COMMISIONER OF INCOME TAX Vs. S KRISHNA RAO

JUDGEMENT

(1.) The following two questions of law are referred to this court for its opinion u/s. 256(1) of the IT Act, 1961.

(2.) The reference relates to the asst. yr. 1970-71. The assessee was a Hindu joint family consisting of the Karta and three major sons. During the accounting year relevant for the asst. yr. 1970-71, the family purchased new machinery of the value of Rs. 1,38,977 and secured deduction on account of development rebate to the extent of Rs. 48,648. On 10-5-1972, there was a partition of the joint family assets including the business of the family. After the partition, it appears, the four coparceners of the erstwhile joint family constituted themselves into a partnership and carried on the business which was previously carried on by the joint family. The ITO held the view that, by reasons of the partition of the joint family assets including the properties, there was a violation of the conditions of s. 34(3)(b) of the IT Act, 1961 (hereinafter referred to as the Act) governing the grant of development rebate rebate and consequently applied the provisions of s. 155(5) of the Act and rectified the assessment of the joint family for the year 1970-71. In the order of rectification, the ITO withdraw the development rebate originally granted. The assessee appealed to the AAC challenging the correctness of the withdrawal of the development rebate u/s. 155(5) of the Act. The limited plea taken before the AAC was that the partition of the assets of the joint family did not amount to transfer under law and consequently there was neither a sale nor transfer within the meaning of s. 34(3)(b) of the Act. The AAC accepted the above contention and held that, inasmuch as the machinery, in respect of which development rebate was allowed, was not the subject matter of either a sale or transfer, the ITO was in withdrawing the development rebate initially allowed. The AAC accordingly allowed the appeal. Against the order of the AAC, the revenue filed an appeal before the ITAT. It was urged before the Tribunal that in any event, the partition where on the machinery, in respect of which development rebate was initially allowed, was thrown into the Common Stock of the partnership consisting of the four coparceners of the erstwhile joint family, there was a transfer and consequently, there was a violation of the conditions of s. 34(3)(b) of the Act. The Tribunal rejected the contention of the revenue and held that partition of property by metes and bounds between the members of the joint family did not involve any transfer of property. The Tribunal did not specifically deal with the contention that there was transfer of the assets to the partnership firm. The Tribunal dismissed the appeal filed by the department. The CIT applied for a reference under s. 256(1) of the Act and the Tribunal referred the above mentioned questions for the opinion of this court.

(3.) It is settled law that, so far as partition of the joint family assets is concerned, it does not amount to a transfer at all. Reference may be invited to the decision of the Supreme Court in CIT v. M. K. Stremann (1965) 56 ITR 62 (SC) where the Supreme Court clearly held that the partition of the assets of a joint family does not amount to a transfer in the eye of law. The same view was taken in a number of other cases and it is not necessary to multiply authorities for this purpose. It, therefore, follows that when the machinery, in respect of which development rebate was allowed, was partitioned between the coparceners of the joint family, there was in law no transfer. As regards the contention that, in any event, there was a transfer when the dividend coparceners threw the same machinery again into the common stock of the partnership, the position here again is fairly settled. When a person throws his individual property into the common stocks of partnership abandoning his separate rights over the same with the intention or treating such property as the property of the partnership firm under s. 14 of the Indian Partnership Act, there is no transfer by the partner to the partnership firm. This proposition flows directly from the judgment of the Supreme Court in Narayanappa v. Bhaskara Krishnappa AIR 1966 SC 1300. Reference may also be invited to the decision of this court in CIT v. A. V. Bhanoji Rao (1983) 33 CTR (AP) 38 : (1983) 142 ITR 706 (AP) wherein this court has taken the same view that, when a partner impresses his individual property with the character of partnership property, there is in law no transfer and much less a sale. It must, therefore, be said that, even when the divided coparceners threw the machinery, which fell to their respective shares, into the common stock of partnership, there is neither a sale nor transfer within the meaning of s. 34(3)(b) of the Act and consequently, the provisions of s. 155(5) of the Act have no application.