Holding

The development rebate must be withdrawn because the machinery was not used by the assessee for eight years and its sale by the coparceners after partition triggers Section 155(5).

Summary

The assessee, a Hindu Undivided Family (HUF), was granted a development rebate under Sections 33 and 34 of the Income‑Tax Act for new machinery used in its business for assessment years 1960‑61 to 1965‑66. In 1967 a partial partition of the HUF allotted the machinery to two coparceners, who subsequently sold it to a third party within eight years of its installation. The Assessing Officer withdrew the rebate under Section 155(5), a decision upheld by the Tribunal and the Madras High Court. The Supreme Court examined whether the sale by the coparceners, post‑partition, amounted to a transfer by the assessee and whether the machinery had been used by the HUF for the requisite eight‑year period. It held that the HUF had not used the machinery for eight years and that the sale, even though effected by the coparceners after partition, satisfied the conditions of Section 155(5); consequently the rebate was correctly withdrawn. The appeal was allowed in favour of the revenue.

Issues considered

Whether a partial partition of a Hindu Undivided Family results in a transfer of machinery within the meaning of Section 2(47) and Section 155(5).
Whether the HUF used the machinery for the full eight‑year period required under Section 33(1)(a) and Section 34(3)(a).
Whether Section 155(5) can be invoked to withdraw a development rebate when the machinery is sold by coparceners after partition.

Legislation cited

Income Tax Act, 1961s. 155(5), s. 2(47), s. 33, s. 34

Subjects

development rebateSection 33Section 34Section 155(5)Hindu Undivided Familypartial partitiontransfer of assetsincome tax

Judgment

COMMISSIONER OF INCOME-TAX, TAMIL NADU A
v.
S. BALASUBRAMANIAN

MARCH 24, 1998

[SUJATA V. MANOHAR AND D.P. WADHWA, JJ.] B

Income-Tax Act, 1961--Sections 33, 34 and 155(5)-Development
Rebate-Withdrawal of-Business carried on by Assessee, a Hindu Undivided
Family-Development Rebate allowed to assessee on new machinery and
plant-Partial Partition of Joint Family properties-New Machinery and C
Plant, allotted to two coparceners at written down value-Sold by them
within eight years of purchase-Held, Development Rebate allowed earlier
rightly withdrawn.

Section 2(47)-Hindu Undivided Family-Partial Partition-Share D
allotted to coparcener-Does not amount to transfer.

Assessee, a Hindu Undivided Family, carried on business. For
assessment years 1960-61 to 1965-66 development rebate was allowed to the
assessee on new machinery and plant. On a partial partition of joint family
properties, plant and machinery were allotted to two coparceners at written E
down value. Within eight years of purchase the same was sold by them to
a third party. The Development Rebate allowed earlier was withdrawn by the
lncoine Tax Officer. In Appeal, the Tribunal held that the withdrawal of
Development Rebate by the Income Tax Officer was wrong. The Tribunal's
decision was upheld by the High Court.
F
In appeal before this court it was contended by the Revenue that under
Section 33(l)(a) the assessee had before the expiry of eight"years, ceased to
carry on the business. The plant and machinery purchased was sold by them
before the expiry of eight years, whereby they ceased to comply with Section
33(1 )(a) and also the requirement of Section 34(3)(a) and lost its right to
development rebate which was granted earlier. G
Allowing the appeal, this Court
HELD: I. In the instant case the assessee has not used the machinery
• for its business for a period of eight years even if one takes the assessee
as a compendium of joint Hindu family-cum-coparceners. Sections 33, 34 H
415
416 SUPREME COURT REPORTS (1998] 2 S.C.R.

A and 155(5) of the Income-Tax Act have to be read together. Development
Rebate can be granted when the new machinery is wholly used by the
assessee for the purpose of his business for a period of eight years and it
should not be sold or otherwise transferred by the assessee. 1423-G-HJ

2. On partition, the shares of the coparceners in the joint family
B business become defined and their community of interests is separated. The
property which so comes to the share of the coparcener, therefore, cannot
be considered as transfer by joint family to a coparcener or the extinguishment
of the right of the joint family in the property, the joint family not having
its own separate interest in that property which can be transferred.1421-GI
c Malabar Fisheries Co. v. Commissioner of Income-Tax, Kera/a, 120
ITR 49, referred to.

CIVIL APPELLATE JURISDICTION : Civil Appeal Nos. 4048-53
of 1984.
D From the Judgment and Order dated 2 I. 7.81 of the Madras High Court
in T.C. Nos. 38-43of1977.

T.L.V. Iyer, Arun K. Sharma, C. Radha Krishna and B.K. Prasad for the
Appellant.
E S. Ganesh, T. Ravi Kumar, Pratap Venugopal, Ms. Manju Mishra and
K.J. John for the Respondent.

The Judgment of the Court was delivered by

MRS. SUJATA V. MANOHAR, J. The following question was referred
F to the High Court of Madras under Section 256(1) of the Income-tax Act, 1961: i
"Whether on the facts and in the circumstances of the case, the
Appellate Tribunal was right in holding that the provisions of Section
155(5) of the Income-tax Act, 1961 are not applicable to the facts of
G the casP- and that the Developments rebate allowed for assessment
years 1960-61 to 1965-66 cannot be withdrawn by the Income-tax
Officer?"

The assessee at the material time, was a Hindu undivided family of
which one Srinivasa Iyer was the Karta and his son, the respondent, was a
H coparcener. The joint family carried on business. For the assessment years
C.J.T. v. S. BALASUBRAMANIAN [SUJATA V. MANOHAR, J.] 417
1960-61to1965-66 development rebate was allowed to the joint Hindu family A
on new machinery and plant installed by joint Hindu family for the purpose
its business. On 1.8.1967, there were a partial partition of the joint family and
the plant and machinery which had been the subject matter of development
rebate was allotted to the two coparceners at written down value. After the
partition, the two members sold the machinery and plant allotted to them B
respectively to a third party on I st of October, 1967.

On coming to know of the sale within a period of eight years from the
installation of the said plant and machinery, the Income-tax Officer by his
letter dated 6th of February, 1961, proposed to withdraw the development
rebate granted to the assessee on the ground that the machinery had been
sold within the statutory period. It was contended on behalf of the assessee C
that the person to whom the development rebate had been allowed was the
Hindu undivided family. The Hindu undivided family did not sell or transfer
the plant or machinery and hence Section 155(5) of the Income-tax Act, 1961
would not be attracted. This contention has been upheld by the Tribunal as
well as by the High Court. The High Court further held that the Hindu D
undivided family had not merely not sold the machinery or plant itself, or
transferred it, but it had also not ceased to utilise the amount credited to the
reserve fund as contemplated by Section 34(3). As a result, the withdrawal
of the development rebate by the Income-tax Officer was held to be wrong.

To decide the controversy before us, it is necessary to set out the E
relevant provisions of Sections 33, 34 and 155(5) as they stood at the relevant
time:

"33. Development rebate - (l)(a) In respect of a new ship or new
machinery or plant, (other than office appliances or road transport
vehicles) which is owned by the assessee and is wholly used for the F
purposes of the business carried on by him, there shall, in accordance
with and subject to the provisions of this section and of Section 34,
be allowed a deduction, in respect of the previous year in which the
ship was acquired or the machinery or plant was installed or, if the
ship, machinery or plant is first put to use in the immediately succeeding
previous year, then, in respect of that previous year, a sum by way G
of development rebate as specified in clause (b ).

34. Conditions for depreciation allowance and development rebate- H
418 SUPREME COURT REPORTS [ 1998] 2 S.C.R.

A
(3)(a) The deduction referred to in Section 33 shall not be allowed
unless an amount equal to seventy-five per cent of the development
rebate to be actually allowed is debited to the profit and loss account
of any previous year and credited to a reserve account to be utilised
by the assessee during a period of eight years next following for the
B
purposes of the business undertaking, other than
r
(b) If any ship, machinery or plant is sold or otherwise transferred
by the assessee to any person at any time before the expiry of eight
c years from the end of the previous year in which it was acquired or
installed, any allowance made under Section 33 or under the
corresponding provisions of the Indian Income Tax Act, 1922 ( 11 of
1922), in respect of that ship, machinery or plant shall be deemed to
have been wrongly made for the purposes of this Act, and the
provisions of sub-section (5) of Section 155 shall apply accordingly:
D

(underlining ours)

Section 155(5) which deals with withdrawal of development rebate provides
as follows:
E
"155(5): Where an allowance by way of devdopment rebate has been
made wholly or partly to an assessee in respect of a ship, machinery
or plant installed after the 3 lst day of December, 1957, in any ·
assessment year under Section 33 or under the corresponding
provisions of the Indian Income Tax Act, 1922, and subsequently -
F
(i) at any time before the expiry of eight years from the end of the
previous year in which the ship was acquired or the machinery
or plant was installed, the ship, machinery or plant is sold or
otherwise transferred by the assessee to any person other than
the Government, a local authority, a corporation established by
G a Central, State or Provincial Act or a Government company as
defined in Section 617 of the Companies Act, 1956 or in
connection with any amalgamation or succession referred to in
sub-section (3) or sub-section (4) of Section 33; or

(ii) at any time before the expiry of the eight years referred to in sub-
H section (3) of Section 34, the assessee utilises the amount credited
C.l.T. v. S. BALASUBRAMANIAN [SUJATA V. MANOHAR. J.] 419

to the reserve account under clause (a) of that sub-section- A
,. (a) for distribution by way of dividends or profits; or

(b) for remittance outside India as profits or for the creation of any
asset outside India; or
B
(c) for any other purpose which is not a purpose of the business of
~
the undertaking;

the development rebate originally allowed shall be deemed to have
been wrongly allowed, and the Assessing Officer may, notwithstanding
anything contained in this Act, recompute the total income of the
c
assessee for the relevant previous year and make the necessary
amendment, and the provisions of section I 54 shall, so far as may be,
apply thereto, the period four years specified in sub-section (7) of that
section being reckoned from the end of the previous year in which the
D
".
sale or transfer took place or the money was so utilised."

(underlining ours)

Jn the present case, we are concerned with the application of Section
155(5) and the withdrawal of development rebate. There are two situations in
which the development rebate which was originally allowed shall be deemed
E
to have been wrongly allowed. And the Income-tax Officer will be entitled to
recompute the total income of the assessee for the relevant previous years
and make the necessary amendment as set out in that section. These two
conditions are: (1) That at any time before the expiry of eight years from the
I
,.. end of the previous year in which the machinery or plant was installed, the F
machinery or plant is sold or otherwise transferred by the assessee as set out
in that section (2). If the assessee at any time before the expiry of eight years
utilises the amount in the reserve account either for distribution by way of
dividends, profits or for remittance outside India as profits or for the creation
of any asset outside India or for any other purpose which is not a purpose G
of the business of the undertaking. In the present case, the reason for
invoking the provisions of Section 155(5) is that the assessee has, before the
""" expiry of eight years, sold or other wise transferred the machinery or plant.

The Joint Hindu family, in the present case, effected a partial partition.
As a result of that partial partition, portions of plant and machinery came to . H
420 SUPREME COURT REPORTS (1998] 2 S.C.R.

A the share of each of the coparceners. These coparceners, in turn, sold the
machinery to a third party. Section 155 (5) (I) requires that: (I) the plant or
machinery should be sold or otherwise transferred: (2) the transfer should be
by the assessee to any person. Here, on a partial partition of the joint Hindu
family portions of plant and machinery have come to the share of two
B coparceners. We have to examine first, whether this amounts to a transfer of
plant and machinery by the joint Hindu family to the individual coparceners.
The term 'transfer' is defined under Section 2(47) of the Income-tax Act, 1961, ~
in a wide manner so as to include not merely a sale or exchange, but also
extinguishment of any right in the capital assets (vide capital gains). Whether
in the present case the partial partition results in the extinguishment of any
C right of the assessee joint Hindu family in the assets of the joint Hindu family,
or amounts to a transfer of its assets to the individual coparcener, requires
to be considered.
A similar question came up before this Court and was considered by
D a Bench of three judges in Malabar Fisheries Co. v. Commissioner of Income-
tax, Kera/a, ( 120 ITR 49). In that case the development rebate had been
granted to the partnership firm which was dissolved within a period of eight
years. On dissolution of the firm, assets were distributed between the partners.
This Court examined the question whether on dissolution of the pa11nership
firm there was any transfer of assets from the partnership firm to the partners.
E This Court held that there was no transfer of any asset from the partnership
finn to its partners on dissolution of the firm. This Court observed (p.54), "On
a plain reading of Section 34(3)(b) it will appear clear that before that provision
can be invoked or applied three conditions are required to be satisfied: (a) that
the ship, machinery or plant must have been sold or otherwise transferred,
F (b) that such a sale or transfer must be by the assessee, and (c) that the same
must be before the expiry of eight years from the end of the previous year
in which it was acquired or installed. It is only when these three conditions
are satisfied that any allowance made under Section 33 shall be deemed to
have been wrongly made and the Income-tax Officer acting under Section
G I 55(5) will be entitled to withdraw such allowance." Referring to the definition
of 'transfer' in Section 2(47) the Court said : " The question is whether the
distribution, division or allotment of assets of a firm consequent on its
dissolution amounts to a transfer of assets within the meaning of words
'otherwise transferred' occurring in Section 34(3)(b) of the Act, regard being
had to the definition of 'transfer' contained in section 2(47). To put it pithily, .
H the question is whether the dissolution of a firm extinguishes the firm's rights
C.l.T. v. S. BALASUBRAMANIAN [SUJATA V. MANOHAR, J.) 421

in the assets of the partnership so as to constitute a transfer of assets under A
Section 2(47)." After examining a number of authorities in a detailed judgment,
this Court came to the conclusion that the partnership firm under the Indian
Partnership Act, 1932 is not a distinct legal entity apart from the partners
1 constituting it and equally in law, the firm, as such, has no separate rights
of its own in the partnership assets. When one talks of the firm's property
B
or firm's assets, all that is meant is property or assets in which all partners
' have a joint or common interest. If that be the position, it is difficult to accept
the contention that upon dissolution the firm's rights in the partnership
assets are extinguished. The firm as such has no separate rights of its own
in the partnership assets but it is the partners who own jointly or in common
the assets of the partnership and, therefore, the consequence of the c
distribution, division or allotment of assets to the partners which flows upon
dissolution after discharge of liabilities is nothing but a mutual adjustment of
rights between the partners and there is no question of any extinguishment
of the firm's rights in the partnership assets amounting to a transfer of assets
within the meaning of Section 2(47) of the Act." D
":'
The same reasoning would apply to partition of a Hindu Joint family.
In "Principles of Hindu Law", Mulla, at page 262 (16th Edition) has compared
a partnership firm and a joint Hindu family firm and set out points of distinction
between the two. The main distinction is that in a joint family business no
member of the family can say that he is the owner of any specific share. The E
essence of joint Hindu family property is unity of ownership and community
of interest. Shares of the members are not defined. However, in view of the
unity of ownership and community of interest of all coparceners in the joint
Hindu family business, the position on partition of joint Hindu family business,
r whether it be partial or complete, is very similar in law to the position on F
• dissolution of a partnership firm. On partition the shares of the coparceners
in the joint family business become defined and their community of interests
is separated. Division of assets is a matter of mutual adjustment of accounts
as in the case of a dissolved partnership firm. The property which so comes
to the share of the coparcener, therefore, cannot be considered as transfer by
the joint family to a coparcener or the extinguishment of the right of the joint G
"'<·
family in that property, the joint family not having its own separate interest
'
in that property which can be transferred. Therefore, the entire reasoning in
the case of Malabar Fisheries Co. (supra) equally applies to the partition of
the assets of a joint Hindu family. If that be so, then the ratio in the case of
Malabar Fisheries Co. (supra) covers the present case as has been held in H
422 SUPREME COURT REPORTS [ 1998] 2 S.C.R
A the impugned judgment of the Madras High Court.
In the Malabar Fisheries Co., (supra) there is an additional reason
given for holding that Section 34(3)(b) is not attracted. The Court has said
that the sale or transfer of assets mus: be by the assessee to a person. Upon
dissolution, the firm ceases to exist. Then follows the making up of the
B accounts, distribution of assets etc. This distribution is not done by the
dissolved firm. In this sense, there is no transfer of assets by the assessee,
that is to say, the dissolved firm, to any person. The same will be the position
in the case of partition of a joint Hindu family when assets are divided
between the coparceners.
c
In the present case, however, unlike the Malabar Fisheries Co. 's case
(supra), a further event has occurred within eight years after the partial
partition of the Hindu Joint family and distribution of its assets amongst the
coparceners. The coparceners have sold the machinery to a third party within
D a period of eight years. Looking to the conditions which have been stipulated
in Section 34(3)(b), the sale or transfer is required to be by the assessee to
a third party. In the present case since the sale is not by the joint family to
the third party this condition is held as not fulfilled by the Madras High
Court, although there is, in fact, a sale to a third party. In the light of the
judgment in the Malabar Fisheries Co. 's case (supra), the Madras High Court
E has, therefore, held that the re-opening by the Income-tax Officer under
Section 155(5) of the Income-tax Act, 1961 was not in accordance with law.

The appellant, however, has drawn our attention to two recent decisions
of this Court where a somewhat different view has been taken of the provisions
p relating to development rebate. In the case of South India Steel Rolling Mills,
Madras v. Commissioner of Income tax, Madras, (1997] 9 SCC 728, a Bench ,1
of two judges of this Court examined the case where the partnership firm had
obtained the benefit of development rebate under Section 33(J)(a) but the
partnership firm stood dissolved before the expiry of eight years on account
of the death of one of the two partners, although from the next day a new
G partnership firm was constituted. This Court said that under Section 33( 1)(a),
the words which qualify an assessee for obtaining development rebate are,
(plant and machinery) "which is owned by the assessee and is wholly used
for the purposes of the business carried on by him." Therefore, the machinery
must be used for a period of eight years by the assessee for the purposes
H of the business carried on by him. Since the assessee had ceased to carry
C.l.T. v. S. [lALASUBRAMANIAN [SUJATA V. MANOHAR. J.] 423
on business within the period of eight years, it ceased to comply with Section A
33(1 )(a) and the similar requirements of Section 34(3)(a). Hence it would lose
its right to the development rebate which was earlier granted. This Court
distinguished the decision in Malabar Fisheries Co. 's case (supra) by saying
that in that case this Court had construed the expression 'transfer' in the
context of Section 34(3)(b) of the Act while in the case before it the partnership B
firm ceased to exist because it was dissolved before the period of eight years.
In the case of Commisswner of Income-lax v. Narang Dairy Products, (219
ITR 478) development rebate was withdrawn when the assessee did not use
the machinery for the purpose of his business for eight years.

The right to recompute the total income which is given to the Income- C
tax Officer under Section 155(5) on the ground that the development rebate
originally allowed shall be deemed to have been wrongly allowed has to 6e
exercised in accordance with the provisions of Section 155 (5). The
circumstances under which the development rebate shall be deemed to have
been wrongly allowed are set out in Section 155(5) and these are: (I) That at D
':- any time before the expiry of eight years, the plant or machinery is sold or
otherwise transferred by the assessee to any person. (2) The second condition
is about the breach of terms relating the utilisation of the reserve account.
There is no express requirement under Section 155(5)(i) or section 34(3)(b)
that the plant or machinery should be used for a period of eight years by the E
assessee wholly for the purpose of his business. However, Sections 155(5)
and 34(3)(b) cannot be read in isolation ignoring Section 33. In Malabar
Fisheries Co. 's case (supra) the question whether the asset could'be said to
be used by the partnership firm for a period of eight years for the purposes
of its business when the firm was dissolved within eight years, was never
r• raised. Moreover, this question possibly did not arise because the machinery F
remained with the partners during eight years although the firm was dissolved.
In the present case, although the partial partition does not result in any
transfer and we may treat the machinery as with the assessee, there is a sale
of the machinery to a third party within eight years. Therefore, this is a clear
case where the assessee has not used the machinery for his business for a G
period of eight years even if we take the assessee as a compendium of joint
"I'- Hindu family-cum-coparceners. Sections 33, 34 and 155(5) have to be read
together. Development rebate can be granted when the new machinery is
wholly used by the assessee for the purpose of his business. It should be
so used by the assessee for a period of eight years. It should also not be H
424 SUPREME COURT REPORTS [1998] 2 S.C.R

A sold or otherwise transferred by the assessee. Since that is not the case here,
Section 155(5) has been rightly invoked in the present case.

The appeals are, therefore, allowed. The question is answered in the
negative and in favour of the revenue.

B N.J. Appeals allowed.