Holding

A lease that deprives the assessee of exclusive possession of machinery constitutes an "otherwise transfer" under Section 34(3)(b), justifying withdrawal of the development rebate.

Summary

The assessee, Narang Dairy Products, was granted a development rebate under Section 33(1)(a) of the Income Tax Act for its entire machinery in AY 1965-66. Subsequently, part of the machinery was sold and the remaining plant was leased to Hindustan Lever Ltd for three years, within the eight‑year period prescribed by Section 34(3)(b). The Income Tax Officer withdrew the entire rebate, invoking the "otherwise transferred" clause of Section 34(3)(b). The Income Tax Appellate Tribunal held that a lease did not constitute a transfer and allowed the assessee's appeal, but the Revenue sought review. The Supreme Court held that leasing the plant removed the assessee’s exclusive possession and enjoyment, which under the inclusive definition of "transfer" in Section 2(47) amounts to an "otherwise transfer"; consequently, the withdrawal of the rebate was justified. The Court set aside the Tribunal’s decision and allowed the Revenue’s appeal.

Issues considered

Whether a lease of machinery within the eight‑year period amounts to an "otherwise transfer" under Section 34(3)(b) of the Income Tax Act, 1961.
Whether the withdrawal of the development rebate under Section 33(1)(a) is justified when the assessee ceases to have exclusive use of the plant.

Legislation cited

Income Tax Act, 1961s. 2(47), s. 256(1), s. 256(2), s. 33(1)(a), s. 34(3)(b)
Transfer of Property Act, 1882s. 53A

Subjects

development rebateSection 33Section 34(3)(b)transferleaseexclusive possessionIncome Taxcapital asset

Judgment

(

J -
A THE COMMISSIONER OF INCOME TAX
v.
MIS. NARANG DAIRY PRODUCTS

FEBRUARY 28, 1996

B [B.P. JEEVAN RADDY AND K.S. PARIPOORNAN, JJ]

Income Tax Act, 1961: Sections 2(47), 33((1)(a) and 34(3)(b)

Development rebate-Granted for entire machine1y owned by assessee
C and used for its business--S:1bsequently pmt of machine1y sold and remaining
leased out-Within prohibited statut01y peliod--Consequently entire develop-
ment rebate withdrawn-Held : such lease covered by expression "otlwwise
transfen·ed''--Hence, withdrawal of entire development rebate j~tstified.

Development rebate-Entitlement to-Conditions for-Held
D Machi1wy or plant must not only be owned but also exclusively used by
assessee for the business.

Words and Phrases :

"Transfer''-"Othe1wise transfe11"ed''-Meaning of-Jn the context of Sec-
E tion 34(3)(b) of the Income Tax Act, 1961.

The respondent-assessee was a registered firm. In respect of its as-
sessment for the assessment year 1965-66, the Income Tax Officer allowed
development rebate for the entire machinery and plant owned by it. A part
of the machinery was subsequently sole and the machinery that was left was
F let out by the assessee on lease. In the circumstances, the Income Tax
Officer withdrew the development rebate. The appeal filed by the assessee
was dismissed by the Appellant Assistant Commissioner. Its further appeal
was allowed by Income Tax Appellate Tribunal. It also refused the
Revenue's application for reference to the High Court. Therefore Revenue
G filed an application under S. 256(2) before the High Court, which was also
dismissed. Hence this appeal.

On behalf of the Revenue it was contended that by entering into the
lease transaction the assessee had "otherwise transferred" the machinery
or plant before the expiry of eight years as prescribed by Section 34(3)(b)
H of the Income Tax Act, 1961 from the year of acquisition and installation
1168
C.l.T. v. NARANG DAIRY PRODUCTS 1169

and, therefore, the withdrawal of development allowance was justified. A
On behalf of the assessee it was contended that under Section
34(3) (b) read with Section 2( 47) of the Act this was not a case of any "sale"
or "transfer otherwise" extinguishing its rights in the machinery or plant.

Allowing the appeal, this Court B
HELD : 1. It is not only the ownership of the plant or machinery, but
also its exclusive user by the assessee for the purpose of its business, that
is essential to enable the assessee to get the development rebate under
Section 33(1)(a) of the Income Tax Act, 1961. In cases where an assessee
disables himself for such continued exclusive user of the plant or C
machinery for the specified period, the consequences specified in_ Section
34(3) (b) of the Act will follow, provided the machinery or plant is "otherwise
transferred". It is true that there is no sale; nor is there any complete
extinguishment of the right of the assessee in the machinery or plant by the
grant oflease; but the exclusive possession and t:njoyment of the machinery D
or plant by the assessee no longer exists or survives. It is a case where the
machinery or plant is "otherwise transferred" by the assessee to any person
before the expiry of eight years from the end of previous year in which it
was acquired. Even assuming that the transaction may not be a "transfer"
as defined under Section 2(47) of the Act, the definition section is an
inclusive one and does not exclude the contextual or the ordinary meaning E
of the word, "transfer". (1174-D-G]

2. Keeping in view the purpose for which the relief by way of develop-
ment rebate is afforded under Section 33(1)(a) of the Act, in cases where the
machinery or plant is not used by the assessee for the purpose of business
carried on by him, for the.specified period, and such user is given over to F
another, it can be safely stated that the machinery or plant is "otherwise
transferred" by the assessee to another person. Hence, the withdrawal of the
development rebate by the Income Tax Officer is justified. [1175-B-C]

Blue Bay Fisheries (P) Ltd. v. Commissioner of Income Tax, 161 ITR G

- 1, approved.

CIVIL APPELLATE JURISDICTION: Civil Appeal No. 388 (NT)
of 1978.

From the Judgment and Order dated 1.8.77 of the Allahabad High H
1170 SUPREME COURT REPORTS [1996] 2 S.C.R.
)
A Court in LT.A. No. 194 of 1977.
Dr. V. Gauri Shankar, Manoj Arora and S.N. Terdol for the Appel-
lants.

Ms. S. J anani for the Respondents.
B
The Judgment of the Court was delivered by

PARIPOORNAN, J. The Commissioner of Income Tax, Lucknow
(the Revenue) having o?tained special leave of this Court in Special Leave
Petition (Civil) No. 3204 of 1977 by order dated 21.2.1978, has filed the
C Civil Appeal against the order ...>f Allahabad High Court dated 1.8.1977,
rendered in ITA No. 194 of 1977 rejecting the application filed by the
Revenue under Section 256(2) of the Income Tax Act (hereinafter referred
to as the Act). The Revenue required the Income Tax Appellate Tribunal,
Allahabad Bench, to refer the following question of law under Section
D 256(1) of the Act for the decision of the High Court :
"Whether the Tribunal was in law justified in holding that the
amendment order made by the 1.T.O. was not sustainable to the
extent to which it purported to withdraw development rebate
adm.issible to the assessee in respect of that part of the
E machinery/plant which was the subject matter of the hiring agree-
ment dated 27.8.1969."

(emphasis supplied)

The Appellate Tribunal rejected the said application by order dated
F 20.10.1976. It is, thereafter the Revenue filed the application undet Section
256(2) of the Act before the High Court, which was rejected by order dated
1.8.1977.

2. The. facts of this case are in a narrow compass. The respondent-
G assessee is a registered firm. It carried on the business of manufacture of
"milk powder". We are concerned herein with the assessment year 1965-66.
For the said year, the Income Tax Officer, by order dated 29.6.1968,
allowed development rebate for the entire machinery and plant owned by
the assessee and used for the said business in the sum of Rs. 1,00,093. A
part of the machinery was subsequently sold. The machinery that was left
H entitling the assessee to the development rebate for the said year was
\
~

C.l.T.v. NARANGDAIRYPRODUCTS (PARIPOORNAN,J.] 1171

determined at of Rs. 85,222. This machinery was let out by the assessee on A
27.8.1969 to M/s. Hindustan Lever Limited for a period of three years with
a provision for further renewal of the agreement or for outright purchase.
In the circumstances, the Income Tax Officer, by an amendment order
dated 30.3.1970, withdrew the development rebate of Rs. 1,00,093. The
appeal filed by the assessee was dismissed by the Appellate Assistant

- Commissioner. In further appeal before the Income Tax Appellate B
Tribunal, it was contended that there was no "sale" or "transfer" within the
meaning of Section 34(3)(b) of the Act, permitting withdrawal of the
development rebate of Rs. 1,00,093, granted earlier and in this view the
amendment order passed by the Income Tax Officer was improper and
unjustified. The Appellate Tribunal followed its earlier decision rendered C
for the assessment year 1970-71 and held that no transfer was involved by
the lease agreement and so Section 34(3)(b) of the Act was not attracted.
The appeal filed by the assessee was allowed. Thereafter the Revenue
required the Appellate Tribunal in RA No. 131/1976-77, to refer the
question of law, formulated hereinabove for the decision of the High Court.
The Tribunal declined the request of the Revenue and the application filed D
by the Revenue before the High Court also met with the same fate. It
necessitated the Revenue to approach this Court by special leave. After
obtaining special leave in SLP(C) No. 3204/77, the above appeal has been
filed.

3. We heard counsel. The. original assessment order for the year E
1965-66 was rendered on 29.6.1968. The amendment order withdrawing the
development rebate was passed by the Income Tax Officer on 30.3.1970.
In view of the pendency of the matter for over two decades we intimated
counsel on both sides that we propose to finally adjudicate the matter and
in that behalf, we withdraw the entire matter from the High Court, to this F
Court.

4. It is common ground that for the year 1965-66 the assessee was
allowed development rebate for the entire machinery and plant owned and
used by it for the purpose of business in the ~um of Rs. 1,00,093. Later, a
part of the machinery was sold. The assessee ~became entitled to develop- G
ment rebate only in the sum of Rs. 85, 222. It is common ground that the
machinery was let out by the assessee on 27.8.1969 to M/s. Hindustan Lever
Limited for a period of three years with the provision for further renewal
of the agreement or for outright purchase. The sole question that arises for
consideration is, whether in the circumstances, Section 34(3)(b) of the H
(
} ...
1172 SUPREME COURT REPORTS [1996] 2 S.C.R.

A Income Tax Act is attracted enabling the Income Tax Officer to pass the
amendment order as he did, dated 30.3.1970, withdrawing the development
rebate of Rs. 1,00,093 ? ·

5. Dr. Gauri Shankar, senior counsel appearing for the appellant,
submitted that by entering into the lease transaction the assessee has
B "otherwise transferred" the machinery or plant before the expiry of eight ......
years from the end of the previous year in which it was acquired and
installed and so the allowance made under Section 33 of the Act, in respect
of the machinery or plant should be deemed to have been wrongly made
for the purpose of the Act. Counsel for the assessee Smt. S. Janani,
c submitted that Section 34(3)(b) of the Act should be read along with the
definition contained in Section 2( 47) of the Act, and so read, this is not a
case of any "sale" or "transfer othewise" extinguishing the rights of the
assessee in the machinery or plant.

6. It will be useful to bear in mind the relevant statutory provisions
D Section 2(47), Section 33 and Section 34(3)(b) applicable to the instant
case:

"Section 2(47) - ("transfer", in relation to a capital asset, includes,-

(i) the sale, exchange or relinquishment of the asset; or
E
(ii) the extinguishment of any right therein; or

(iii) the compulsory acquisition thereof under law; or

(iv) in a case where the asset is converted by the owner
F thereof into, or is treated by him as, stock-in-trade. of a
business carried on by him, such conversion or treatment;)
(or)

(v) any transaction involving the allowing of the.possession of
any immovable property to be taken or retained in part
G
performance of a contract of the nature referred to in section
· 53A of the Transfer of Property Act, 1882 (4 of 1882); or

(vi) any transaction (whether by way of becoming a member
of, or acquiring shares in, a co-operative society, company or
H other association of persons or by way of any agree!llent or
C.I.T. v. NARANG DAIRY PRODUCTS [PARIPOORNAN, J.] 1173

any arrangement or in any other manner whatsoever) which A
has the effect of transferring, or enabling the enjoyment of,
any immovable property.

Explanation - For the purposes of sub-clauses (v) and (vi), "im-
movable property" shall have the same meaning as in clause ( d) of

- section 269UA;"

"33(1)(a) In respect of a new ship or new machinery or plant (other
than office appliances or road transport vehicles) which is owned
B

by the assessee and is wholly used for the pwposes of the business
canied on by him, there shall, in accordance with and subject to C
the provisions of this section and of section 34, be allowed a deduc-
tion, 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 of
development rebate as specified in clause (b). D

"34(3)(b) - If any ship, machinery or plant is sold or otlte1wise
transfe1Ted by the assessee to any person at any time before the
expily of eight years from the end of the previous year in which it
was acquired or installed, any allowance made under section 33 or E
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:
F
Provided that this clause shall not apply -

(i) where the ship has been acquired or the machinery or
plant has been installed before the 1st day of January, 1958;
or
G
(ii) where the ship, machinery or plant is sold or otherwise
transferred by the assessee to the Government, a local
authority, a corporation established by a Central, State or
Provincial Act or a Government Company as defined in
section 617 of the Companies Act, 1956 (1 of 1956); or H
}
1174 SUPREME COURT REPORTS [1996] 2 S.C.R.

A (iii) where the sale or transfer of the ship, machinery or plant \.

is made in connection with the amalgamation or succession,
referred to in sub-section (3) or sub-section (4) of section 33.

(emphasis supplied)
B
7. In this case, the machinery or plant was not sold. Admittedly, the .....
machinery was let out by the assessee to M/s. Hindustan Lever Limited on
27.8.1969, within a period of eight years from the end of the previous year
in which it was acquired. The only question is whether it can be said that
the machinery or plant was "otherwise transferred" by the assessee to any
C person. Under Section 33(1)(a) the development rebate is allowed in
respect of the new machinery and plant which is owned by the assessee
and is wholly used for the purpose of business canied on by him. When the
machinery was let out by the assessee to M/s. Hindustan Lever Limited, it
cannot admit of any doubt, that the said machinery or plant could not and
D was not used by the assessee for the purpose of business carried on by him.
It is not only the ownership of the plant or machinery, but also is its
exclusive user by the assessee for the purpose of his business, that is
essential to enable the assessee to get the development rebate under
Section 33(1)(a). In cases where an assessee disables himself from such
continued exclusive user of the plant or machinery for the purpose of his
E business for the specified period, the consequences specified in Section
34(3)(b) will follow, provided the machinery or plant is "otherwise trans-
ferred". It is true that there is no sale; nor is there any complete extinguish-
ment of the right of the assessee in the machinery or plant by the grant of
lease; but the exclusive possession and enjoyment of the machinery or plant
p by the assessee no longer exists or survives. Such right to exclusive posses-
sion and enjoyment vests in the lessee and it is a case where the machinery
or plant is "otherwise transferred" to the lessee. It is a case where the
machinery or plant is "otherwise transferred" by the assessee to any person
before the expiry of eight years from the end of previous year in which it
G was acquired. Even assuming that the transaction may not be a "transfer"
as defined under Section 2(47) of the Act, in our view, the definition
section is an inclusive one and does not exclude the contextual or the
ordinary meaning of the word, "transfer". There are different shades of
meaning to the word "transfer", viz., "to make over possession of to
another", "a delivery of title or property from one person to another", "to
H displace from one surface to another", "removal", "handover", "make over
C.l.T.v. NARANGDAIRYPRODUCTS [PARIPOORNAN,J.] 1175

-- possession of property to another", "change", "displace" etc. The words A
"otlwwise transfen-ed" occurring in Section 34(3)(b) should bear an ap-
propriate me;ming, in the context of the main provision, Section 33(1)(a)
of the Act. Section 34(3)(b) is closely linked to Section 33(1)(a) of the Act.
Keeping in view the purpose, for which the relief by way of development
rebate is afforded under Section 33(1)(a) of the Act, in cases where the B
machinery or plant is not wholly used by the assessee for the purpose of
business carried on by him, for the specified period, and such user is given
over to another, it can be safely stated that the machinery or plant is
"otherwise transferred" by the assessee to another person. In the above view
of the matter, we are of the view, that the withdrawal of the development
rebate by the Income Tax Officer in the amendment order dated 30.3.1970 C
by relying on Section 34(3)(b) of the Act is justified. We are broadly in
agreement with the decision of the Kerala High Court reported in Blue Bay
Fisheries (P) Ltd. v. Commissioner of Income-T<iX., (166 ITR 1), in the
interpretation of the crucial words occurring in Section 34(3)(b) of the Act,
"otherwise transferred". We set aside the decision of the Allahabad High D
Court and also of the Appellate Tribunal and answer the question formu-
lated by the Revenue under Section 256(1) of the Act in the negative, in
favour of the revenue and against the assessee. The appeal is accQrdingly
allowed. There shall be no order as to costs.

V.S.S. Appeal allowed.