Addl. Commissioner Of Income-Tax, Mysore v. M.A.J Vasanaik

Venkataramaiah, J.:— Since the point of law involved in the questions referred to us by the Income-tax Appellate Tribunal, Bangalore Bench, in the above two cases under s. 256(1) of the Income-tax Act, 1961 (hereinafter referred to as “the Act”), is the same we propose to dispose of these two cases by this common order.

2. In I.T.R.C No. 65/74, the assessee is Mr. M.A.J Vasanaik and the assessment year is 1964–65. During the assessment year, the assessee claimed development rebate under s. 33 of the Act in respect of certain machinery and plant which was being used by him in business. After some protracted proceedings, the case was remanded to the ITO to pass a fresh order of assessment in accordance with law. The ITO disallowed the claim made by the assessee under s. 33 of the Act on two grounds,— (i) that the assessee had not created the necessary reserve in accordance with the provisions of the Act; and (ii) that the machinery and plant had been transferred to a firm within eight years. In the appeal filed by the assessee against the said order of assessment, the AAC by his order dated March 7, 1972, upheld the order of the ITO disallowing the development rebate on the latter ground, namely, that the proprietary concern of the assessee which owned the assets in respect of which development rebate was claimed, had been converted into a partnership with effect from April 1, 1965, in which the assessee was also a partner and the said assets had become the partnership assets. He, however, held that the first ground on which the ITO had disallowed the rebate was not available. Against the order of the AAC, the assessee filed an appeal before the Tribunal. The Tribunal allowed the appeal holding that when a partnership was formed for the first time and one of the members of the partnership brought into the firm his individual assets, there was no transfer in the eye of law which attracted s. 34(3)(b) of the Act. In doing so, the Tribunal relied upon the decision of the High Court of Madras in Commissioner Of Income-Tax, Madras v. Janab N. Hyath Batcha Sahib.*, [1969] 72 ITR 528. At the instance of the department, the following two questions have been referred to this court:

“1. Whether, on the facts and in the circumstances of the case, the Tribunal is right in law in holding that the development rebate claim of the assessee of Rs. 15,260 was allowable?

2. Whether, on the facts and in the circumstances of the case, the Tribunal is right in law in coming to the conclusion that the transaction in the instant case, treating the individual assets of the assessee as the property of the partnership firm, did not amount to a transfer which disentitled the assessee from claiming the development rebate?”

3. In I.T.R.C No. 118/75, the assessee is Mr. V.G Krishna Murthy. The assessment year is 1969–70. The assessee had been allowed development rebate under s. 33 of the Act in respect of certain plant and machinery exclusively owned by him during the assessment year in question. Subsequent, he converted his individual business in which the machinery and plant in respect of which development rebate had been allowed were employed into a partnership firm in which he was also a partner. Thereafter, the ITO initiated action under s. 154 read with s. 155 of the Act to withdraw the development rebate. After hearing the assessee, the ITO passed an order withdrawing the development rebate. The appeal filed by the assessee against the order of the ITO was dismissed by the A AC. In the second appeal filed before the Tribunal, the Tribunal affirmed the order passed by the authorities below and dismissed the appeal holding that on the conversion of individual business into a partnership business, there was a transfer of assets which attracted ss. 34(3)(b) and 155(5) of the Act. In reaching this conclusion which was contrary to its decision in the case of Mr. M.A.J Vasanaik referred to above, the Tribunal relied upon the Full Bench decision of the Kerala High Court in A. Abdul Rahim v. CIT, [1977] 110 ITR 595. At the instance of the assessee the Tribunal has referred the following question to this court in the above case:

“Whether, on the facts and in the circumstances of the case, the Tribunal is justified in law in confirming the withdrawal of development rebate amounting to Rs. 24,518?”

The relevant provisions of the Act which arise for consideration in these cases are ss. 34(3)(b) and 155(5) of the Act which read as follows:

“34. (3)(b) If any ship, machinery or plant is sold or otherwise transferred by the assessee to any person at any time before the expiry of eight years from the end of the previous year in which it was acquired or installed, any allowance made under section 33 or under the corresponding provisions of the Indian Income-tax Act, 1922 (11 of 1922), in respect of that ship, machinery or plant shall be deemed to have been wrong made for the purposes of this Act, and the provisions of sub-section (5) of section 155 shall apply accordingly:

Provided that this clause shall not apply—

(i) where the ship has been acquired of the machinery or plant has been installed before the 1st day of January, 1958; or

(ii) where the ship, machinery or plant is sold or otherwise transferred by the assessee to the Government, a local authority, a corporation established by a Central, State or Provincial Act or a Government company as defined in section 617 of the Companies Act, 1956 (1 of 1956); or

(iii) where the sale or transfer of the ship, machinery or plant is made in connection with the amalgamation or succession, referred to in subsection (3) or sub-section (4) of section 33. The relevant part of s. 155(5) of the Act reads:

“155. (5) Where an allowance by way of development rebate has been made wholly or partly to an assessee in respect of a ship, machinery or plant installed after 31st day of December, 1957, in any assessment year under section 33 or under the corresponding provisions of the Indian Income-tax Act, 1922 (11 of 1922), and subsequently—

(i) at any time before the expiry of eight years from the end of the previous year in which the ship was acquired or the machinary or plant was installed, the ship, machinery or plant is sold or otherwise transferred by the assessee to any person other than the Government, a local authority, a corporation established by a Central, State or Provincial Act or a Government company as defined in section 617 of the Companies Act, 1956 (1 of 1956) or in connection with any amalgamation or succession referred to in sub-section (3) or sub-section (4) of section 33; or………

the development rebate originally allowed shall be deemed to have been wrongly allowed, and the Income-tax Officer may, notwithstanding anything contained in this Act, recompute the total income of the assessee for the relevant previous year and make the necessary amendment; and the provisions of section 154 shall, so far as may be, apply thereto, the period of four years specified in sub-section (7) of that section being reckoned from the end of the previous year in which the sale or transfer took place or the money was so utilised.”

4. The contention of the assessee in these cases is that on the conversion of an individual business into a partnership in which the owner of the individual business is also a partner and the assets of the individual business being treated as partnership assets, no transfer of the assets of the individual takes place in the eye of law. The expressions “ownership”, “persons”, “property” and “transfer of a right” are used in different senses in different contexts. Sometimes they are given a wide connotation and sometimes given limited meaning. Ownership can be individual or collective. Persons may be natural persons or legal persons. In taxation laws sometimes even entities like HUF or firm are also called as persons. Property may consist of tangible or intangible things. Transfer of a right may be brought about either by acts of law or acts of parties which are also known as acts in law. Title to a right is acquired or lost by the existence of certain facts which are generally called vestitive facts. An investitive fact confers a right and a divestitive fact extinguishes a right. When the title to a thing is acquired for the first time by a person then he is known to have the original title to it. All other titles are derivative. Similarly when titles are just lost and not transferred to another person, the facts bringing about such extinction are called extinctive facts. When titles are transferred such transfers are brought about by facts which are called alienative facts. The laws in force recognise several ways in which rights are either acquired or lost. Sometimes a right is transferred by an individual who is its owner to himself in another capacity, e.g, as a trustee. Every passing of title is not, however, a transfer. Whenever we think of a transfer, we think of an alienative fact and not an extinctive fact. A Hindu coparcener throwing his exclusive property into the joint family hotchpot brings about the extinction of his exclusive right even without the consent of the other coparceners. This act is not considered as a transfer: vide Commissioner Of Income Tax, Gujarat v. Keshavlal Lallubhai Patel ., [1965] 55 ITR 637 (SC), Goli Eswariah v. CIT, [1970] 76 ITR 675 (SC), Pushpa Devi v. Cit, New Delhi. , [1977] 109 ITR 730 (SC) and CIT v. Dr. (Mrs.) Sita Bateja, [1973] 91 ITR 193 (Mys). Similarly, when a Hindu widow surrendered in favour of the whole body of reversioners the widow's estate held by her and allowed the reversioners to take it over, there was only an acceleration in the passing of the property in favour of the reversioners by operation of law. Such surrender is not a matter of contract. It is no transfer. The estate vests in the reversioners without any act of acceptance on their part. Similarly, there are other castes where alterations in the ownership take place, which do not amount to transfers. When at a partition amongst members of a joint Hindu family, properties are allotted in favour of the members thereof in recognition of their preexisting right, no transfer takes place (vide CIT v. M.K Siremann, [1965] 56 ITR 62 (SC)). When on dissolution of partnership, the partnership property is allotted to the shares of the erstwhile partners under s. 48 of the Partnership Act no transfer of such property takes place (Commissioner Of Income Tax, Madhya Pradesh v. Dewas Cine Corporation, [1968] 68 ITR 240 (SC)). But when the properties of a private limited company are transferred to a firm of which the shareholders of the company were the partners, it was held by the Supreme Court in Chittoor Motor Transport Co. (P.) Ltd. v. ITO, [1966] 59 ITR 238 (SC) that there was a sale or transfer within the meaning of those expressions in s. 10(2)(vib) of the Indian I.T Act, 1922, corresponding to s. 34(3)(b) of the Act. In that decision, the Supreme Court after a review of the decisions cited before it observed as follows (page 242):

“Mr. Naunit Lal then urges that in this case there has been no sale or transfer within s. 10(2)(vib). He says that the company consisted of the same three persons as the partnership firm. He further says that it is not a commercial transaction at all and what the latter part of s.] 0(2)(vib) contemplates is a commercial sale or transfer. In this connection, he relies on Commissioner Of Income-Tax v. Sir Homi M. Mehta's Executors, [1955] 28 ITR 928 (Bom), Rogers and Co. v. CIT, [1958] 34 ITR 336 (Bom) and CIT v. Mugneeram Bangur & Co., [1963] 47 ITR 565 (Cal). In the first case, the facts in brief were these. The assessee and his sons formed a private limited company and transferred to that company shares in several joint stock companies which the assessee has held jointly with his sons, for Rs. 40,97,000 which was the market value of the shares at that time. It was found that these shares had cost to the assessee only Rs. 30,45,017 and the I.T authorities levied income-tax on the difference between the market price and the cost price of the shares on the ground that the assessee had made a profit to that extent by this transaction. The High Court held that though the assessee and his sons on the one hand and the private limited company formed by them were distinct entities in law but in truth and substance the only result of this particular transaction was that Sir Homi Mehta and his sons held these very shares in a different way from the way they held before the transaction. It observed that, they adopted a different mode, the mode of the formation of the limited company with all its advantages, in order to hold these shares and to deal with these shares and to make profit out of these shares. It further held that Sir Homi Mehta did not deal with these shares in the ordinary course as a businessman when he transferred these shares to the private limited company. In our opinion, this case has no relevance to the question of the interpretation of the words sold or otherwise transferred in the latter part of s. 10(2)(vib).

5. The second case, Rogers & Co. v. CIT, [1958] 34 ITR 336 (Bom), is on the same lines. The Calcutta High Court in CIT v. Mugneeram Bangur & Co., [1963] 47 ITR 565 followed Doughty's case, [1927] AC 327 (PC), but there too they were not concerned with the interpretation of the words sold or otherwise transferred.

6. If we look at the resolution, dated June 30, 1959, it is quite clear that it is a sale for consideration of a number of buses by the limited company to the partnership. It would be a sale under the Sale of Goods Act and it would be a sale in any other proper meaning which might be given to the word sale. We are not concerned whether any profit resulted to the assessee but what we are concerned with is whether the assessee had sold or transferred these buses to the partnership. To us the answer seems to be plain that whether the transaction resulted in profit to the company or not, the transaction comes within the purview of the latter part of s. 10(2)(vib).”

7. In Commissioner Of Income Tax, Gujarat Ii v. B.M Kharwar, [1969] 72 ITR 603 (SC) in which s. 10(2)(vii) of the I.T Act, 1922, corresponding to s. 32(1)(iii) and s. 41(2) of the Act came up for interpretation, the Supreme Court held that where a transfer of machinery and plant had been made by a firm in favour of a private limited company in which the partners of the firm had the same interest as they had in the assets and profits of the firm, a sale which attracted prov. (ii) to s. 10(2)(vii) of the Indian I.T Act, 1922, had taken place. In the course of the said decision, the Supreme Court observed as follows ([1969] 72 ITR 603, 608):

“In the present case the machinery of the factory belonging to the firm was transferred to the private limited company. Assuming that thereby readjustment of the business relationship was intended the liability to be taxed in respect of the readjustment had to be determined according to the strict legal form of the transaction. The company was a legal entity distinct from the partnership under the general law. Transfer of the machinery was by the firm to the company; and the legal effect of the transaction was to convey for consideration the rights of the firm in the machinery to the company. The transaction resulted in excess realisation over the written down value of the machinery to the firm, and the liability to tax, if any, arising under the Act could not be avoided merely because in consequence of the transfer the interest of the partners in the machinery was substituted by an interest in the shares of the company which owned the machinery.”

8. It is significant that in the Act, Parliament has thought it fit to enact sub-ss. (3) and (4) of s. 33, cl. (iii) of the prov. to cl. (b) of s. 34(3) and sub-ss. (5) and (6) of s. 33A of the Act. Cl. (iii) of the prov. to s. 34(3)(b) expressly excludes the application of s. 34(3)(b) to a case where the sale or transfer of machinery or plant in respect of which development rebate has been allowed takes place in connection with the amalgamation or succession referred to in sub-s. (3) or sub-s. (4) of s. 33 subject to the conditions mentioned therein. That means even in a case where amalgamation or succession referred to therein takes place but the conditions mentioned therein are not satisfied, then under s. 34(3)(b) the development rebate has to be withdrawn. Sub-ss. (3) and (4) of s. 33 are set out below for ready reference:

“33. (3) Where, in a scheme of amalgamation, the amalgamating company sells or otherwise transfers to the amalgamated company any ship, machinery or plant in respect of which development rebate has been allowed to the amalgating company under sub-section (1) or subsection (1A),—

(a) the amalgamated company shall continue to fulfil the conditions mentioned in sub-section (3) of section 34 in respect of the reserve created by the amalgamating company and in respect of the period within which such ship, machinery or plant shall not be sold or otherwise transferred and in default of any of those conditions, the provisions of sub-section (5) of section 155 shall apply to the amalgamated company as they would have applied to the amalgamating company had it committed the default; and

(b) the balance of development rebate, if any, still outstanding to the amalgamating company in respect of such ship, machinery or plant shall be allowed to the amalgamated company in accordance with the provisions of sub-section (2), so, however, that the total period for which the balance of development rebate shall be carried forward in the assessments of the amalgamating company and the amalgamated company shall not exceed the period of eight years specified in sub-section (-2) and the amalgamated company shall be treated as the assessee in respect of such ship, machinery or plant for the purposes of this section and section 34.

(4) Where a firm is succeeded to by a company in the business carried on by it as a result of which the firm sells or otherwise transfers to the company any ship, machinery or plant, the provisions of clauses (a) and (b) of sub-section (3) shall, so far as may be, apply to the firm and the company.

Explanation.— The provisions of this clause shall apply only where—

(i) all the property of the firm relating to the business immediately before the succession becomes the property of the company;

(ii) all the liabilities of the firm relating to the business immediately before the succession become the liabilities of the company; and

(iii) all the sharesholders of the company were partners of the firm immediately before the succession.”

9. Sub-ss. (5) and (6) of s. 33A which deal with similar provisions relating to development allowances granted in respect of tea plantations are also couched in a language more or less similar to s. 33(3) and (4).

10. In interpreting the words “sold or otherwise transferred” in s. 34(3)(b), therefore, we have to make an attempt to ascertain the true legal effect of an individual converting his asset in respect of which development rebate has been granted into a partnership asset of a firm of which he is also a partner. While doing so we cannot ignore the documents and agreements which have brought about such transaction and the legal rights and liabilities flowing therefrom.

11. Partnership is a creature of contract between the parties. The amount of capital to be contributed by the partners to the firm, the manner in which profits of the firm can be divided, the question as to whether any partner can convert his individual and exclusive property into partnership property and several other matters have to be agreed upon by all the partners.

12. It is urged on behalf of the assessees that the words “otherwise transferred in the expression” sold or otherwise transferred “in s. 34(3)(b) should be given the same meaning as the word “sold” preceding them and as no sale takes place when the properties of an individual are transferred to a firm of which he is a partner, s. 34(3)(b) would not be applicable. Reliance is placed by the assessees on the rule of ejusdem generis in support of the above contention. We find it difficult to agree with the above submission. The rule of ejusdem generis is not always applicable whenever certain words referring to particular classes are followed by general words. Before the general words can be so interpreted, there must be a genus constituted or a category disclosed with reference to which the general words can and are intended to be restricted. The above principle is clear from the decision of the Supreme Court in Jagdish Chandra Gupta v. Kajaria Traders (India) Ltd., AIR 1964 SC 1882. In that case, the interpretation of sub-s. (3) of s. 69 of the Partnership Act arose for consideration. The relevant part of s. 69 of the Partnership Act is set out below for ready reference. It reads:

“69. (1) No suit to enforce a right arising from a contract or conferred by this Act shall be instituted in any Court by or on behalf of any person suing as a partner in a firm against the firm or any person alleged to be or to have been a partner in the firm, unless the firm is registered and the person suing is or has been shown in the Register of Firms as a partner in the firm.

(2) No suit to enforce a right arising from a contract shall be instituted in any Court by or on behalf of a firm against any third party unless the firm is registered and the persons suing are or have been shown in the Register of Firms as partners in the firm.

(3) The provisions of the sub-sections (1) and (2) shall apply also to a claim of set-off or other proceedings to enforce a right arising from a contract…”

13. In that case, the question was whether the words “other proceedings” which followed the words “a claim of set-off” should be given a restricted meaning and confined to cases similar to those in which a claim of set-off was made. The Supreme Court held that the words “other proceedings” in sub-s. (3) should receive their full meaning untrammelled by the words “a claim of set-off” and that the latter words neither intended nor could be construed to cut down the generality of the words other proceedings and in that connection observed as follows (page 1885):

“It remains, however, to consider whether by reason of the fact that the words other proceedings stand opposed to the words a claim of set-off any limitation in their meaning was contemplated. It is on this aspect of the case that the learned judges have seriously differed. When in a statute particular classes are mentioned by name and then are followed by general words, the general words are sometimes construed ejusdem generis, i.e, limited to the same category or genus comprehended by the particular words. But it is not necessary that this rule must always apply. The nature of the special words and the general words must be considered before the rule is applied. In Allen v. Emmerson, [1944] 1 KB 362, Asquith J., gave interesting examples of particular words followed by general words where the principle of ejusdem generis might or might not apply. We think that the following illustration will clear any difficulty. In the expression ‘books, pamphlets, newspapers and other documents’ private letters may not be held included if ‘other documents’ be interpreted ejusdem generis with what goes before. But in a provision which reads newspapers or other document likely to convey secrets to the enemy, the words other document would include document of any kind and would not take their colour from ‘newspapers’. It follows, therefore, that interpretation ejusdem generis or noscilur a sociis need not always be made when words showing particular classes are followed by general words. Before the general words can be so interpreted there must be a genus constituted or a category disclosed with reference to which the general words can and are intended to be restricted. Here the expression claim of set-off does not disclose a category or a genus. Set-offs are of two kinds—legal and equitable—and both are already comprehended and it is difficult to think of any right arising from a contract which is of the same nature as a claim of set-off and can be raised by a defendant in a suit. Mr. B.C Misra, whom we invited to give us examples, admitted frankly that it was impossible for him to think of any proceeding of the nature of a claim of set-off other than a claim of set-off which could be raised in a suit such as is described in the second sub-section. In respect of the first sub-section he could give only two examples. They are (i) a claim by a pledger of goods with an unregistered firm whose goods are attached and who has to make an objection under Order 21, rule 58 of the Code of Civil Procedure and (ii) proving a debt before a liquidator. The latter is not raised as a defence and cannot belong to the same genus as a claim of set-off. The former can be made to fit but by a stretch of some considerable imagination. It is difficult for us to accept that the legislature was thinking of such farfetched things when it spoke of other proceedings ejusdem generis with a claim of set-off.”

14. It is significant that when Parliament intended that amongst the several kinds of transfers only a sale should be considered as an event altering the liability to tax it used the word “sold” in the course of the Act: vide s. 32(1)(iii) of the Act and Expln. (2) thereto. The words “otherwise transferred” in s. 34(3)(b) of the Act, have, therefore, to be given an unrestricted meaning and apply to all cases of transfer in view of the fact that the only word “sold” used before them does not refer to a class.

15. It may be that no formal deed or conveyance is necessary to transfer the property of an individual to the firm of which he is a partner. But there must be an agreement amongst the partners to do so. If the partners agree to treat the property of any of them as partnership property, such property will become partnership property and s.] 4 of the Partnership Act becomes applicable. The said Act is not similar to the unilateral act on the part of a coparcener who throws his separate property into the family hotchpot. The legal results which flow from the individual's property being converted into partnership property are that the partner to whom the property belonged before becoming partnership property loses his exclusive title to it and the right he thereupon acquires is only the right of a partner in the partnership assets, in accordance with the partnership agreement and the provisions of the Partnership Act. There is virtually a transfer of his right in the property to the partners of the firm including himself. S. 5 of the Transfer of Property Act recognises transfer from an owner to himself and others. But the Transfer of Property Act is not an exhaustive code dealing with all kinds of transfers. As its preamble suggests it deals with only certain kinds of transfers. It cannot, therefore, be said that any Act which transfers right in a property but which is not covered by the Transfer of Property Act is no transfer.

16. In Addanki Narayanappa v. Bhaskara Krishnappa, AIR 1966 SC 1300, the effect of the individual property being treated as partnership property is explained by the Supreme Court as follows (page 1303):

“From a perusal of these provisions it would be abundantly clear that whatever may be the character of the property which is brought in by the partners when the partnership is formed or which may be acquired in the course of the business of the partnership it becomes the property of the firm and what a partner is entitled to is his share of profits, if any, accruing to the partnership from the realisation of this property, and upon dissolution of the partnership to a share in the money representing the value of the property. No doubt, since a firm has no legal existence, the partnership property will vest in all the partners and in that sense every partner has an interest in the property of the partnership. During the subsistence of the partnership, however, no partner can deal with any portion of the property as his own. Nor can he assign his interest in a specific item of the partnership property to anyone. His right is to obtain such profits, if any, as fall to his share from time to time and upon the dissolution of the firm to a share in the assets of the firm which remain after satisfying the liabilities set out in clause (a) and sub-cls. (i), (ii) and (iii) of cl. (b) of s. 48.”

17. Following the above decision, in CIT v. R.M Chidambaram Filial, [1977] 106 ITR 292 the Supreme Court observed as follows (page 298):

“Lindley on Partnership, 12th Edn., page 28, has this:

‘The firm is not recognised by English lawyers as distinct from the members composing it. In taking partnership accounts and in administering partnership assets, courts have to some extent adopted the mercantile view, and actions may now, speaking generally, be brought by or against partners in the name of their firm; but speaking generally, the firm as such has no legal recognition. The law, ignoring the firm, looks to the partners composing it; any change amongst them destroys the identity of the firm; what is called the property of the firm is their property, and what are called the debts and liabilities of the firm are their debts and their liabilities. In point of law, a partner may be the debtor or the creditor of his co-partners, but he cannot be either debtor or creditor of the firm of which he is himself a member, nor can he be employed by his firm, for a man cannot be his own employer.’

18. The Indian law of partnership is substantially the same……”

19. In CWT v. Mrs. Christine Cardoza (T.R.C Nos. 10 and 11 of 1975, decided on June 8, 1978) [since reported in [1978] 114 ITR 532 (Kar)], a Division Bench of this court, of which one of us was a member, has held, following the above two decisions of the Supreme Court, that the partners of a firm are really the owners of the partnership property and while assessing them under the W.T Act, the benefit of s. 5(1)(iva) of that Act should be given to each of them having regard to the extent of interest each one of them has in the assets of the firm. The effect of converting individual assets into assets of a partnership firm of which the individual is a partner is that he ceases to be the exclusive owner of the property and his rights in the property stand transferred to the partners of the firm including himself. There is, therefore, an extinguishment of his exclusive right and acquisition of that right by all partners including himself. This is not a case similar to the allotment of property to the share of a member of a joint Hindu family at a partition or allotment of the properties of a partnership firm to the share of erstwhile partners on its dissolution in recognition of the pre-existing right of the allottee either as a member of the joint family or as a partner of the firm.

20. In A.S Krishna Setty & Sons v. AMI. CIT, [1975] 100 ITR 587 (Kar), we have held that when the properties of an assessee-firm which had seven partners and two minors admitted to the benefits of the partnership was allowed development rebate under s. 33 of the Act in respect of plant and machinery used in its business, the development rebate was liable to be withdrawn when one of its business, namely, coir factory was transferred in favour of four partners and the machinery and plant in another unit of its business, i.e, oil mills were transferred to the other three partners.

21. A Full Bench of the Kerala High Court has held in the case of A. Abdul Rahim v. CIT, [1977] 110 ITR 595 that on the conversion of an individual business into a partnership, a transfer of the assets of the individual to a firm attracting the provisions of s. 34(3)(b) of the Act takes place. It is no doubt true that the Full Bench has relied upon s. 2(47) of the Act which defines the expression “transfer”. S. 2(47) provides that “transfer” in relation to a capital asset includes the sale, exchange or relinquishment of the asset or the extinguishment of and rights therein or the compulsory acquisition thereof under any law. It is argued that the definition of “transfer” found in s. 2(47) is introduced in the Act only for the purpose of s. 45 of the Act which deals with capital gains and it cannot be relied upon for interpreting the words “otherwise transferred” in s. 34(3)(b) of the Act. We are of opinion that in order to hold that on the individual business being converted into partnership business there is a transfer of the assets of individual to the partnership it is not necessary to rely on the definition in s. 2(47) at all because the said transaction amounts to a transfer in the eye of law even when the word “transfer” is understood in the ordinary sense and not in the wider sense in which it is defined in s. 2(47) of the Act.

22. It was next contended that in order to attract s. 34(3)(b) the transfer must be from one legal person to another legal person and as a firm is not a legal person, the transaction in question cannot be a transfer. The word “person” is defined in s. 2(31) of the Act as including within its scope a HUF, a firm and an association of persons or a body of individuals whether incorporated or not. The word “person” in s. 34(3)(b) of the Act has to be given the meaning assigned to it in s. 2(31). It is also to be seen that in s. 34(3)(b) itself there is reference to the transfer of assets of a firm to a company which is excluded from the operation of s. 34(3)(b) of the Act. Even granting that the firm is not a person, but it really represents a group of individuals who are partners, the result is the same as there is a transfer of asset from one individual to a group of individuals including himself who acquire interest in it as tenants-in-common (See Chidambaram Pillai's case, [1977] 106 ITR 292 (SC)). We do not, therefore, find any substance in this contention.

23. In K.D Pandey v. CWT, [1977] 108 ITR 214, a Division Bench of the Allahabad High Court, of which one of us was a member, while dealing with the question whether a registered deed was necessary when immovable property of a partner was transferred to the partnership of which he was a partner, observed that on mere expression of the intention of the partner concerned the property stood transferred to the partnership firm by virtue of s. 14 of the Partnership Act and so no registered instrument was necessary. Their Lordships further affirmed the view that on such expression of intention the property would become the property of the firm and would cease to be the property of the individual.

24. In Commissioner Of Income Tax, West Bengal v. Hind Construction Ltd. , [1972] 83 ITR 211, the Supreme Court no doubt held that a person by handing over his goods to a partnership of which he was a partner as his share of the capital cannot be considered as having sold his goods to the firm. But the Supreme Court did not say that the goods had not been otherwise transferred thereby. That was not a case dealing with s. 34(3)(b) of the Act. Cases in which prov. (e) tos. 24(2)(ii) of the Indian I.T Act, 1922, and s. 78 of the Act have been considered are not of much assistance to the assessees as the decisions rendered in those cases are based on express statutory provisions which have no bearing on the issues involved in these cases. Hence, we have not chosen to deal with them.

25. A partner and a firm are two different entities under the Act, is also clear from the decisions which lay down that payments made in the course of business other than those referred to in s. 40(b) of the Act to a partner by a firm are admissible deductions in the hands of the firm. The decision of the Court of Appeal in Hsastiey. Veiich & Co., [1934] 2 ITR 456 also emphasises the said view. In the result, we hold that on the conversion of the property of an individual into property of a firm of which he is a partner, there is a transfer of interest of the individual to the partnership and ss. 34(3)(b) and 155(5) of the Act are attracted where development rebate has been allowed in respect of the property which becomes partnership property.

26. We, therefore, answer the two questions referred to us in ITRC No. 65/74 in the negative and in favour of the department and the question referred to us in ITRC No. 118/75 in the affirmative and against the assessee. No costs.