COMMISSIONER OF INCOME TAX Vs. NIPA TWISTING WORKS

JUDGEMENT

(1.) At the instance of the Revenue, the Income Tax Appellate Tribunal, Ahmedabad Bench 'B' has referred following question of law for our opinion under section 256(1) of the Income-tax Act, 1961 ("the Act" for short), for Assessment Year 1979-80 :

(2.) FACTS The respondent-assessee was a firm and was carrying on business of twisting majuri in the name and style of 'M/s. Nipa Twisting Works'. During the previous year, relevant to the Assessment Year 1981-82, the firm was dissolved on June 30, 1980 and its assets had been distributed amongst the partners in specie. The reserve credited under section 32-A(4) of the Act had also been so distributed. While framing the assessment under section 143(3) of the Act, Income-tax Officer withdrew the investment allowance of Rs. 20,899/allowed to the assessee on the ground that on the dissolution of the firm, the machineries were transferred to the partners before 8 years within the meaning of section 32A(5) of the Act and reserve was also transferred to the partners within the meaning of section 32A(5)(c) of the Act.

(3.) On appeal before the CIT (Appeals), the assessee relied on the decision of the Supreme Court in MALABAR FISHERIES CO. v. COMMISSIONER OF INCOME-TAX, KERALA, (1979) 120 ITR 49 and contended that since on the dissolution of the firm no transfer of assets had taken place, the provisions of section 32A(5) of the Act were not attracted. The Commissioner (Appeals) however, upheld the action of I.T.O. taking the view that closing of reserve account by transfer of 1/4th of the amount to each partner's account was not a purpose of the undertaking. Feeling aggrieved by the order of CIT (Appeals), the assessee went in appeal before the Tribunal. Relying on the aforesaid decision of the Supreme Court as well as the decision of the Gujarat High Court in ABDUL REHMAN HAJI MIYA v. V.P.MINOCHA, INCOME-TAX OFFICER, AHMEDABAD AND OTHERS, (1977) 106 ITR 821, it was argued by the assessee before the Tribunal that when machinery is divided amongst partners on dissolution of firm, no transfer or utilisation of machinery takes place and therefore, development rebate was not liable to be withdrawn. At the time of hearing of the matter, two learned Members of the Tribunal having differed on the question of allowability of investment allowance, the point of difference, "Whether on the facts and circumstances of the case, the assessee is entitled to benefit of investment allowance ?" was referred to Third Member. The Third Member found that the two branches into which the partners had separated have continued the business and the assets of the business which they had jointly owned had been only distributed among them in specie. The Third Member further found that the reserve was also so distributed and in the continued business the reserve continued as such. In view of the above referred to findings, the learned Third Member of the Tribunal deduced that the assessee had not allowed the reserve to disappear in such a way that it was not available for the purchase of machinery, nor transferred the assets of the firm on its dissolution and as there was no breach of provisions of section 32A(5) of the Act, investment allowance granted could not have been withdrawn. In view of the opinion of the learned Third Member of the Tribunal, the appeal filed by the assessee was allowed by the Tribunal. Thereupon the Commissioner of Income Tax, Surat claimed reference, which claim was accepted by the Tribunal and that is how the above referred to question arises for our consideration in this Reference.