1972 (1) TMI 41 - HC - Income Tax

Court Upholds Assessee's Development Rebate; Partnership Formation Not a Trigger for Rebate Withdrawal

Commissioner of Income-Tax, Kerala Versus CM Kunhammed.

The Court ruled in favor of the assessee, holding that the development rebate granted for the assessment years 1960-61 and 1961-62 could not be withdrawn ... ' (1) Whether the development rebate granted cannot be withdrawn under section 155(5) of the Income-tax Act of 1961 ? (2) Whether Tribunal was right in holding that the development rebate could not be withdrawn under section 35(11) of the Indian Income-tax Act, 1922 ? ' - I, answer question No. 1 in favour of the assessee and against the department. I answer question No. 2 also in the affirmative, that is, in favour of the assessee and against the department Issues Involved:1. Applicability of Section 155(5) of the Income-tax Act, 1961, versus Section 35(11) of the Indian Income-tax Act, 1922.2. Whether the development rebate for the assessment years 1960-61 and 1961-62 could be withdrawn under the relevant provisions.Issue-wise Detailed Analysis:1. Applicability of Section 155(5) of the Income-tax Act, 1961, versus Section 35(11) of the Indian Income-tax Act, 1922:The core issue is whether the development rebate granted for the assessment years 1960-61 and 1961-62 could be withdrawn under Section 155(5) of the Income-tax Act, 1961, or whether Section 35(11) of the Indian Income-tax Act, 1922, would apply. The Tribunal had accepted the contention that only the provisions of the 1922 Act would apply since the development rebate was allowed under the 1922 Act, and the assessments were finalized before the 1961 Act came into force. The Tribunal also held that there had been no transfer as envisaged by Section 35(11)(i) of the 1922 Act.The Court noted that the Indian Income-tax Act, 1922, was repealed by Section 297(1) of the 1961 Act, and Section 297(2) provides for actions to be taken as if the Act had not been passed. The Court examined Section 34(3)(b) and Section 155(5) of the 1961 Act, which allow for the withdrawal of development rebate if the conditions mentioned are satisfied, even if the rebate was granted under the 1922 Act. The Court concluded that Section 155(5) could apply to actions taken for withdrawing development rebate granted under the 1922 Act, provided the conditions in Section 155(5) are met.2. Whether the development rebate for the assessment years 1960-61 and 1961-62 could be withdrawn under the relevant provisions:The Court examined whether there had been a transfer of machinery by the formation of a partnership on August 1, 1960, which would trigger the withdrawal of the development rebate under Section 155(5). The Court emphasized that the determination of whether there was a transfer should be based on the law as it stood at the time of the alleged transfer. The Court referred to the Supreme Court decisions in Commissioner of Income-tax v. Dewas Cine Corporation and Commissioner of Income-tax v. Bankey Lal Vaidya, which held that the adjustment of rights of partners in a dissolved firm is not a transfer or sale.Applying this principle, the Court held that the formation of a partnership did not constitute a sale or transfer of machinery. Thus, there was no transfer as envisaged by Section 155(5) or Section 35(11) of the respective Acts. Consequently, the development rebate could not be withdrawn.Conclusion:The Court answered both questions in favor of the assessee and against the department, affirming that the development rebate granted for the assessment years 1960-61 and 1961-62 could not be withdrawn under Section 155(5) of the Income-tax Act, 1961, or Section 35(11) of the Indian Income-tax Act, 1922. The Court directed the parties to bear their respective costs and ordered a copy of the judgment to be sent to the Appellate Tribunal as required by Section 260(1) of the Income-tax Act, 1961.