will pay and bear their own costs.

Sudhindra Mohan Guha, J.

6. I agree.


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