N RAMASWAMI UDAYAR Vs. COMMISSIONER OF INCOME TAX

JUDGEMENT

(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 assessee-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 s. 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 right 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 ?" *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.

(2.) 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. Kandaswami 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 purchases 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.

(3.) 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 s. 154 and withdraw the development rebate. On the date the ITO passed the order on October 31, 1963, the transfer having already taken place within the period of ten years as contemplated under s. 35(11) or eight years as contemplated under s. 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 s. 154 of the Act. It was not even necessary for the ITO first to grant rebate and then to withdraw the same under s. 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. 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 s. 10(2) 9vib) of the Indian I.T. Act, 1922.