1991 (2) TMI 356 - HC - Income Tax

Court Upholds Decision on Development Rebate Transfer in Partnership Dispute

The High Court upheld the decision to withdraw the development rebate on machinery transferred to a partnership following the conversion of the business. ... Developement Rebate, Transfer Issues:Assessment of development rebate on machinery purchased by an assessee over several years, withdrawal of development rebate due to conversion of business into a partnership, interpretation of 'transfer' under section 34(3)(b) of the Income-tax Act.Analysis:The judgment pertains to an assessee's reference regarding the assessment of development rebate for the years 1964-65 to 1970-71. The assessee had been purchasing new machinery annually and claiming development rebate on it. However, in 1970, the assessee converted his business into a partnership, contributing the business assets, including machinery with development rebate, to the partnership as capital. The Income-tax Officer subsequently withdrew the development rebate under section 155(5) of the Income-tax Act, citing it as a transfer of assets within eight years of installation. The Appellate Assistant Commissioner and the Tribunal upheld this decision.The Income-tax Appellate Tribunal referred two questions of law to the High Court under section 256(1) of the Income-tax Act. The first question queried the justification of withdrawing development rebate on machinery transferred to a partnership, while the second questioned whether the conversion of the business into a partnership constituted a transfer under section 34(3)(b) and section 155(5) of the Income-tax Act.The counsel for the assessee argued that the conversion into a partnership did not amount to a sale but acknowledged it as a transfer of assets to the firm. The counsel relied on a Madras High Court decision to support the assessee's position. Conversely, the Revenue's counsel contended that the Supreme Court precedent established the act of contribution to a partnership as a transfer. The High Court analyzed the relevant sections and previous judgments, noting that the term 'transfer' under section 34(3)(b) encompassed capital assets like machinery. Citing previous decisions by the Kerala and Karnataka High Courts, which were endorsed by the Supreme Court, the High Court affirmed that the contribution of assets to a partnership constituted a transfer.Ultimately, the High Court held in favor of the Revenue, affirming the Tribunal's decision as aligned with the Supreme Court's interpretation of the term 'transfer.' Both questions were answered in the affirmative, supporting the withdrawal of development rebate due to the conversion of the business into a partnership. No costs were awarded in the judgment.