1. These seven appeals, relating to the assessment years 1971-72 to 1977-78, filed by the assessee-company against the orders of the Commissioner (Appeals) deal with a similar issue and are, therefore, for the sake of convenience, disposed of by a consolidated order.
2. The assessee is a limited company. We were given to understand at the time of hearing of the appeals that Shri Laldas Jamnadas Vora was the chairman of the company, while the brother Shri Dhirendralal Kantilal Vora and the son of Shri Laldas Jamnadas Vora, Shri Umeshlal Vora, were the managing directors of the company. In July 1978, as part of family arrangement, it was decided that Shri Laldas Jamnadas Vora, Shri Dhirendralal Kantilal Vora and Shri Umeshlal Vora, who were, as already described, the chairman and managing directors, respectively of the company, will go out of the company and in consideration thereof the assessee-company transferred certain machinery for manufacturing valve seal rings to Voras Engineering (P.) Ltd. The ITO found that on the machinery and plant, transferred by the assessee-company to Voras Engineering (P.) Ltd., development rebate had been allowed for the assessment years 1971-72 to 1976-77 and investment allowance had been allowed for the assessment year 1977-78. The ITO held that since the plant and machinery on which development rebate was allowed in the earlier years had been transferred before expiry of 8 years from the end of the previous year in which the machinery and plant were installed, the development rebate had been wrongly allowed as laid down under the provisions of Section 155(5) of the Income-tax Act, 1961 ('the Act'). Similarly, for the assessment year 1977-78, the ITO held that the investment allowance had been wrongly allowed. The ITO, therefore, by orders under Section 155(5), withdrew the development rebate for the assessment years 1971-72 to 1976-77 on these items of plant and machinery which was, as already described, wrongly allowed and similarly withdrew the investment allowance, which for the assessment year 1977-78, was wrongly allowed. When the matter went up in appeal, the Commissioner (Appeals) agreed with the ITO on this issue and refused to interfere. The assessee-company has, therefore, come up in the present appeals before us.
3. The assessee's learned counsel, Shri Palkhivala, at the outset submitted that the assessment orders under consideration here were the subject-matter of appeals to the AAC/Commissioner (Appeals) and since the assessment orders had merged in the orders of the AAC/Commissioner (Appeals), there was no room for any rectification of the assessment orders by the ITO. Our attention was invited to the wordings-'the provisions of Section 154 of the Act shall so far as may be apply thereto'-and it was contended that the provisions of Sub-section (5) of Section 155 were not meant to negative and nullify the principle of merger of the order appealed against in the order of the appellate authority. Reference, in this connection, was made by him to the various judicial pronouncements in the cases of CIT v. Tejaji Farasram Kharawala [1953] 23 ITR 412 (Bom.), J.K. Synthetics Ltd. v. Addl. CIT [1916] 105 ITR 344 (All.), Jeewanlal (1929) Ltd. v. Addl. CIT [1977] 108 ITR 407 (Cal.) and CIT v. Narpat Singh Malkhan Singh [1981] 128 ITR 77 (MP). The first argument of Shri Palkhivala, therefore, was that since the assessment orders under consideration before us had been the subject-matter of appeals, the assessment orders had merged in the orders of the appellate authorities and, therefore, the ITO had no jurisdiction to rectify the assessment orders. Proceeding further, Shri Palkhivala argued that in interpreting the provisions of a statute, consideration had to be given to the intention of the Legislature and what was the reasonable construction to be put on the wordings of the provisions. Elaborating on his argument, Shri Palkhivala submitted that the intention of the Legislature in allowing development rebate was to encourage plough back of surplus for expansion of existing industry or setting up of new industries and the restriction on sale or transfer of the plant and machinery on which development rebate was allowed for a period of 8 years was with a view to prevent abuse of this incentive allowed by the Government. According to Shri Palkhivala, where there was a transfer of machinery and plant, as a result of the family arrangement, by the co-owners of the plant and machinery to one of them, it could never be the intention of the Legislature that this amounted to an abuse of the incentive of the development rebate earlier allowed and, hence, the development rebate should be withdrawn. Shri Palkhivala submitted that even though the machinery and plant belonged to the assessee-company, the fact remained that the company was owned by the various shareholders and the transfer of plant and machinery, as a result of the family arrangement, was to another company in which some of the shareholders of the assessee-company were also the shareholders, i.e., in other words, they were also the co-owners of the plant and machinery. A point was made that even if a company was a separate entity, it functioned through" the instrument of its shareholders, directors, etc. and the question of a sale or transfer only arises where a transfer is by a person who is the owner to another person who was not the owner and not where the transfer is by a set of co-owners to another co-owner. Our attention was invited to the ruling of the Hon'ble Supreme Court in the case of K.P. Varghese v. ITO [1981] 131 ITR 597 wherein their Lordships of the Hon'ble Supreme Court laid down that a statutory provision must be so construed, if possible, that absurdity and mischief may be avoided and where the plain literal interpretation of a statutory provision produces a manifestly absurd and unjust result which could never had been intended by the Legislature, the Court may modify the language used by the Legislature or even do some violence to it so as to achieve the obvious intention of the Legislature and produce a rational construction. On this basis, Shri Palkhivala submitted that the transfer of plant and machinery in the present case does not attract the provisions of Clause (b) of Sub-section (3) of Section 34 of the Act and the provisions of Sub-section (5) of Section 155. The third limb of the arguments of Shri Palkhivala was that the rectification under consideration here was being carried out under Section 154 and under Section 154 only that mistake can be rectified which is apparent from the record, that is, in respect of which no two conceivable views are possible and which does not involve a debatable issue. According to Shri Palkhivala, in view of the submissions made, whether there was a mistake apparent from record itself was a debatable issue and, therefore, the jurisdiction of the ITO under Section 154 was barred. It was also pointed out by Shri Palkhivala that the transfer of plant and machinery by the assessee-company, under consideration here took place after the assessments under appeal before us had been completed and this itself meant that there was no mistake apparent from the record in the assessment orders. In these circumstances, according to Shri Palkhivala, there was no question of any rectification under Section 154. Summing up, Shri Palkhivala submitted that the orders under Section 154, read with Section 155(5), for the assessment years 1971-72 to 1976-77 were unjustified and should be cancelled.
4. For the assessment year 1977-78, where what was withdrawn was not the development rebate but the investment allowance, the assessee's learned counsel, Shri Palkhivala, submitted that since the relevant provisions on the issue of the withdrawal of the investment allowance, where in pari materia with the provisions relating to the withdrawal of development rebate by order under Section 154, read with Section 155, the same arguments, as in the case of development rebate, will apply here as well.
5. On the other hand, the learned departmental representative, Shri Mahadeshwar submitted to us that the rulings cited by the assessee's learned counsel, Shri Palkhivala, on the issue of merger of the assessment orders in the order of the appellate authority were in the context of the powers of revision of the Commissioner under Section 33B of the Indian Income-tax Act, 1922 ('the 1922 Act') and Section 263 of the 1961 Act, which will not be applicable to the issue of rectification or amendment of the assessment orders, as laid down under Section 154 and Section 155. He referred to a number of rulings in the cases of Central Indian Insurance Co. Ltd. v. ITO [1963] 47 ITR 895 (MP), Kalooram Tirasilal v. ITO [1966] 59 ITR 308 (MP), Mrs. Freny Rashid Chenai v. ACED [1973] 90 ITR 31 (AP) and Karsandas Bhagwandas Patel v. G.V. Shah ITO [1975] 98 ITR 255 (Guj.), wherein their Lordships laid down that even where the assessment order is a subject-matter of appeal,"what merges in the order of the appellate authority is only that part of the assessment order which was the subject-matter of appeal before the appellate authority and even after an appeal from an order of assessment, a mistake in that part of the order of assessment which was not the subject-matter of appeal to the appellate authority and was left untouched by the appellate authority can still be rectified by order under Section 154 of the Act or the corresponding Section 35 of the 1922 Act, because the mistake was his own which he can always correct under Section 154 or Section 35, as the case may be. Our attention was also invited to Sub-section (1A) of Section 154, wherein it has been laid down that even if there is an appeal or revision against an order, any mistake in the order which was not the subject of consideration and decision by the appellate authority can be rectified under Section 154. This, according to Shri Mahadeshwar, clinches the issue that notwithstanding what according to the assessee's learned counsel, Shri Palkhivala, was the theory of merger of the order appealed against in the order of an appellate authority, that part of the order which was not the subject-matter of consideration or decision by the appellate authority, can always be rectified under Section 154. Proceeding further, Shri Mahadeshwar submitted that the words 'the provisions of Section 154 shall so far as may be apply thereto' refer to the provisions of Section 154 with a view to give effect to the provisions of Section 155(5) and from this it cannot be inferred that there was any of the intention Legislature express or implied that the provisions of Sections 154 and 155 will not be applicable where an assessment order has been the subject-matter of appeal even in respect of that part of the order which was left untouched by the appellate authority. Coming to the second limb of the argument of Shri Palkhivala, Shri Mahadeshwar submitted that the assessee under consideration here is a limited company which is a separate entity from its shareholders both under the income-tax law and under the general law and, therefore, to claim that the chairman, the managing directors and other shareholders of the assessee-company were the owners of the plant and machinery belonging to the assessee-company was not correct. Elaborating on his argument, Shri Mahadeshwar pointed out that the shareholders of a company are not the owners of the assets of the company except in the case of liquidation of the company or the distribution of the assets of the company in the shape of the dividends, etc. and none of these rare exceptions, apply in the present case. According to Shri Mahadeshwar, even if it is open to the revenue authorities to pierce the corporate veil in order to arrive at the truth and the correctness of the state of affairs, this can only be done where what is suspected is fraud or what is apparent is not the real state of affairs and this too cannot be said to be the case here.
He further submitted that the wordings of the provisions of Section 34(3)(b) and Sub-section (5) of Section 155 were very clear and do not lead to any ambiguity or absurdity and, therefore, the meaning and intention of the provisions of Section 34(3)(b) and Section 155(5) must be collected from the plain and unambiguous expressions used therein rather than from any notions which may be entertained regarding what is just or expedient, as laid down by the Hon'ble Supreme Court in the case of CIT v. Shahzada Hand & Sons [1966] 60 ITR 392. We were taken through the provisions of Sub-section (5) of Section 155 in order to point out that where there was a transfer of plant and machinery within the prohibited period of 8 years, the development rebate originally allowed is deemed to have been wrongly allowed and the ITO, notwithstanding anything contained in the Act, should recompute the total income for the relevant assessment year and make the necessary amendment, the provisions of Section 154 being applicable thereto with the further rider that the period of 4 years will be reckoned from the end of the previous year in which the sale or transfer took place. He, therefore, submitted that there is no question of a debate or difference of opinion which would bar the jurisdiction of the ITO as laid down under Sub-section (5) of Section 155. Elaborating on his argument, Shri Mahadeshwar submitted that the mention of Section 154 in Section 155(5) was only with a view to provide machinery to implement the provisions of Section 155(5) and to claim that since there was no mistake in the assessment orders on the date the assessment orders were passed and, hence, no action under Section 154 can be taken, is to put an interpretation which will make Section 155(5) a dead letter and cannot be said to be a reasonable construction of the provisions of Sections 154 and 155. Summing up, Shri Mahadeshwar justified the orders under Section 154, read with Section 155, passed by the ITO for all the assessment years under consideration before us and vehemently argued before us that these orders were rightly upheld in appeal by the Commissioner (Appeals).
6. We have carefully considered the rival submissions. We have gone through the rulings cited by the assessee's learned counsel, Shri Palkhivala, on the issue of merger of an order appealed against in the appellate order and find that these rulings were in the context of the power of revision of the Commissioner under Section 35B of the 1922 Act and Section 263 of the 1961 Act for enhancing, modifying or cancelling the assessment order passed by the ITO and directing a fresh assessment. These rulings will, therefore, not be applicable here. On the other hand, the rulings cited by the learned departmental representative, Shri Mahadeshwar, were on the issue of rectification of an assessment order which has been the subject-matter of appeal and their Lordships laid down that in respect of that part of the order of the ITO which was left untouched by the appellate authorities, the ITO has the jurisdiction to rectify any mistake appearing therein in exercise of his powers under Section 154. Even if there was any controversy on this issue, the same has been set at rest by Sub-section (1A) of Section 154 where it has been specifically laid down that even if an order has been considered and decided in any proceeding by way of appeal or revision, the ITO still has the jurisdiction to amend that part of the order which was not considered or decided by the appellate authority. Viewed in this context, it is not under dispute that the issue of grant of development rebate for the assessment years 1971-72 to 1976-77 and grant of investment allowance for the assessment year 1977-78 was never the subject-matter of consideration or decision by any appellate authority. The ITO's jurisdiction, therefore, to amend the assessment orders on this issue cannot be barred on the ground of the assessment orders having been the subject-matter of appeal to the appellate authorities.
7. We agree with the learned departmental representative that a limited company is a separate and distinct entity from its shareholders both under the general law and under the income-tax law. The properties owned by a limited company, therefore, cannot be said to belong to the shareholders except where the company is in liquidation or these properties have been distributed by the company in the form of dividends, etc., which is not the case here. In these circumstances, when the various items of plant and machinery by the assessee-company were transferred to another company, it was a transaction between two distinct and separate entities and the assessee's contention that this should be deemed to be a transaction between the shareholders of these two companies appears to be too far fetched and cannot be accepted.
8. The provisions of Clause (b) of Sub-section (3) of Section 34 and the provisions of Sub-section (5) of Section 155, are as follows : 34(3)(6) : 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 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 : (i) where the ship has been acquired or the machinery or plant has been installed before the 1st day of January, 1958 ; or (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 denned in Section 617 of the Companies Act, 1956 (1 of 1956) ; or (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.
155. (5) Where an allowance by way of development rebate has been made wholly or partly to an assessee in respect of a ship, machinery or plant installed after the 31st day of December, 1957, in any assessment year under Section 33 or under the corresponding provisions of the Indian Income-tax Act, 1922 (11 of 1922) and subsequently- (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 a Central, State or Provincial Act or a Government company as defined in Section 617 of the Companies Act, 1956 (1 of 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 eight years referred to in Sub-section (3) of Section 34, the assessee utilises the amount credited to the reserve account under Clause (a) of that Sub-section- (b) for remittance outside India as profits or for the creation of any asset outside India ; or (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 Income-tax Officer may, notwithstanding anything contained in this Act, recompute the total income of the assessee for the relevant previous year and make the necessary amendment ; and the provisions of Section 154 shall, so far as may be, apply thereto, the period of four years specified in Sub-section (7) of that section being reckoned from the end of the previous year in which the sale or transfer took place or the money was so utilised.
A combined reading of both of these provisions shows that there is no room for any confusion or ambiguity and the Legislature has laid down that except in the case of a transfer to a Government, a local authority, a Government corporation, a Government company or in cases of amalgamation of succession referred to in Sub-section (3) or (4) of Section 33, the transfer of plant and machinery within the prohibited period of 8 years, will result in the development rebate allowed originally being deemed to have been wrongly allowed and the ITO, notwithstanding anything contained in the Act, will recompute the total income for the relevant previous year for making the necessary amendment and for this purpose the provisions of Section 154 can be invoked within 4 years of the end of the previous year in which the sale or transfer took place. The words -'the provisions of Section 154 shall so far as may be, apply thereto', therefore, refer to the machinery provided to the ITO for making the necessary amendment in the assessment order with a view to withdraw the development rebate which according to Section 155(5), on account of the transfer of the plant and machinery on which development rebate was originally allowed having been sold or transferred within 8 years, was wrongly allowed. Since there is no ambiguity or confusion in the expressions used in Section 34(3)(b) and Section 155(5), or any absurdity resulting therefrom, the intention of the Legislature must be collected from the plain and unambiguous expressions used therein rather than from any notions of what is just or expedient. We are fortified in this view by the ruling of the Hon'ble Supreme Court in the case of Shahzada Nand & Sons (supra).
9. A similar issue also cropped up in the case of Chittoor Motor Transport Co. (P.) Ltd. v. ITO [1966] 59 ITR 238 (SC), wherein it was claimed before their Lordships of the Hon'ble Supreme Court that since the buses were sold by the limited company to a partnership firm constituted by the shareholders of the company, it is not a sale or transfer as contemplated by Section 10(2)(vib) of the 1922 Act [corresponding to Section 34(3)(b) of the 1961 Act under consideration here] and their Lordships laid down that they were not concerned whether there was any profit resulting from the transaction but whether there was a sale or transfer by the company to the partnership and, therefore, the provisions of Section 10(2)(vi-b) will be attracted to this transaction. The facts of the present case, where the sale was by the assessee-company to another limited company whose shareholders were not identical, are very much more unfavourable to the assessee than in the case of Chittoor Motor Transport Co. (P.) Ltd. (supra), decided by their Lordships of the Hon'ble Supreme Court. Following with respect, this ruling of the Hon'ble Supreme Court, we have no hesitation in holding that the provisions of Section 34(3)(b) and Section 155(5) will be applicable to the transfer of plant and machinery under consideration here. The development rebate allowed on these items of plant and machinery for the assessment years 1971-72 to 1976-77 was, therefore, rightly withdrawn by the ITO by the orders under Section 154, read with Section 155. Since the same reasonings and arguments will apply to the withdrawal of investment allowance for the assessment year 1977-78, we hold, for the assessment year 1977-78, that the investment allowance, already allowed on items of plant and machinery transferred, was rightly withdrawn by the ITO by order under Section 154, read with Section 155. This means that for all the 7 assessment years under appeal before us, the orders of the Commissioner (Appeals), on this issue, are upheld.10. Before we close, we would like to place on record our very deep appreciation of the very able manner in which both, the assessee's learned counsel, Shri Palkhivala, as well as the learned departmental representative, Shri Mahadeshwar, put forward their respective arguments.