TaxTMI 
TaxTMI 
1999 (2) TMI 108
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....ment year 1981-82, the assessment was made on 21-1-1984 determining the total income at Rs. 1,07,234. It is stated that this was after granting investment allowance of Rs. 40,244 for this year. For the assessment year 1980-81, the assessment was made on 15-4-1982 determining the total income at Rs. 64,925 after setting off business loss and investment allowance of Rs. 1,12,843. 3. By an indenture of Trust declared on 1-4-1981 the Karta of the assessee HUF declared the business carried on in the style of T.R. Ganapathy Chettiar and Ganapathy Refineries as trust property held for the benefit of the maintenance of his children and family members. He himself was to be the trustee, until the death and thereafter by Board of Trustees. The trust was to exist for a period of 20 years and thereafter until extinguishment by the beneficiaries. The conversion of the business as trust property was also returned as a gift but it was claimed that it was exempted under Gift-tax Act because it was made in the course of the business. The gift-tax assessment was made on 28-3-1985 which is stated to be pending consideration in appeal. 4. The ITO was of the opinion that this conversion of the busines....
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....conditions had been fulfilled the investment allowance granted should not be withdrawn. On the other hand, the contention of the Revenue is that the declaration of the trust itself amounted to transfer and disentitled the assessee from claiming the investment allowance. 7. Before we consider the rival submissions, a look at the legislative history would be necessary to keep the matter in the right perspective. The development rebate was introduced by the Finance Act, 1955. In the Budget speech (27 ITR Statutes page 42), the Finance Minister referred to the recommendation of the Taxation Enquiry Commission and said that he proposed to allow development rebate 25% of the cost of all the new plant and machinery installed for business purposes instead of the present initial depreciation allowance of 20%. The Act introduced clause (vib) in section 10(2) and the only condition prescribed was that no allowance shall be made unless the particulars prescribed had been furnished by the assessee. 8. There was an amendment proposed by the Finance Bill of 1958 (33 ITR Statutes 61) prescribing the further condition that an amount equal to the amount of allowance due is debited to the profit & ....
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....ions prescribed were the same as for development rebate except that there was now a positive obligation to utilise the reserve within a period of ten years for acquiring new assets for the purposes of the same business. The section as it stands at present excludes the conversion of the firm's property into the property of a company as well as the amalgamation by one company with another from the operation of the condition relating to the transfer of the plant or machinery, as in the case of development rebate earlier. Section 155(5) reproduced the provision in old section 35(11) for rectification of assessment to withdraw the development rebate in case of breach of condition. Section 155(4A) made a similar provision to meet any breach of conditions relating to investment allowance given under section 32A. 11. In the fight of this background, we have to consider the scope and object of the expression "sold or otherwise transferred" which occurs in section 32A. As we have seen above this expression came into the statute in 1958 to prevent certain abuses. The Revenue has not enlightened us about the nature of the abuse which was sought to be prevented by this expression so that we ....
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....Supreme Court has said in the case of George Da Costa v. CED [1967] 63 ITR 497 that the word "otherwise" in the expression "contract or otherwise" should be construed ejusdem generis and it should be interpreted to mean some kind of legal obligation akin to a contract. If we apply this principle of ejusdem generis here we have to consider that the word "transfer" should have the meaning analogous to that of a sale in the sense of a transaction in the nature of a sale. There is also the other principle of noscitur a saciis according to which where two or more words which are susceptible to analogous meaning are coupled together, they take the colour from each other, the meaning of the more general term being restricted to a sense analogous to that of the less general. On this principle also the meaning of the word "transfer" takes the colour from its context and particularly from the word "sold" preceding it. 13. But the more important rule of interpretation is Ut Res Magis Valant Quam Pereat. This is a crucial rule which states that the words of statute should be given a sensible meaning so as to make them effective. The Supreme Court has said in the case of Tirath Singh v. Bachit....
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.... remembered-that courts have held that balancing charge is not to be applied where the business is transferred as a going concern and not the individual machinery. Thus a reading of these provisions clearly indicate that there is a distinction between an asset and an undertaking as well as between the assessee and the business in which an asset is used. In other words, there is a clear indication that the intention of Parliament was to see that the asset should be continuously used in the undertaking and not that the assessee should continue to be the owner of the asset. We are fortified in inferring this distinction by the decision of the Supreme Court in the case of Sir Kikabhai Premchand v. CIT(Central) [1954] 24 ITR 506. In that case, an assessee withdrew certain stocks from the business and declared it a trust and the revenue sought to tax the transaction. The Supreme Court observed: "It is well recognised that in revenue cases regard must be had to the substance of the transaction rather than to its mere form. In the present case disregarding technicalities it is impossible to get away from the fact that the business is owned and run by the assessee himself. In such circumst....
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....e fulfilled or not. That question has not arisen here presumably because the undertaking continues to be operated by the business which has been taken over as a running concern by the trust and the trust continues to have the reserve which can be properly utilised as required by the section. There is nothing in the Act which prevents the successor in the interest in fulfilling the conditions stipulated for the grant of the development rebate especially when that development rebate is allowed to be carried forward and set off in computing the income of the business even in the hands of the successor assessee. 18. In the circumstances, we are convinced that not only was there no transfer within the meaning of the expression "sold or otherwise transferred" but also that the section was not intended to affect cases of a transfer of the undertaking as such where the successor in interest ensures that the conditions required for the development rebate are fulfilled and the objects of the legislature namely the use of the machinery in the industry is effectuated. If the development rebate is to be withdrawn even when the undertaking is kept up, it would, in our opinion, go against the in....
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....e recital made in the document are to be considered. This is the dicta of the Supreme Court in the case of CIT v. Durga Prasad More [1971] 82 ITR 540 & 545. The McDowell principle is also required to be applied McDowell & Co. Ltd. v. CTO [1985] 154 ITR 148 (SC). According to Galmond the purpose of trusteeship is to protect the rights and interests of persons such as unborn, infants, lunatic etc. who for any reason are unable effectively to protect them for themselves. The law vests those rights and interest for safe custody, as it were, in some other person who is capable of guarding them and dealing with them and also is placed under a legal obligation to use them for the benefit of those to whom they in truth belong. In this context the creation of the trust is nothing but a device for ulterior purpose or with a view of tax planning. Thus the assessee who has hither to become the owner of he trust property ceases to be so with effect from 1-4-1981 by virtue of the trust created. The trust is said to be irrevocable though it could be terminated earlier if all the beneficiaries agreed to do so vide para 5(ii) or as decided by the trustee/board of trustees. 3. Section 63 defines "t....
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....rs utilised the reserve for distribution of dividends or profits or remittance outside India for any other purpose which is not a purpose of the business of the undertaking and in the event of any such eventuality the provisions of section 155(4A) would be attracted. 9. Applying the aforesaid statutory prescription to the facts of the assessee's case, clause (a) and clause (b) of section 5 are applicable in the facts and circumstances of the case. Even clause (c) of that section can also be said to be applicable insofar as the utilisation of the reserve for the purpose other than the purpose of business of the undertaking because the assessee is the sole trustee and the trust business is carried on him at his discretion and even the trust could be determined as per his discretion. 10. The trust created by the assessee is not a successor to the erstwhile proprietary business so as to be entitled to the benefit of carry forward and set off of investment allowance. It is not also bound to utilise the reserve for the purpose for which it was created. Consequently, clause (a) and clause (b) of section 155(4A) of the I.T. Act, 1961 are attracted and, therefore, the investment allowance....
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.... under consideration. 14. Consequently the orders of the CIT (Appeals) are upheld and the appeals filed by the assessee are dismissed. ORDER UNDER SECTION 255(4) OF THE INCOME-TAX ACT, 1961 We have differed in our opinions and the Point of Difference is set out below:- "Whether on the facts and in the circumstances of the case the investment allowance already granted should be withdrawn under section 155(4A) read with section 32A(5) of the Income-tax Act, 1961?" 2. Accordingly the case is stated to the President of the Income-tax Appellate Tribunal for favour of necessary action. THIRD MEMBER ORDER Per Shri T.V. Rajagopala Rao (Third Member)-The following difference arose between the Members while disposing of these appeals by a common order: "Whether, on the facts and in the circumstances of the case, the investment allowance already granted should be withdrawn under section 155(4A) read with section 32A(5) of the Income-tax Act, 1961?" The then President constituted himself as Third Member to resolve the difference as per Head Office's order communicated to the Vice-President (SZ) in U.O. No. F/232(AT) dated 2-2-1988. As successor President, I resumed jurisdiction to hea....
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.... the Assessing Officer, called for withdrawal of investment allowance under the provisions of section 32A(5) read with section 155(4A) of the I.T. Act. Therefore, he issued notices under section 154 to the assessee on 22-1-1985. The assessee-HUF filed its objections on 29-5-1985. In the objections, it was contended that by a mere declaration of trust relating to the assessee's business assets, there was neither sale nor transfer. It was contended that a transfer should always be in favour of a person who was in existence, whereas in the case on hand the trust came into existence only at the time of declaration and never before. Therefore, there was no element of transfer in the declaration of trust and so sub-section (a) of section 155(4A) was not attracted or applicable. It was also contended that since the investment allowance granted for these four years was already utilised for purchase of new assets, the conditions laid down in section 32A were all fulfilled and, therefore, it should not be withdrawn. The provisions of sub-section (iii) of section 155(4A) were also not contravened. The Assessing Officer did not accept any of the objections filed and elaborated before him on be....
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....1985 for assessment years 1980-81 and 1981-82. Challenging the orders of the CIT(A), the assessee-HUF came up in the second appeal before this Tribunal. 4. These appeals were taken up together and the Bench sought to dispose them off by a common order. The then ld. Judicial Member, by his order dated August 1987, proposed to allow the appeals. However, the then ld. Accountant Member did not agree with the ld. Judicial Member on the reasons stated in his dissenting order dated 9-10-1987. The ld. Members identified their difference of opinion as already extracted above and referred the matter to Third Member. Thus, the matter stands for my consideration. 5. The ld. Judicial Member traced out the origin of the investment allowance right from Finance Act, 1955. Ultimately, he traced out that section 32A, which provided investment allowance came into the statute book under the Finance Act of 1976. He held that the conditions prescribed for relief under section 32A were the same as in the case of development rebate except that there was now a positive obligation to utilise the reserves within a period of 10 years for acquiring new assets for the purposes of the same business. He also h....
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....ontinues to be carried on by the same person first on behalf of the HUF and later on behalf of the trust. Thus, the learned Judicial Member found that in substance there was no abuse of the provisions which was required to be met by treating the transaction as a transfer within the scope of the expression "sold or otherwise transferred". He went to the extent of holding that no doubt, the conversion of the property of the HUF into the property of the trust by declaration of the trust constituted a transfer under the general law but it would not be a transfer within the restricted meaning of the expression "sold or otherwise transferred" keeping in mind the object and intention of Parliament in enacting this provision. He distinguished the Kerala High Court decision in the case of Radhas Printers where the development rebate was withdrawn when a business of a firm was converted into a trust. The distinguishing feature, according to him, was that in that case it was not disputed that the transfer by creation of a trust did not fall within the expression "otherwise transferred" as the only objection was that there was no transfer at a. Though the revenue relied upon the Madras High Co....
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....ther words, they co-existed. Having regard to the terms of the trust deed dated 1-4-1981 that beneficiaries under the trust deed the beneficial owners as well as the legal owners of the trust property, he held that the author of the trust was desirous of not only making provision for the welfare, well being and prosperity, etc., of all the beneficiaries but also provided them (sons and their wives) with assets, properties and the like, i.e., corpus of the trust property vide clauses 2(a), 2(b) and 4(a) of the trust deed. Thus, he held that there was not only transfer of income but also the corpus to the beneficiaries. Therefore, he held that the assessee was no longer the owner of the business in general and the asset in particular on which the investment allowance was granted earlier. He held that the business was no longer carried on by the assessee; the assessee could be said to be carrying on the business for and on behalf of the beneficiaries as sole trustee under the trust deed. As per the terms of the trust deed, he found that the assessee was not entitled to have any benefit or enjoyment from the income or property of the trust. He relied upon the Supreme Court decision in ....
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....isposed of by a consolidated order dated 11-4-1986 wherein it was held that the scope of the observation of the Madras High Court in S. Balasubramanian's case could not be equated with the ratio of the Madras High Court in the case of Dalmia Magnesite Corpn. and on that scope the ratio of Dalmia Magnesite Corpn.'s case could not lose its binding nature over the Madras Tribunal. Ultimately, he justified the withdrawal of investment allowance under section 155(4A) read with section 32A(5) of the I.T. Act. In view of the conflicting views expressed by the learned Members, the difference was referred to the then President and thus the matter now stands for my consideration. 7.1 have heard Shri Devanathan, learned counsel for the assessee, and Shri Ganapathy Iyer, learned Jr. Departmental Representative. Shri Devanathan fully adopted the reasoning given by the Id. Judicial Member in his order and thus he fully supported his order. He, inter alia, contended the following: It would appear that the Id. Accountant Member did not differ with the interpretation put by the Id. Judicial Member on section 32A(5) of the I.T. Act and, therefore, the question is to be decided in favour of the ass....
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....as granted, were the only assets transferred. (2) He raised a pivotal contention that the relief of investment allowance was attached to the plant and machinery for which it is to be granted and the relief does not belong to a person who is the owner of the plant and machinery. (3) In the facts and circumstances of this case, if at all the Tribunal holds that there was a transfer it should be taken that the transfer is not only of assets but also liabilities incurred by the business and the transfer was effected with regard to a going concern. (4) He relied upon Circular No. 378 dated 3-3-1984 (1991) Vol. I Page 781 and letter No. F. 15/563 dated 15-12-1963 under section 80J. (5) He also cited and relied upon CIT v. Narang Dairy Products [1996] 219 ITR 478/85 Taxman 375 (SC) at page 484 and CIT v. P.K. Ramaswamy Raja [1997] 223 ITR 324/95 Taxman 173 (Mad.) to convey the true meaning of the words "other-wise transferred". (6) When I brought to his notice that the decisions were given against the assessee, Shri Devanathan maintained that his purpose to rely upon them was only to distinguish them from the facts on hand. I brought to his notice that the Madras High Court in P.K. R....
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....sessee, the learned D.R. submitted that the issue there was about the withdrawal of development rebate. He submitted that the ultimate decision in this case was in favour of the department. He further submitted that the Hon'ble Supreme Court duly took into consideration the fact that plant and machinery changed hands and that itself empowered the withdrawal of development. (5) The ratio of the above decision clearly applies to the facts of this case. Here also, the ownership changed hands and not merely user. (6) He submitted that the withdrawal of development rebate under section 34(3)(b) is analogous to withdrawal of development rebate under section 32A(5). So, according to him, the decision in Narang Dairy Products' case , though given with reference to the withdrawal of development rebate, equally applies to the case of withdrawal of investment allowance also. (7) He invited my attention to the decision of the Hon'ble Supreme Court in the case of South India Steel Rolling Mills v. CIT [1997] 224 ITR 654/91 Taxman 196. The Supreme Court decision represents an appeal preferred against the Madras High Court decision in South India Steel Rolling Mills's case which was already fo....
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.... the purpose of the business of the undertaking for which the development rebate was given. Since the firm which had been granted the rebate had been dissolved and ceased to exist before the expiry of 8 years, the rebate was liable to be withdrawn. The ld. Departmental Representative also cited and relied upon the Delhi High Court decision in CIT v. Northern India Iron & Steel Co. Ltd. [1997] 226 ITR 342 (Delhi). In that case, the plant and machinery were leased out and development rebate was claimed by the lessor. The Delhi High Court refused to grant the development rebate on the ground that the assessee after leasing out the machinery had no control over the use of the machinery and could not be said to be manufacturing and producing articles. The ld. Departmental Representative had drawn my attention to the Hon'ble Supreme Court's decision in Sunil Siddharthbhai's case wherein it was held that an asset belonging to an individual partner was brought to the partnership business towards his capital. The transaction, no doubt, amounted to a transfer. In this case also, the transfer is very much involved when once the businesses of the HUF were transferred to the trust by means of t....
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....e author of the trust and the several beneficiaries under the trust deed: T.R. Ganapathy Chettiar S/o. Ramaswamy Chettiar Mrs. Ammakannu Ammal (W)-(B1) --------------------------------------------------------------------------- | | | | (B2) | | (B8) | | | | Raghunathan (S1) Gunase- Prabhakaran (S3)(B6) Mrs. Maragatham Mrs. Rani (W) kharan Shanti (W)(B4) W/o G. Bala- | (S2)(B5) | chandran (B8) ----------------- | | | | Sundara- | | Master Vinaya- valli (W) Master Sudhakar | Ramaswamy kamur- (B5) (B13) | (B9) thy | | (B10) | | | | ------------------ -------------------- | | | | | | Miss Gayatri Miss Anitha | | (B14) (B15) | | | | Abiramasun- Kalaivani dari (B11) (B12) Clause 3 of trust deed states that the whole of the schedule properties including the assets and liabilities of the business run by him under the name and style of T.R. Ganapathy Chettiar and Ganapathy Refineries, including all other tangible and intangible rights and benefits attached thereto, are declared to be trust properties and Shri Ganapathy Chettiar declared himself to be the author of the trust as well as the sole trustee and he further declared that he held and stand p....
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....: 1. J.K. Trust v. CIT [1957] 32 ITR 535 (SC) 2. CIT v. Breach Candy Swimming Bath Trust [1955] 27 ITR 279 (Bom.) 3. Dharma Vijaya Agency v. CIT [1960] 38 ITR 392 (Bom.) Thus, a business can also be the Subject of a trust or with reference to which a trust can be created. It may here itself be pointed out that the ld. Judicial Member, in the course of his order conceded the position that under general law declaration of trust amounts to transfer, though the word "transfer" under section 32A(5) does not include creation of a trust. The basis or the sheet-anchor for the edifice built subsequently, in the Judicial Member's order was that investment allowance relief goes along with plant and machinery, whoever may the owner of the plant and machinery. In my humble opinion the very foundation has no legal basis. My reasons are as follows. 11. Section 29 of the I.T. Act lays down the broad procedure for computing the income from profits and gains in which it is stated that it should be computed in accordance with the provisions of sections 30 to 43D. Tire heading of section 28 is "Profits and gains of business or profession" carried on by the assessee at any time during the previous....
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....lise the amount credited to the reserve account under sub-section (4) for the purposes of acquiring a new ship or a new aircraft or new machinery or plant..... for the purposes of the business of the undertaking; (C) It is an agreed position that in order to claim investment allowance, 75% of the amount of investment allowance claimed should be debited to the profit and loss account and credited to a separate reserve account and that is the requirement prescribed under section 32A(4). However, if the plant and machinery on which the investment allowance was granted was "sold or otherwise transferred" before the expiry of 8 years after the installation of plant and machinery by the assessee or, if within 10 years after the installation of plant and machinery the amount in the reserve account was not utilised for the purpose of acquiring a new ship, a new aircraft, new machinery or plant, it must be deemed that the investment allowance was wrongly allowed and should be brought to tax by rectifying the order of assessment under section 155(4A). In South India Steel Rolling Mill's case the correctness of the decision given by the Madras High Court in South India Steel Rolling Mill's ....
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.... lessor was the owner of the plant and machinery. The plant and machinery, no doubt, was being used by the lessee. However, it was found as a fact that leasing out plant and machinery was the business carried on by the assessee. Therefore, their Lordships concluded that the impugned plant and machinery before them should be considered to have been used for the purpose of the business of the assessee. Had it been the decision of the Hon'ble Supreme Court that user of plant and machinery itself entitled the person using them for investment allowance, then the lessee in that case should have been granted investment allowance but not the lessor. I also came across a decision of the Gujarat High Court in CIT v. Nandiniben Narottamdas [1983] 140 ITR 16/[1981] 7 Taxman 389 (Guj.). There, the question was whether it is a case to which section 60 can apply. In that case also, the share of the assessee in a firm was assigned and donated to specified beneficiaries and also declared himself that thereafter he holds the share in the firm as trustee and not as owner. In the facts of that case, the Gujarat High Court held that the assessee can no longer be held to be the owner of the share in the....