COMMISSIONER OF INCOME TAX Vs. SHANTILAL RUGNATHJI DESAI

JUDGEMENT

(1.) THE assessee, an individual, was allowed development rebate in the asst. yrs. 1969 70 to 1971 72 in the sum of Rs. 10,942, Rs. 8,642 and Rs. 13,327 respectively in respect of plant and machinery installed during the relevant previous years. The assessee, however, converted his proprietary business into a partnership business w.e.f. April 1, 1971. Since conversion, the business has been carried on in the name and style of Billimoria Electricity Supply Company. He became one of the partners of that firm having 20 paise share in a rupee in the profit and loss thereof. In the asst. yr. 1972 73, the ITO learned about the conversion of the proprietary business into a partnership one, whereupon he invoked S. 34(3)(b) of the IT Act, 1961 (hereinafter called "the Act"), which provides as under :

(2.) SUB s. (5) of S. 155 provides that where an allowance by way of development rebate has been made wholly or partly to an assessee in respect of the ship, machinery or plant installed after the 31st day of December, 1957, in any assessment year under S. 33 or under the corresponding provisions of the 1922 Act, and subsequently at any time before the expiry of eight years from the end of the previous year in which the ship was acquired or the machinery or plant was installed, the ship, machinery or plant is sold or otherwise transferred by the assessee to any person other than the Government,a local authority, a corporation established by a Central, State or Provincial Act or a Government company as defined in S. 617 of the Companies Act, 1956, or in connection with any amalgamation or succession referred to in Sub S. (3) or Sub S. (4) of S. 33, the development rebate originally allowed shall be deemed to have been wrongly allowed and the ITO may, notwithstanding anything contained in the Act, recompute the total income of the assessee for the relevant previous year and make the necessary amendment. Accordingly, the ITO ordered withdrawal of the development rebate allowed earlier in view of S. 34 (3) (b) r/w S. 155(5) of the Act. The assessee, feeling aggrieved against the said order, appealed to the AAC who held that the conversion of the proprietary business into partnership business did not involve a transfer of the plant and machinery in question. He, therefore, allowed the appeal and set aside the order of the ITO against which the Revenue preferred an appeal to the Tribunal. The Tribunal dismissed the appeal of the Revenue relying on its earlier decisions in Poonamchand F Shah vs. ITO and Abdulrahim Umarbhai Maniar vs. ITO, dated January 31, 1975 in I.T.As Nos. 905 and 906/Ahd/1975 76 and 668 and 669/Ahd/69 70 respectively. The Revenue, therefore, claimed a reference and the following question has been referred for our opinion :

(3.) IN the context of the expression "otherwise transferred" used in cl. (b) of Sub S. (3) of S. 34 as well as Sub S. (5) of S. 155 of the Act, the Kerala High Court in Abdul Rahim (A.), Travancore Confectionary Works vs. CIT (1977) 110 ITR 595 (SC), held that when the business in the manufacture and sale of confectionery owned by the assessee was converted into a partnership business of the assessee and his son and the firm took over the assets and liabilities of the said business, there was an extinguishment of the right of the assessee in the property which was exclusively his and it was brought in for the purpose of the business of the firm and amounted to a "transfer" of a capital asset within the meaning of S. 2(47) r/w S. 34(3)(b) and S. 155(5) of the Act.