Commissioner of Income Tax vs P.K. Ramaswamy Raja

K.A. Thanikkachalam, J.—Pursuant to the direction given by this Court in TCP No. 119 of 1981 dt. 27th October, 1981, the Tribunal

referred the following question for the opinion of this Court under s. 256(2) of the IT Act, 1961 :

Whether, on the facts and in the circumstances of the case and having regard to the provisions of s. 2(47) of the IT Act, 1961, the Tribunal was

correct in law in holding that when the HUF business was taken over by the partnership firm, there was no transfer or relinquishment or

extinguishment of rights and hence the provisions of s. 155(5) of the IT Act for the asst. yr. 1972-73 cannot be validly invoked for withdrawing

development rebate granted earlier ?

The assessee is an HUF consisting of the Kartha, Sri Ramasamy Raja, his wife, three minor sons and three minor daughters. The ITO noticed

that this family was allowed development rebate in the asst. yr. 1967-68 to the extent of Rs. 33,353 but it was carried forward and set off in

1972-73 assessment. With effect from 1973-74 assessment, the assessee formed a partnership firm by name, M/s Sri Ram Products. Since the

assets of the family had been taken over by the new firm, the development rebate allowed earlier had to be withdrawn under s. 155. Hence, the

ITO issued a notice, and there was no reply. The ITO revised the assessment for the asst. yr. 1972-73 under s. 155(5) by order dt. 21st

February, 1995. On appeal before the AAC, the assessee contended that the ITO failed to consider the representation made by the authorised

representative as well as the fact that there was no transfer. The AAC held that the assets were transferred from the HUF to the firm and

accordingly he upheld the order of the ITO.

Aggrieved, the assessee filed appeal before the Tribunal. According to the Tribunal, the family was carrying on business of manufacture and sale

of surgical dressing and absorbent cotton wool and other allied products under the name and style of Sri Ram Products. A partial partition was

effected on 28th March, 1963 by which the capital employed in the business was divided equally and the business was taken over and carried on

by the Kartha and the partnership was formed on 4th April, 1972 consisting of the Karta and his eldest son. The other two sons being miners were

admitted to the benefits of partnership. Therefore, according to the Tribunal, what happened was that the property of the HUF became the

property of the partnership firm consisting of the very same coparceners of the family. According to the Tribunal, though the HUF ceased to hold

the property the coparceners of the HUF held the property as partners. Therefore, there was no transfer of property involved in this process.

Reliance was placed upon the decisions reported in the case of Commissioner of Income Tax Vs. Janab N. Hyath Batcha Sahib, , D. Kanniah

Pillai Vs. Commissioner of Income Tax, , Mahavir Transport Co. Ltd. Vs. Commissioner of Income Tax, Gujarat-V, Ahmedabad, and A.

Subbiah Nadar Vs. Commissioner of Income Tax, . Accordingly, the Tribunal allowed the appeal filed by the assessee.

Before us, the learned standing counsel for the Department submitted that the Tribunal was not correct in holding that there was no transfer

when the assets of the HUF were taken over by the newly constituted firm. Development rebate was granted to the HUF in the asst. yr. 1967-68.

The HUF is entitled to the development rebate for the period of eight assessment years. In the meanwhile, there was a partition in the family on

28th March, 1963. The divided members of the HUF formed a partnership from 4th April, 1972. The assets of the HUF were taken over by the

partnership firm. Therefore, according to the learned standing counsel, as per the provisions of s. 34(3)(b) and s. 155(5) of the IT Act, 1961 in as

much as the assets to which development rebate was already granted, were transferred otherwise the development rebate granted is liable to be

withdrawn. According to the learned standing counsel, the HUF who is the assessee and the partnership firm are two different entities. It was

submitted that the word otherwise transferred should be given a widest meaning so as to take note of all kinds of transfer of ownership in whatever

kind it may be. The learned standing counsel further submitted that the Tribunal was not correct in holding that when the HUF assets were taken

over by the partnership firm, it is not transfer. According to the learned standing counsel, the decisions relied on by the Tribunal are not applicable

to the facts of this case. The learned standing counsel relied on the decision of this Court in the case of Baldevji Vs. Commissioner of Income Tax,

in order to support his contention.

Learned standing counsel further submitted that according to the facts arising in the present case, the development rebate was granted after the

partition in favour of the HUF. Therefore, according to the learned standing counsel, the Tribunal was not correct in holding that there is no transfer

in this case.

On the other hand, the learned counsel for the assessee while supporting the order passed by the Tribunal submitted that even in the case of

''otherwise transfer'' there must be delivery of possession for consideration. In the concept of otherwise transfer, there is no consideration.

Therefore, there is no transfer. According to the learned counsel s. 2(47) of the Act defines the word ""transfer"". Sale will not include otherwise

transfer. In the present case there is no sale. There is also no consideration for the otherwise transfer when the assets of the HUF became the

assets of the partnership while the members of the HUF and the partners of the firm are same persons.

We have heard the learned counsel for the Department as well as the learned counsel for the assessee. The fact remains that the ITO was

processing the assessment from the asst. yr. 1972-73. The assessee is an HUF consisting of the Kartha, Shri Ramasamy Raja, his wife, three

minor sons and three minor daughters. Development Rebate was granted to the HUF for the asst. yr. 1967-68. There was a partition on 28th

March, 1963 and according to the Tribunal, there was a partial partition which took place on that date and the capital employed in the business

was divided equally and the business was taken over and carried on by the Kartha and the coparceners. The partnership firm was formed on 4th

April, 1972 consisting of the Kartha and his eldest son. The other two sons being minors, were admitted to the benefits of the partnership.

Therefore, the assets belonging to the HUF were taken over by the partnership consisting of Kartha and his eldest son and the two minor sons

were admitted to the benefit of the partnership. It remains to be seen that the development rebate was granted in favour of the HUF in the asst. yr.

1967-68. The HUF is entitled to enjoy the benefit of the development rebate for a period of 8 years from the asst. yr. 1967-68. Since the assets

of the HUF were taken over by the partnership, on 4th April, 1972, the Department was of the view that the development rebate already granted

is liable to be withdrawn. If there is otherwise transfer of the assets belonging to the HUF, in favour of the partnership, then the Department is

entitled to withdraw the development rebate granted in favour of the HUF.

The point for consideration is ""Whether there is any otherwise transfer occurred while the assets of the HUF were taken over by the partnership

firm ?

In the case of Sunil Siddharthbhai Vs. Commissioner of Income Tax, Ahmedabad, Gujarat, , the Supreme Court while considering the

provisions of s. 45 of the IT Act, 1961 held that,

Where a partner of a firm makes over capital assets which are held by him to a firm as his contribution towards capital, there is a transfer of a

capital, asset within the terms of s. 45 of the IT Act, 1961, because an exclusive interest of the partner in personal assets is reduced, on their entry

into the firm, into a share interest.

In the case of Baldevji vs. CIT (supra) while considering the provisions of s. 33 and s. 155(5), this Court held as under :

The normal position of a firm under the scheme of the IT Act, 1961 is that it is an entity assessable on its own. It is an entity distinct even from its

partners. Apart from various charging and machinery provisions of the Act, which regard a firm as possessing a taxable personality of its own, the

definition of the expression ""person"" occurring in s. 2(31)(iv) of the IT Act, 1961, expressly includes a firm. There is nothing in the subject or

context of s. 155(5), wherein the expression ""person"" occurs, which would render repugnant the application of the definition of the expression

person"" occurring in s. 2(31)(iv) as including a firm.

The expression ""Transfer"" occurring in s. 155(5) has not been defined. However, in legal parlance, it bears a wide connotation. Even the transfer of

a mere fractional interest in property would come within the conception of transfer of property. There is an indication in s. 155(5) itself that

Parliament intended the term ""transfer"" to be understood in the widest sense possible. This is seen from the expression ""sold or otherwise

transferred"". The transfers, as it were, are divided into two categories, sales and non-sales. The expression ''otherwise'' exhausts all the categories

of transfers other than sales which are transfers of a kind for consideration. The expression ""otherwise"" occurring in a combination of words has

sometimes been regarded as indicating the application of the ejusdem generis rule. The subject and context of s. 155(5) clearly point to the

intention of Parliament that the machinery which has obtained a grant of development rebate by reason of its having come under the ownership of

the assessee should continue to remain in the same ownership and should not be parted with by him for a period of at least eight years from the

date of installation. In this context, therefore, any parting with that asset would involve a breach of the statutory condition, subject to which alone

development rebate is originally granted. It stands to reason, therefore, that the expression ""otherwise transferred"" must be given such wide

amplitude of meaning as is consistent with its ordinary connotation. There can be no warrant for cutting down that meaning, to any extent. When

persons who become partners bring into the partnership firm their separate properties, what actually happens is a change in the ownership of

everyone of those properties. What was property of an individual a moment before the formation of the partnership becomes, by virtue of the

terms of the partnership contract, the property of the partnership firm as such. Sec. 14 of the Partnership Act speaks of property originally

brought"" into the stock of the firm by partners as forming part of the property of the firm. But the process of bringing separate properties of the

partners into the joint stock of partnership assets itself involves a change of ownership.

Hence, where a sole proprietary concern is converted into a partnership and the machinery which was the property of the sole proprietor becomes

the property of the firm, there is a ""transfer"" of ownership of the machinery and if development rebate had been granted in respect of such

machinery, it is liable to be withdrawn under the provisions of s. 155(5) of the IT Act, 1961.

The above decision rendered by this Court was followed by the Andhra Pradesh High Court in the case of Commissioner of Income Tax Vs.

Suresh Chandra Jain, wherein it was held as under :

We may refer to a more recent judgment of the Madras High Court in Baldevji Vs. Commissioner of Income Tax, . This was also a case where

on the individual transferring the assets in respect of which development rebate was originally granted, the Revenue withdrew the rebate acting

under s. 155(5) of the Act. The correctness of the Revenue''s action was questioned. The Madras High Court referred to Commissioner of

Income Tax Vs. Janab N. Hyath Batcha Sahib, and referred to the Court''s finding that the transaction was neither a sale nor a transfer otherwise.

The view that it was not a transfer otherwise was not followed by the Madras High Court in Baldevji''s case (supra) on the short ground that the

clear-cut distinction made by the Supreme Court between the legal consequence of the formation of a partnership on the one hand and the

dissolution of a partnership on the other was not followed by the Court. We may refer to the following observations at page 782 :

''Notwithstanding the clear-cut distinction made by the Supreme Court between the legal consequences of the formation of a partnership on the

one hand, and the dissolution of partnership on the other, as respects the plural character of the transactions, this Court in Commissioner of Income

Tax Vs. Janab N. Hyath Batcha Sahib, seems to have thought that there was no material difference between the two terminal transactions. For

coming to that conclusion, this Court not only relied on the observations of the Supreme Court, but set them down verbatim in a quotation. The

quotation, however, is not of a contiguous passage of the Supreme Court''s judgment, but widely separated portions of the Supreme Court''s

judgment taken from different parts of the judgment, and jointed together with the help of dots. Without any further discussion of the Division

Bench ruling, therefore, we should express our preference, as we must abide by the decision of the Supreme Court rather than be led by the

observations contained in the judgment of this Court.""''

It would, therefore, be seen that while the view that the impugned transaction was not a sale was held to be correct, the decision in Baldevji''s case

(supra) recognised that there is a ""transfer otherwise"" within the meaning of s. 34(3)(b) of the Act and, consequently s. 155(5) of the Act becomes

applicable. The Bench held that when an individual throws his individual assets into the common stock of a partnership firm of which he becomes a

partner, there is no sale, nevertheless, there is a transfer otherwise. The learned judges deciding Baldevji''s case (supra) came to the conclusion that

the expression ""sold or otherwise transferred"" occurring in s. 34(3)(b) of the Act is fairly wide and the subject and the context of s. 155(5) clearly

pointed out to the intention of Parliament that the machinery which was obtained on a grant of development rebate by reason of its having come

under the ownership of the assessee should continue to remain in the same ownership of the assessee and should not be parted with by him for a

period of at least eight years from the date of installation. The High Court held that :

It stands to reason, therefore, that the expression ''otherwise transferred'' must be given such wide amplitude of meaning as is consistent with its

ordinary connotation. There cannot be a warrant for cutting down that meaning to any extent.

The same view was also taken by the Allahabad High Court in the case of TARUN BHAI Vs. COMMISSIONER OF Income Tax., . In this

decision, the Allahabad High Court followed the decision of the Andhra Pradesh High Court reported in Commissioner of Income Tax Vs. Suresh

Chandra Jain, .

In the case of S.M. Chemicals and Electronics Pvt. Ltd. Vs. Commissioner of Income Tax, the Bombay High Court while considering the

provisions of ss. 32A(5), 34(3)(b), 155(4A) and 155(5) of the IT Act, 1961 held that on a reading of the provisions of ss. 32A(5), 34(3)(b),

155(4A) and 155(5) of the IT Act, 1961, the intention of the legislature is to withdraw the benefit of development rebate given to the assessee in

respect of certain machinery if such is sold or ""otherwise transferred"" by the assessee within the stipulated period. The expression ""otherwise

transferred"" is a very wide expression and takes within its sweep transfer of the assets from the assessee to another person by any means or mode

whatsoever.

Thus, considering the facts arising in this case, in the light of the judicial pronouncements cited supra, we are also of the opinion that in as much

as while the assets belonging to the HUF were taken over by the partnership firm, there is transfer otherwise as contemplated under ss. 34(3)(b)

and 155(5) resulting in the withdrawal of the development rebate already granted in favour of the HUF. Therefore, the Tribunal was not correct in

holding that there is no transfer while the assets belonging to the HUF were taken over by the partnership firm. In this view of the matter, we

answer the question referred to us in the negative and in favour of the Department. No costs.