Development rebate reserve: later partnership reconstitution did not trigger withdrawal under section 155(5)

Section 155(5) of the Income-tax Act applies only where the development rebate reserve is voluntarily used for a prohibited purpose; it does not cover a mere non-utilisation caused by later reconstitution or redistribution of partnership assets. Where the business and assets belonged to the firm during the relevant assessment years and the rearrangement occurred only in a subsequent year, the withdrawal provision was not triggered. The assessee therefore remained entitled to the development rebate.

---

---

Issues: Whether section 155(5) of the Income-tax Act, 1961 was attracted so as to withdraw the development rebate claimed by the assessee on the ground that the partnership business was subsequently rearranged and the relevant assets were transferred to newly constituted firms.

Analysis: The assessment years in question related to periods when the business and the assets on which development rebate had been claimed belonged to the assessee firm. The later rearrangement of the partnership business took place only in the subsequent year. The governing principle was that the withdrawal provisions under section 155(5) operate only where there is a voluntary utilisation of the development rebate reserve for a prohibited purpose. When the assets are redistributed on reconstitution or dissolution of the partnership, there is no such voluntary utilisation; at most there is non-utilisation brought about by the restructuring of the business. The earlier view taken by the Tribunal in a similar matter was not accepted, and the deeming provision could be invoked, if at all, only after rebate had been allowed and then withdrawn under the statutory mechanism.

Conclusion: Section 155(5) was not attracted on the facts, and the assessee remained entitled to the development rebate.

---