TaxTMI 
TaxTMI 
1999 (2) TMI 108
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....ward. For the assessment 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 c....
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....section and since all other conditions had been fulfilled the investment allowance granted should not be withdrawn.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....
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....e by Finance Act of 1976. The conditions 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 b....
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.... former will have a restricted meaning. The 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 ....
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.... transfer in a scheme of amalgamation. It is to be 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 own....
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.... other condition regarding the reserve to be created could be 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 under....
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....t documents but the surrounding circumstances, the realities of the 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 d....
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.... to reserve account for acquiring new machinery or before the expiry of 10 years 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 15....
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....th section 32A(5) and withdrawing the investment allowance already granted for these years 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 Vic....
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....p; 40,244 (as current year investment allowance). Admittedly, the karta of the HUF, T.R. Ganapathy Chettiar, had declared on 1-4-1981 by means of an indenture that the business was carried on by him as trust property held for the benefit and maintenance c f his children and family members. Copy of the trust deed was filed and since there is no dispute with regard to the beneficiaries and regarding other terms contained in the trust deed, it is not necessary to mention the various recitals of the trust deed. It is enough for my purposes that Shri T.R. Ganapathy Chettiar himself constituted Trustee for the Trust till his death under clause 14 of the Indenture. All the names of the beneficiaries and their beneficial interests in the trust property have been mentioned at para 4(b) of the Indenture. According to the Assessing Officer, the creation of the trust amounted to a transfer of the businesses hitherto carried on by Shri Ganapathy Chettiar in favour of the trust. This act of transfer, in the opinion of the Assessing Officer, called for withdrawal of investment allowance under the provis....
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....usiness of the trust from 1-4-1981. Therefore, according to him, there was extinguishment of the assessee's rights to run the business from the date of declaration of the trust. He had adopted the definition of "transfer" in section 2(47) of the I.T. Act and held that transfer included declaration of property in trust. He also held that simply because the reserves were utilised for acquisition of new plant and machinery, it did not prevent the revenue to withdraw the investment allowance granted when once it was found that the provisions of section 32A(5) were violated. According to the Assessing Officer, this violation justified the rectification permitted under law under section 155(4A). Thus holding, the Assessing Officer withdrew the investment allowances granted for these years. 3. Against the orders dated 12-2-1985 for these four years, the assessee went in appeal before the CIT (Appeals), Coimbatore. The assessee was not successful in the appeals. Hence, the appeals were dismissed by separate orders dated 21-7-1986 for assessment year 1978-79, 30-12-1985 for assessment year 1979-80, 13-11-1985 for assessment years 1980-81 and 1981-82. Challenging the orders of the CIT(A),....
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....the Govt. would only by it at a price which it will take into consideration the rebate taken by the assessee and, therefore, the provision was not violative of the constitution. The Supreme Court also held that the sale by a firm to the company formed by partners would fall within the provisions contained in this section. He felt that the legislature perhaps took note of the hardship caused by this decision and that was the reason why the Finance Act, 1961, provided that a case of amalgamation or conversion of a firm into a company would not fall within the scope of a sale or transfer of the asset. By this, the learned Judicial Member was of the opinion that the expression "transfer" should not be given wide meaning but only a restricted application and it should be restricted to apply to sales or transfers which will defeat the purpose of the legislation. He dealt with the true meaning of the word "transfer" defined under section 2(47) of the I.T. Act in paragraphs 12 & 13 of his order and in para-14 he observed that in the appeals before him also, shorn of technicalities, one finds that the business continues to be carried on by the same person first on behalf of the HUF and late....
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....ensured that the conditions required for the development rebate were fulfilled and the objects of the legislature, namely, the use of the machinery in the industry, was effectuated. If the development rebate was to be withdrawn even when the undertaking was kept up, it would go against the intention of the Parliament in granting the development rebate and, therefore, he held that the provisions of section 155(4A) could not be invoked and investment allowance already granted could not be withdrawn or cancelled. 6. The learned Accountant Member was not able to agree with the opinion expressed by the Judicial Member in his order. According to the learned Accountant Member, for the purpose of grant of investment allowance in terms of section 32A of the I.T. Act. "ownership" of asset and "user" for the purpose of business "carried on by the assessee" were integrated and inseparable requirements. He cited the Supreme Court's decision in Sir Kikabhai Premchand's case , for the proposition that it was wholly unreal and artificial to separate the business from its owner and treat them as separate entities. In other words, they co-existed. Having regard to the terms of the trust deed date....
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.... learned Accountant Member had due regard to the provisions of sub-section (4) of section 32A and also the provisions of sub-section (5) of section 32A as well as the provisions of section 155(4A). The learned Accountant Member also held that the trust created by the assessee was 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. He also held that it was also not bound to utilise the reserve for the purpose for which it was created. Then, he considered what was meant by "transfer". He held on the basis of the Supreme Court and Madras High Court decisions cited in para-10 of his order that the conversion of proprietary business into partnership business involved transfer. He held that the obiter in S. Balasubramanian's case holding that the decision in the case of Dalmia Magnesite Corpn. required reconsideration in the light of the Supreme Court decision in Malabar Fisheries' case did not help the assessee and this was duly considered by the Madras D-Bench of the Tribunal in Wilson Industries' case which were all disposed of by a consolidated order dated 11-4-1986 wherein it was held that th....
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..... I have put a specific question to the assessee's counsel that when, according to both the Members, creation of trust amounted to "transfer", how could he argued against this position. Shri Devanathan, in answer, argued that while supporting the Judicial Member's order, this position could be taken, and he cited the Jabalpur Bench decision of the Tribunal in Asstt. CIT v. Thermoflics India [1997] 60 ITD 554. He also, inter alia, relied upon the Madras High Court decision in CIT v. K.S. Vaidyanathan [1985] 153 ITR 11/23 Taxman 169 (FB) in support of the elaborate discussion made by the ld. Judicial Member in his order that section 32A should be given purposive interpretation. He also laid down the following propositions for my acceptance: (1) Since the assessee is a going concern, the department cannot pick up an item of asset of the said concern and argue that that asset only was transferred. He elaborated saying that the HUF, if at all, had transferred the whole of the going concern with all its assets and liabilities and, therefore, it cannot be said that plant and machinery, for which the investment allowance was granted, were the only assets transferred. (2) He raised....
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....tion of the ld. Judicial Member that the gift-tax assessment was made on 28-3-1985 which is stated to be pending consideration in appeal and asked him whether he could tell whether that gift-tax appeal is still pending and, if so, with whom. The answer given is that it is still pending, with which the learned counsel for the assessee also agreed. However, the ld. Departmental Representative was unable to provide the gift-tax appeal number pending with the Tribunal. (2) The Id. Departmental Representative drew my attention to section 32A(5), particularly sub-section (a), and to the words "sold or otherwise transferred by the assessee to any person at any time before the expiry of eight years from the end of the previous year in which it was acquired or installed". (3) The ld. D.R. argued that in this case the transfer was made within the meaning of the said provision. According to him, once the trust is created, the ownership of the trust property changed hands. He maintained that without divesting the ownership of the property, trust cannot be created. (4) Explaining the ratio in Narang Dairy Products' case , which was cited for the assessee, the learned D.R. submitted tha....
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....aid down in section 34(3)(a), which means that the assessee who has obtained the development rebate under section 33(1)(a) must also be the assessee, who should utilise the amount credited to the reserve account during the period of eight years next following for the purpose of the business of the undertaking for which the development rebate was given. The condition for grant of rebate under section 33 read with section 34(3)(a) would not be satisfied, if the assessee who has availed of the rebate ceased to exist before the expiry of the period of eight years. Since the firm which had been granted the rebate had been dissolved and ceased to exist before the expiry of eight years, the rebate was liable to be withdrawn." Thus, it can be seen that the benefit of development rebate is available only to the owner of the machinery and plant who is also using the same wholly for the purposes of the business carried on by him. It was further held that the assessee who had obtained the development rebate under section 33(1)(a) must also be the assessee who should utilise the amount credited to the reserve account during the period of 8 years next following for the purpose of the business....
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.... by the ld. Accountant Member, and in support of this proposition he relied on CIT v. Podar Cement (P.) Ltd. [1997] 226 ITR 625/92 Taxman 541 (SC). 10. Thus, I have completely gone through the records of the case, heard the arguments on both sides and also had due regard to the point of difference cropped up between the two Members as referred to me. Firstly, I should hold that execution of the trust deed or creation of the trust amounts to a transfer. In this case, the trust deed was executed on 1-4-1981 by Shri T.R. Ganapathy Chettiar aged 58 years. I have gone through the trust deed which runs into 26 pages. The salient features of the terms of the trust deed are only highlighted for our purpose. It is stated that Shri Ganapathy Chettiar was carrying on business as a proprietary concern by the name and style of T.R. Ganapathy Chettiar and Ganapathy Refineries. The author of the trust appeared to be having wife, three sons and one daughter. The sons were all married and also were having children. So also his daughter was married and having her own children. As can be called out from the trust deed, the following appears to be the relationship between the author of the trust an....
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....p; (S2)(B5) | chandran (B8) ----------------- | | | | Sundara- | | Master Vinaya- valli (W) Master Sudhakar | Ramaswamy ....
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....bsp; | | Miss Gayatri Miss Anitha | | (B14) (B15) | | | | &nb....
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....ustee thereof for disposer, the disposer may at any time afterwards declare a specific trust of the property." Therefore, the terms of the trust deed made it very clear that Shri Ganapathy Chettiar was conducting the business as a sole trustee for each of the accounting years in question, though the trust deed was executed by him on 1-4-1981. Further, it was never the case of the assessee that the businesses were not run by the trust but represented his own businesses. Another question, which may be relevant, was whether the properties held under trust included business undertakings also. As per the following decisions of the Hon'ble Supreme Court as well as the Bombay High Court, the expression 'property' used in section 11 of the I.T. Act has the widest amplitude and it includes a business undertaking: 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 concede....
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....wrong, with due difference to my learned Brother, under law. I want to further strengthen my reasoning with reference to sub-section (5) of section 32A. So far as it is relevant for my purpose, the said sub-section reads as follows: "(5) Any allowance made under this section in respect of any ship, aircraft, machinery or plant shall be deemed to have been wrongly made for the purposes of this Act- (a) if the ship, aircraft, machinery or plant is sold or otherwise transferred by the assessee to any person at any time before the expiry of eight years from the end of the previous year in which it was acquired or installed; or (b) if at any time before the expiry of ten years from the end of the previous year in which the ship or aircraft was acquired or the machinery or plant was installed, the assessee does not utilise 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....
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....ts of that case before them. In CIT v. Shaan Finance (P.) Ltd. [1998] 231 ITR 308/97 Taxman 435, the Hon'ble Supreme Court, inter alia, considered the legality and correctness of First Leasing Co. of India Ltd.'s case . At pages 311 and 312, the following pre-conditions are to be fulfilled by any assessee before being entitled to investment allowance: "(1) the machinery should be owned by the assessee, (2) it should be wholly used for the purposes of the business carried on by the assessee, and (3) the machinery must come under any of the categories specified in sub-section (2) of section 32A." Therefore, it can be seen that the pre-condition for grant of investment allowance is that the assessee must be the owner of the plant and machinery. In the case before the Hon'ble Supreme Court also, the admitted fact was that the 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 ....