1987 (2) TMI 112 - AT - Income Tax

Distribution of Machinery in Firm Dissolution Not a Transfer under IT Act

The Tribunal held that the distribution of machinery among partners upon the dissolution of a firm does not constitute a transfer for the purpose of ... - Issues:- Whether the machinery distributed between partners on the dissolution of a firm allows for the withdrawal of development rebate under section 155 of the IT Act.Analysis:1. The appeals were against the AAC's order for the assessment years 1977-78, 1978-79, and 1979-80, focusing on the withdrawal of development rebate on machinery distributed between partners upon the firm's dissolution. The ITO withdrew the rebate, citing the transfer of machinery to partners as the reason.2. The contention was that the investment allowance was wrongly withdrawn as there was no actual transfer of assets when machinery was distributed among partners. The AAC held that the investment allowance was rightly withdrawn based on legal interpretations and precedents, without delving into the factual aspects of the case.3. The AAC relied on legal definitions of 'transfer' and previous judgments to support the withdrawal of the investment allowance, emphasizing that a partner's right in assets is extinguished upon contribution to a firm. The AAC supported the ITO's decision based on the transfer of assets upon dissolution of the firm.4. The dissolution deed specified the distribution of machinery among partners, with corresponding entries made in the books. The partners' accounts were debited based on the machinery allotted to them, following the profit-sharing ratio. The contention was that the machinery distribution did not constitute a transfer for the purpose of withdrawing the investment allowance.5. The Tribunal highlighted that the AAC failed to consider the impact of the firm's dissolution on machinery distribution among partners. Referring to legal precedents, including the Supreme Court's ruling in Malabar Fisheries Co., it emphasized that no transfer of assets occurs upon dissolution and distribution among partners.6. Legal principles established that distribution of assets upon dissolution does not constitute a transfer, as seen in previous Supreme Court decisions. The Tribunal differentiated cases involving actual sales or transfers of machinery to individual partners from the distribution upon firm dissolution, asserting that the AAC misinterpreted the legal position.7. The Tribunal noted the importance of assessing the transfer of reserves to partners' accounts and ensuring compliance with the law's requirements. Due to insufficient information, the matter was remanded to the AAC for a thorough review to determine if conditions for withdrawing the investment allowance were met, clarifying that dissolution of the firm does not automatically trigger allowance withdrawal.8. The appeals were treated as allowed for statistical purposes, concluding the judgment.