Development rebate withdrawal depends on a real transfer; forming a partnership alone does not amount to transfer of machinery.
Development rebate already allowed could be reopened under section 155(5) where the statutory conditions were met, even if the rebate had originally arisen under the 1922 Act and the transfer pre-dated the 1961 Act; the later Act was treated as extending to past events for withdrawal purposes. However, the transfer condition had to be proved on the ordinary meaning of transfer applicable at the time of the transaction. On that basis, the formation of a partnership, by itself, did not amount to a sale or transfer of machinery, so the rebate could not be withdrawn on the facts found.
Issues: (i) Whether development rebate earlier allowed could be withdrawn under section 155(5) of the Income-tax Act, 1961, in respect of machinery installed and transferred before the Act came into force. (ii) Whether the formation of a partnership by the assessee amounted to a transfer of the machinery so as to attract withdrawal of development rebate.
Issue (i): Whether development rebate earlier allowed could be withdrawn under section 155(5) of the Income-tax Act, 1961, in respect of machinery installed and transferred before the Act came into force.
Analysis: The provision for withdrawal of development rebate was held to be applicable where the statutory conditions were satisfied, even though the rebate had originally been granted under the Indian Income-tax Act, 1922 and the transfer had taken place before the commencement of the Income-tax Act, 1961. The scheme of sections 34(3)(b) and 155(5) showed that the later Act expressly covered past events for the purpose of reopening and withdrawing rebate. The applicability of the provision did not depend on whether the original assessment had been completed under the earlier Act.
Conclusion: The question was answered against the assessee on the applicability of section 155(5), in the sense that the provision was capable of applying to such cases; however, the withdrawal still depended on proof of a qualifying transfer.
Issue (ii): Whether the formation of a partnership by the assessee amounted to a transfer of the machinery so as to attract withdrawal of development rebate.
Analysis: The alleged transfer had to be judged by the law as it stood at the time of the transaction and not by the definition of transfer introduced in section 2(47) of the Income-tax Act, 1961. On the ordinary meaning of transfer, and applying the principles governing adjustment of rights on partnership dissolution and distribution of assets, the creation of a partnership did not amount to a sale or transfer of machinery for the purposes of the rebate-withdrawal provisions. The machinery was not shown to have been sold or otherwise transferred within the meaning of the relevant provisions.
Conclusion: The issue was decided in favour of the assessee and against the department.
Final Conclusion: The reference was answered by holding that the development rebate could not be withdrawn on the facts found, because no qualifying transfer of the machinery had been established.
Ratio Decidendi: A development rebate can be withdrawn only when the statutory condition of sale or transfer is satisfied according to the ordinary legal meaning applicable at the time of the transaction; the mere formation of a partnership does not, by itself, constitute such a transfer.
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