South India Steel Rolling Mills v. Commissioner Of Income-Tax, Madras.

Balasubrahmanyan, J.:— The question in this reference is whether the Tribunal was right in upholding the action of the Commissioner of Income-tax in cancelling the grant of development rebate granted to the assessee during the assessment years in question.

2. Development rebate under the I.T Act, 1961, is a capital allowance, like depreciation allowance. It is an allowance granted to the assessee on the cost of plant and machinery which are installed for the business. But, unlike depreciation which is operative year after year on the same machinery at a certain percentage on the written down value of the machinery, development rebate is an once-and-for-all allowance granted in the year of installation alone. Besides, the grant of development rebate is hedged in with special conditions and restrictions. One of the conditions is that the assessee must create a development rebate reserve equivalent to 75 per cent of the development rebate to be granted. That reserve must not be eroded by the assessee either for the declaration of dividends or for remittance outside India. This embargo will subsist for a continuous period of 8 years. Nor should the machinery or plant be sold or otherwise transferred by the assessee to any one else before the expiry of 8 years from the end of the year in which it was acquired or installed. To ensure that these conditions are strictly fulfilled by a person to whom the development rebate is granted, power is given to the ITO under s. 155 of the Act to take rectification proceedings, where the conditions for granting the rebate happened to be subsequently violated by the assessee within the statutory period of 8 years. In the present case, the assessee is a firm of two partners. They got development rebate for items of new machinery which they had installed. The allowance was granted for a number of assessment years, for the corresponding previous year in which those items of machinery had been installed. The assessee-firm got the allowance in each of the assessments on the creation by them of the appropriate reserve in their accounts.

3. It came to pass that within a period of eight years after the installation of these items of machinery, one of the partners of the assessee-firm died. With his death the firm stood dissolved. Thereafter, the surviving partner and the heirs of the deceased partner constituted a fresh partnership. This new firm continued the business with all its assets and liabilities including the items of machinery on which development rebate had been: granted and in respect of which the development rebate reserve had been created in the books of account.

4. On the basis of this subsequent turn of events in the career of the assessee-firm, the Commissioner initiated proceedings for a revision under s. 263 of the I.T Act. At the end of those proceedings, the Commissioner cancelled the development rebate already granted. He did so for the reason that the condition under which the development rebate was granted had not been fulfilled. He pointed out that by reason of the dissolution of the assessee-firm on the death of a partner, the development rebate reserve account ceased to be utilised by the assessee for the full period of 8 years following the installation of the machinery for the purposes of the assessee-firm's undertaking. In this view, he directed the ITO to cancel the development rebate already granted to the items of machinery in question.

5. This order of the Commissioner was upheld when the assessee took the matter in appeal before the Income-tax Appellate Tribunal. The assessee now questions the cancellation of the development rebate as illegal.

6. We, however, must hold that the action of the Commissioner was justified on the basis of a decision rendered by a Bench of this court in Addl. CIT v. Dalmia Magnesite Corpn., [1979] 117 ITR 930. That was also a case of development rebate granted to a partnership firm which went out of existence before the conclusion of the statutory period of 8 years. The Bench held that the development rebate must be treated as having been wrongly granted, because the condition for its grant had been violated in the sense that the assessee did not utilise the development rebate reserve for the full term of 8 years, but went out of existence even before that period came to a close. It was urged before the learned judges on the facts of that case that the business of the dissolved firm was nevertheless continued by a reconstituted firm with the machinery in full use and with the development rebate reserve still intact, having been carried over in the books of the new firm. But the Bench held that the presence of these factors were not enough to prevent the original grant of development rebate from being rendered invalid. The Bench observed that s. 34(3)(a) of the Act which imposed the conditions for the grant of the development rebate clearly laid down that not only should a reserve be created and credited to a separate reserve account, but it was also necessary under that provision that the amount credited to the reserve must be for the purpose of utilisation by the assessee during a period of 8 years next following for the purposes of the business of the assessee's undertaking. The learned judge emphasised-that the expression “the assessee”, occurring in s. 34(3)(a), cannot mean any assessee, but only the assessee who installed the machinery and who obtained the development rebate on the basis of the creation of development rebate reserv???. They observed the factual circumstances in that case under which it became impossible for the assessee-firm to have continued the development rebate for the purposes of business for the full term of eight years, since the firm itself had gone out of existence even before. The learned judges, however, did not regard this supervening dissolution as a circumstance which would warrant a different rendering of the conditions prescribed under s. 34(3)(a) for the cancellation of the development rebate. The learned judges said that whatever might be the reason for the assessee not being in a position to continue the reserve for the full statutory period of 8 years, that would not alter the fact that the rese???ve was not held or continued to be kept for utilisation in the business for the full statutory period. The learned judges observed that the provisions of s. 34(3)(a) were clear enough and had to be applied as they are and it would not be proper to change the wording of the statute in order to exclude the application of the section to hard cases of the kind which was before them.

7. In the present case, the position is much the same as in the Division Bench ruling we have cited. The assessee-firm in this case became extinct before the expiry of the eight-year period. What came afterwards was a different entity, even if it comprised only the surviving partner and the deceased partner's legal representatives. In the case cited, the assessee-firm came to an end, because one of the partners in that firm, which was a limited company, became extinct by loss of its identity by a process of amalgamation. The learned judges held that this resulted in the extinction of the assessee-firm. In the present case, the assessee-firm came to an end when one of the two partners breathed his last. The decision squarely applies to the present case.

8. Mr. S.V Subramaniam, learned counsel for the assessee, submitted that once the development rebate is granted under s. 33 of the I.T Act, 1961, it can be cancelled only if the assessee transfers the machinery within eight years from the year of its installation. His thesis was that when a partnership becomes dissolved by the death of a partner, but is immediately reconstituted between the surviving partner or partners and the heirs of the deceased partner, the assets of the business can in no sense be regarded as undergoing a transfer from the firm, which had become dissolved, to the firm which was brought into existence, in the wake of the dissolution of the earlier firm. Learned counsel submitted that all that happens in such a case cannot be regarded as a transfer at all. He pointed out that the legal representatives of a deceased partner represent the dead partner's estate and in that capacity they are entitled to the interest of the deceased partner in the dissolved firm. That being so, along with the surviving partner or partners in the firm, they would be entitled to all the assets of the partnership subject to the liabilities. In such a situation, if they once again bring themselves together under a partnership agreement, that process by no means involves a transfer inter vivos of any of the existing assets of the business, either in the gross, or individually. Learned counsel submitted that precisely the same legal incidents occur when the sole proprietor of a business takes in another person and thenceforward begins to carry on business in partnership with that other. In such a case, all the assets of the sole proprietary business cannot be regarded as having been the subject of a transfer, properly so called, from the sole proprietary business to the partnership business. For the later position, learned counsel, Mr. Subramaniam, cited a decision of a Division Bench of this court which was particularly apposite in the context of the provisions of s. 34(3) of the Act. [Commissioner Of Income-Tax v. Sree Kaliswari Colour Match Works, [1978] 112 ITR 346 (Mad)].

9. We have earlier referred to the provisions in s. 34(3) to the effect that a development rebate properly granted might yet be lost to the assessee, in the event of the assessee selling or otherwise transferring the machinery in question within a period of eight years. This provision is enacted in s. 34(3)(b) of the Act. The case cited by Mr. Subramaniam discusses the applicability of s. 34(3)(b) of the Act in the context of a reconstitution of an existing firm with more or less the same partners, but in different capacities. The learned judges held that, in such a case, there was no transfer of the assets of the business from the firm as originally constituted in favour of the reconstituted firm. In the course of their judgment, they relied on an earlier decision of this court in Commissioner Of Income-Tax, Madras v. Janab N. Hyath Batcha Sahib.*, [1969] 72 ITR 528 (Mad) in which it was held, in the context of a different provision in the I.T Act, that where an assessee took in another person for the purpose of constituting a partnership with that other person, the assessee could not be regarded as having sold the assets of his business to the firm which he was newly forming with himself as one of the partners. Mr. Subramaniam pressed into service the rulings in these decisions in support of his submission that in the present case there cannot be said to be any transfer involved merely because, after the death of a partner, the business was constituted into a fresh partnership between his heirs and the surviving partner.

10. We do not think that the question of transfer at all arises for consideration in the present case. It is, therefore, unnecessary to go into that question. A sale or transfer of the machinery, which had obtained development rebate and which is effected within the statutory period of eight years is not the only occasion provided by the statute for a cancellation of the development rebate granted to that item of machinery. As we have earlier mentioned, the statute requires, as the very foundation for the grant of development rebate, the creation of a statutory reserve up to a limit of 75 per cent of the development rebate to be granted on the machinery. This provision is set out in s. 34(3)(a) of the Act. While laying down the machinery for the creation of a development rebate reserve, in this fashion, this provision further requires that this reserve amount must be utilised by the assessee during a period of eight years next following for the purposes of the business of the undertaking. There is an express exclusion of two acts which are regarded by the Legislature as not for the purposes of the business of the undertaking. They are:

(i) distribution by way of dividend or profits;

(ii) remittance outside India either as profits or for the creation of any assets outside India.

11. The position, therefore, can be summed up thus: As part of the fundamental requirement for the grant of development rebate, the creation of a development rebate reserve is a necessary first step. But that alone is not enough. The reserve account has got to be utilised by the assessee for the purposes of the business of the undertaking for a period of eight years running immediately following the installation of the machinery. The implications of these conditions are that where the assessee does not utilise the reserve account for the purposes of his business during a period of eight years, then the very condition on which the rebate is granted would remain unfulfilled. Hence, the original grant of development rebate itself must perforce be regarded as having been made without the necessary condition being fulfilled therefor.

12. In Dalmia Magnesite Corporation's case, [1979] 117 ITR 930, already cited, this court had upheld the action of the ITO who cancelled the development rebate originally granted by him on the score that the development rebate reserve account was not continuously used by the assessee-firm for a period of eight years. As already noticed, the abrupt discontinuance arose in that case owing to the assessee-firm going out of existence. Apart from the factual distinction between that case and the present one, there is also a difference in the procedure adopted for the cancellation of the development rebate. In Dalmia Magnesite Corporation's case, [1979] 117 ITR 930 (Mad), the ITO himself stirred into action under s. 155(5) to cancel the development rebate already granted by him. What happened in the present case was different. It was the Commissioner who had to invoke his suo motu powers of revision under s. 263 of the Act to apply the corrective. We may point out that no question was raised before us by the assessee's learned counsel as to the competence or the jurisdiction of the Commissioner to take proceedings in exercise of the revisional powers.

13. Learned counsel, however, referred to s. 155(5) of the Act to illustrate the circumstances in which development rebate properly granted to an assessee can be subsequently undone. Learned counsel said that s. 155(5) provides for a rectification of the assessment, so as to cancel the grant of development rebate already given, only in certain cases. All of them, he said, involved the assessee's overt acts in one respect or another. The assessee's acts would entail cancellation of the development rebate in cases where the machinery in question is sold or transferred within eight years; where there has been a dissipation by the assessee of the development rebate reserve either by a distribution of dividends or by remittance of the money outside India or by other acts of misuse. Learned counsel said that where there are no overt acts on the part of the assessee of the kinds mentioned above either touching the machinery in question or touching the development rebate reserve created in respect of that machinery, then the ITO would be powerless to withdraw the development rebate already granted by invoking s. 155(5). Learned counsel submitted that in a case such as the present where the period of eight years could not be gone through because of the supervening circumstance of a dissolution of the assessee-firm owing to the untimely death of a partner, it could not be said that there has been any overt act on the part of the assessee-firm which tends to violate the mandatory conditions of s. 34(1)(a) such as might enable the ITO to take appropriate rectificatory proceedings under s. 155(5) of the Act. The submissions made by Mr. Subramaniam on the scope of the ITO's rectificatory power under s. 155 and the circumstances in which alone it could be invoked do not arise in the present case. They might possibly serve as a later day criticism of the tacit assumption on which the action of the ITO under s. 155(5) was upheld by this court in the Dalmia Magnesite Corporation's case, [1979] 117 ITR 930. The present case is not one of cancellation of development rebate under s. 155(5) of the Act, but a revision order passed by the Commissioner under s. 263. The scope of s. 155(5) and the right occasions for exercise by the ITO of his power under this section do not, therefore, call for examination in this case. They might provoke discussion in an appropriate case considering that in the Dalmia Magnesite Corporation, [1979] 117 ITR 930 decision, this court had no occasion to go into the question of the jurisdiction of the ITO under s. 155(5). So far as the present case is concerned, no question was raised by the assessee either before the Commissioner or before the Tribunal or even before us as to the competence of the Commissioner to exercise his powers of revision in a matter of this kind. Indeed, the only point urged by the assessee even before the Commissioner was that there had not been any transfer, as such, of the machinery or plant which had obtained development rebate, and hence the rebate already granted could not be set aside; This contention raising an inquiry as to whether there was or was not a transfer of the machinery, really cannot arise when the assessee-firm itself had gone out of business within a period of eight years. The one and only enquiry then would be whether, in the events that happened, the conditions laid down under s. 34(1)(a) can be said to have been fulfilled to the letter in this case. In other words, what is in point in this case is not a positive breach by the assessee of the conditions subsequently prescribed either under s. 34(1)(a) or under s. 34(1)(b) of the Act, but a basic failure of the fact-situation in the assessee's case to fit in with the terms of the statutory grant of development rebate, implicit in the section. On our construction of the general statutory imperative in s. 34(1)(a) and on the authority of the Division Bench ruling in Dalmia Magnesite case, [1979] 117 ITR 930, our answer to the question of law in this case must be in the affirmative and against the assessee. The assessee shall pay the costs of the department. Counsel's fee Rs. 500 one set.

14. As we concluded the judgment, Mr. Subramaniam for the assessee made an oral application for leave to appeal to the Supreme Court. We were informed that against the judgment of this court in Addl. CIT v. Dalmia Magnesite Corporation, [1979] 117 ITR 930, this court has already granted a certificate of fitness for appeal to the Supreme Court. It stands also to reason, therefore, that we should grant a similar leave in this case. We do so accordingly.