Lakshmi Paper Industries vs Commissioner of Income Tax

Ismail, J.—The Income Tax Appellate Tribunal, Madras Bench, u/s 256(1) of the Income Tax Act, 1961, has referred the following

question for the opinion of this court:

Whether, on the facts and circumstances of the case, the Tribunal is right in holding that the assessee is not entitled to allowance of development

rebate to the extent of Rs. 1,69,133"" ?

The assessee was a partnership firm consisting of five partners. For the year ending October 18, 1962, relevant assessment year 1963-64, the

assessee-firm installed machinery to the value of Rs. 6,76,549 and claimed development rebate to the extent of Rs. 1,69,133 calculated at 25 per

cent. of Rs. 6,76,549. The firm was dissolved by the time the assessment was taken up. The date of dissolution of the firm was August 20, 1966.

As per the dissolution deed the machinery in question was taken over by three of the five partners. The development rebate reserve created was

also taken over as a liability by the said three partners. The income tax Officer in the assessment in question came to the conclusion that the

machinery had been sold by the assessee before the expiry of eight years from the end of the previous year in which the machinery was installed

and hence the development rebate was not allowable in computing the total income of the assessee in view of Section 34(3)(b) of the Act. On

appeal, the Appellate Assistant Commissioner, relying on a decision of the Supreme Court in Commissioner of Income Tax, Madhya Pradesh Vs.

Dewas Cine Corporation, , held that the machinery cannot be said to have been sold or otherwise transferred on August 20, 1966, when the firm

was dissolved and that the assets and liabilities were merely distributed among the partners according to their rights under the partnership deed and

that the disallowance of the claim for development rebate was not justified and, therefore, allowed the appeal. Against the order of the Appellate

Assistant Commissioner, the department took up the matter in appeal before the Income Tax Appellate Tribunal. The contention of the department

before the Tribunal was that the grant of development rebate was a concession subject to the fulfilment of the conditions prescribed under the Act

and that u/s 34(3)(a) of the Act the development rebate reserve created should be such that it should be credited to a reserve account to be

utilised by the assessee during a period of eight years for the purpose of the business undertaking and after dissolution the utilisation of the reserve

could only be by the partners for the carrying on of the business in their individual capacity and not by the partnership firm for the purpose of its

business undertaking, since the partnership firm is a unit of assessment distinct from the partners constituting it, the utilisation by the three partners

of the reserve cannot be said to be utilisation of the reserve by the partnership firm and consequently the conditions for making a claim for

development rebate had not been fulfilled, with the result the Income Tax Officer was justified in disallowing the claim for development rebate. The

Tribunal accepted this contention advanced on behalf of the department and allowed the appeal preferred by the department. It is the correctness

of this conclusion of the Tribunal that is challenged in the form of the question referred to this court and extracted already.

Section 33 of the Income Tax Act, 1961, provides for the allowance of development rebate. Section 34 deals with the conditions for such

allowance. Section 34(3)(a) states:

The deduction referred to in Section 33 shall not be allowed unless an amount equal to seventy-five per cent. of the development rebate to be

actually allowed is debited to the profit and loss account of the relevant previous year and credited to a reserve account to be utilised by the

assessee during a period of eight years next following for the purposes of the business of the undertaking, other than-

(i) for distribution by way of dividends or profits ; or (ii) for remittance outside India as profits or for the creation of any asset outside India.

There are provisos to this sub-clause and it is not necessary to refer to the same. Consequently, it is clear from the above statutory provision

that the condition precedent for the allowance of the development rebate is the creation of a reserve of an amount equal to seventy-five per cent. of

the development rebate to be actually allowed and such a reserve should be created by debiting the profit and loss account of the relevant previous

year and the reserve so created is to be utilised by the assessee during a period of eight years next following for the purposes of the business of the

undertaking. In this case, the expression ""assessee"" occurring in the statutory provision must be the assessee who claims the development rebate

and in whose favour the development rebate is to be allowed. In this particular case, as we pointed out already, by the time the Income Tax

Officer came to complete the assessment, the firm of five partners was dissolved and, therefore, the firm had ceased to carry on the business, and

the machinery with reference to which the development rebate was claimed was taken over by a new partnership of three partners out of the

erstwhile five partners and the development rebate reserve originally created was also taken over by them. In such a situation, the reserve was not

available to the five partners who originally constituted the firm and there was no question of that reserve being utilised for the purpose of the

business of the undertaking because the business itself had ceased to exist. Consequently, the conditions precedent for the allowance of the

development rebate as contemplated in Section 34(3)(a) are not fulfilled and, therefore, the Income Tax Officer as well as the Income Tax

Appellate Tribunal were right in holding that the erstwhile partners were not entitled to claim the development rebate. In view of this, we answer

the question referred to this court in the affirmative and in favour of the department. There will be no order as to costs.