1. These appeals are directed against the rectification made under section 155(4A) of the Income-tax Act, 1961, for the purpose of withdrawing the investment allowance granted earlier year.
2. The assessee is a Hindu undivided family consisting of the karta and his wife. For the assessment year 1978-79, corresponding to the previous year ended on March 31, 1978, the assessment was made on April 15, 1980. In that assessment income was determined at a net loss of Rs. 2,39,188 which included investment allowance of Rs. 1,37,951 and was to be carried forward. For the assessment year 1979-80, the assessment was made on April 18, 1980, again determining the income at a net loss of Rs. 1,12,843. After adjustment of part of the investment allowance the balance of Rs. 1,12,390 was carried forward. For the assessment year 1981-82, the assessment was made on January 21, 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 April 15, 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 the trust declared on April 1, 1981, the karta of the assessee-Hindu undivided family 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 the 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 the Gift-tax Act because it was made in the course of the business. The gift-tax assessment was made on March 28, 1985, which is stated to be pending consideration in appeal.
4. The Income-tax Officer was of the opinion that this conversion of the business from the property of the Hindu undivided family into the property of a trust invited the application of the provisions of section 155(4A) read with section 32A(5) so that the investment allowance granted earlier had to be withdrawn. He, therefore, issued a notice under section 154 on January 25, 1985, to which the assessee filed its objections on January 29, 1985. The objection of the assessee was that the conversion of the property from the Hindu undivided family property into trust property did not amount to a transfer since there was no person in existence to whom the property was transferred as the trust itself came into existence only after the declaration of the trust and vesting the property in it. It was also claimed that the investment allowance had been utilised and hence the conditions stipulated had been fulfilled. But the Income-tax Officer was of the opinion that the declaration of the trust amounted to a transfer since there was a dispossession by the Hindu undivided family and the extinguishment of its rights in the property. He was also of the opinion that the conditions in section 32A had to be independently satisfied and even if the other conditions were fulfilled the fact that there was a transfer disentitled the assessee for the allowance.
5. He, therefore, passed an order dated February 12, 1985, withdrawing the investment allowance of Rs. 1,37,951 granted for the assessment year 1978-79 and redetermining the net loss of that year at Rs. 1,01,237. On the same day, he made a consequential assessment for the assessment year 1979-80 withdrawing the setting off of the unabsorbed investment allowance and business loss to redetermine the total income at Rs. 25,110. For the assessment year 1980-81 also, he passed an order on the same date withdrawing the investment allowance granted in that year at Rs. 59,988 as well as withdrawing the carried forward investment allowance of the earlier years of Rs. 1,12,843 to redetermine the total income at Rs. 2,24,750. Again for the assessment year 1981-82 by another order of the same date he withdrew the investment allowance of Rs. 40,244 granted for that year and redetermined the total income at Rs. 1,02,474.
6. In this appeal, the contention of the assessee is that there was no breach of any condition in section 32A as the conversion of the property of the Hindu undivided family into a trust property did not amount to a transfer within the expression "sold or otherwise transferred" in that 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 a 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 ([1955] 27 ITR (St.) 42), the Finance Minister referred to the recommendation of the Taxation Enquiry Commission and said that he proposed to allow development rebate of 25 per cent. of the cost of all the new plant and machinery installed for business purposes instead of the present initial depreciation allowance of 20 per cent. 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 ([1958] 33 ITR (St.) 61), prescribing the further condition that an amount equal to the amount of allowance due is debited to the profit and loss account of the relevant previous year and credited to a reserve account to be utilised during a period of ten years next following only for the acquisition of the assets for the purposes of the undertaking or for investment in the undertaking ([1958] 33 ITR (St.) 64). There was a further proviso that the allowance shall be subject to the condition that the plant or machinery is not sold or otherwise transferred by the assessee to any person other than the Government at any time before the expiry of ten years from the end of the year in which the plant or machinery was installed. The Finance Minister in his Budget Speech stated that the conditions for the grant of development rebate will be tightened as some instances of abuse of this concession had come to notice ([1958] 33 ITR (St.) 58). The Finance Act, 1958 ([1958] 33 ITR (St.) 141), however, Provided for the carry forward of the unabsorbed rebate and required the creation of a reserve of only 75 per cent. of the allowance. It also provided only for a negative obligation on the assessee not to utilise the reserve for distribution of profits or for creation of asset or remittance abroad for a period of eight years.
Sub-section (11) was introduced in section 35 to enable the Income-tax Officer to withdraw the allowance granted by recomputing the income in case of any breach of the condition regarding transfer of the asset or utilisation of the reserve.
9. The Finance Act of 1961, reduced the rate of development rebate and also provided that where a company is amalgamated with another company or where a firm is converted into a private company and the asset is transferred, the development rebate already allowed will not be withdrawn and the unutilised portion will be available to the successor company (see Finance Minister's Budget Speech [1961-62] [1961] 41 ITR (St.) 33), at page 55, para 97, and section 6 of the Finance Act, 1961.
10. When the Indian Income-tax Act, 1922, was substituted by the Income-tax Act, 1961, section 32 provided for development rebate as before on almost identical terms. Sub-section (5) enabled the Government to dis-continue the rebate which was done by a notification in 1971. It was revived by the Finance Act, 1977, in some cases. The Direct Taxes (Amendment) Act, 1974, gave an initial depreciation instead by inserting clause (vi) to section 32(1). This was then replaced by section 32A providing for investment allowance by the Finance Act of 1976. The conditions prescribed were the same as for development rebate except that there was now appositive 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 light of this background, we have to consider the scope and object of the expression "sold or otherwise transferred" which occurs in section 32A. As we have seen above this expression came into the statute in 1958 to prevent certain abuses. The Revenue has not enlightened us about the nature of the abuse which was sought to be prevented by this expression so that we can understand the scope of the expression by applying Heydon's rule to suppress the mischief and advance the remedy. But the decision of the Supreme Court in the case of Chittor Rotor Transport Co. (P.) Ltd. v. ITO [1966] 59 ITR 238, throws some light on this point. This provision was challenged as unconstitutional on the ground that it was discriminatory inasmuch as a sale to the Government was excepted. The Supreme Court pointed out that the Legislature perhaps presumed that if the machinery is offered to the Government for sale, the Government will only buy it at a price which will take into consideration the rebate taken by the assessee and, therefore, the provision was not violative of the Constitution.
This shows that the abuse which was in the mind of the Legislature was a possibility of the assessee selling away the machinery after obtaining the rebate and thus defeating the purpose of development of the industry which was the object of the rebate. The Supreme Court also held in that case that a sale by a firm to the company formed by the partners would fall within the prohibition contained in this section.
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.
This also indicates that this expression was not to be given a wide meaning but only a restricted application to sales or transfers which will defeat the purpose of the legislation.
12. The word "transfer" has been defined in section 2(47) in relation to a capital asset to include sale, exchange or relinquishment of the asset or the extinguishment of any rights therein or the compulsory acquisition of the asset and the conversion of the asset into stock-in-trade. But this definition has to be understood in that meaning unless the context otherwise requires. In the present case, the word "transfer" occurs in an expression of "sold or otherwise transferred" and obviously the context does not require that the widest meaning given in section 2(47) should be applied, especially when the section itself excludes the transfer of the Government. One of the rules of construction is that when a general word follows a particular or specific word, the 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 sociis according to which where two or more words which are susceptible to analogous meaning are coupled together, they take 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 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 the statute should be given a sensible meaning so as to make them effective. The Supreme Court has said in the case of Tirath Singh v.Bachittar Singh, AIR "It is well-settled that even if the language of a statute in its ordinary meaning and grammatical construction leads to a manifest contradiction of the apparent purpose of the enactment or to some inconvenience or absurdity, hardship or injustice presumably not intended, a construction may be put upon it which modifies the meaning of the words, and even the structure of the sentence." 14. The apparent purpose of this legislation was the encouragement of industries and the investment of money in respect of machinery to give a fillip to industrial development. Therefore, Parliament has stipulated that the machine should remain in the undertaking for eight years and the allowance also should be ploughed back in the undertaking by creating a reserve. The prohibition against transfer viewed in this light would be only a prohibition against the removal of the machine from the undertaking and not a prohibition with reference to the character in which the machinery is held as long as the machinery is in operation in the undertaking. This is clear from the fact that Parliament has not used the word "transferred" alone, for it would have been easy to say that the machine shall not be transferred thus taking into picture the definition of "transfer" including the extinguishment of rights as given in section, 2(47). It may be noted that the same expression appears in sections 33 and 33A also where again allowances are given in respect of new plant or machinery. This is in contrast to an allowance for an undertaking as such in section 80J. This indicates that the abuse which was noticed and which led to the stipulation of the prohibition of the term "sold or otherwise transferred" must be an alienation of a particular machinery after an allowance has been received in respect of that machine and could not have any relevance to the transfer of the undertaking as such. We may also usefully refer to the balancing charge under section 41 in respect of an asset which is sold after it has enjoyed the deduction of depreciation. There again, the attempt is only to prevent the machinery being taken out of the business after it has enjoyed the depreciation. This is clear from the definition of the word "sold" in section 32 which includes a transfer by way of exchange or compulsory acquisition but not a transfer in a scheme of amalgamation. It is to be remembered that courts have held that the balancing charge is not to be applied where the business is transferred as a going concern and not to individual machinery. Thus a reading of these provisions clearly indicates 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 [1953] 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 (page 509) : "It is well recognised that in revenue cases regard must be had to the substance of the transaction rather than to its mere form. In the present case disregarding technicalities it is impossible to get away from the fact that the business is owned and run by the assessee himself. In such circumstances we are of opinion, that it is wholly unreal and artificial to separate the business from its owner and treat them as if they were separate entities trading with each other and then by means of a fictional sale introduce a fictional profit which in truth and in fact is non-existent." 15. In the present case also if we cut out the technicalities what we find is that the business continues to be carried on by the same persons first on behalf of the Hindu undivided family and later on behalf of the trust. Thus, in substance there is no abuse of the provisions which is required to be met by treating the transaction as a transfer within the scope of the expression "sold or otherwise transferred". No doubt, the conversion of the property of the Hindu undivided family into the property of the trust by declaration of the trust constitutes a transfer under general law but it would not be a transfer within the restricted meaning of the expression "sold or otherwise transferred" keeping in mind the object and intention of Parliament in enacting this provision.
16. The Revenue relied upon the decision of the Kerala High Court in the case of Radhas Printers v. CIT [1981] 132 ITR 300, where the development rebate was withdrawn when a business of a firm was converted into a trust. But in that case it was not disputed that the transfer by creation of a trust did not fall within the expression "otherwise transferred" as the only objection was that there was no transfer at all.
17. The Revenue also referred to the decisions of the Madras High Court in the case of South India Steel Rolling Mills v. CIT [1982] 135 ITR 322 and Addl. CIT v. Dalmia Magnesite Corporation [1979] 117 ITR 930, where the development rebate was denied because the firm which made the investment had been dissolved and was, therefore, not in position to create the reserve or utilise it.
18. The assessee referred to the decision in the case of - CIT v. S.Balasubramanian [1982] 138 ITR 815 (Mad), where it was observed that the decision in Dalmia Magnesite Corporation [1979] 117 ITR 930 (Mad), required reconsideration. In that case, it was held that since the conditions had been fulfilled at the time of granting the development rebate the subsequent disruption of the family cannot affect the validity of the grant of allowance. All these cases related to the question whether the 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 interest 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.
19. In the circumstances, we are convinced that not only was there no transfer within the meaning of the expression "sold or otherwise transferred" but also that the section was not intended to affect cases of a transfer of the undertaking as such where the successor-in-interest ensures that the conditions required for the development rebate are fulfilled and the objects of the Legislature, namely, the use of the machinery in the industry is effectuated. If the development rebate is to be withdrawn even when the undertaking is kept up, it would in our opinion, go against the intention of Parliament in granting the development rebate. In the circumstances, we are of the opinion that this is not a fit case in which the provisions of section 155(4A) should be applied for withdrawing the investment allowance already granted. Hence, the orders made under section 155(4A) are cancelled.
1. I have gone through the order proposed by my learned brother which is both illuminating and instructive. At the same time, I am unable to agree with his decision. Hence, I record my note of dissent.
2. For the purpose of investment allowance in terms of section 32A of the Income-tax Act, 1961, "ownership" of asset and "user" for the purpose of business "carried on by the assessee" are integrated and inseparable requirements for grant of the investment allowance. The Supreme Court in the case of Sir Kikabhai Premchand v. CIT [1953] 24 ITR 506, observed, inter alia, that it is wholly unreal and artificial to separate the business from its owner and treat them as separate entities. In other words, they coexist. In the instant case, the assessee is holding the property in trust for the beneficiaries who have the jus habendi or the right to call upon the trustee to execute the conveyance of the legal estate. Therefore, the beneficiaries are the beneficial owners as well as the legal owners of the trust property. This is evident from the trust deed dated April 1, 1981. The author of the trust was desirous of not only making provision for the welfare, well-being and prosperity, etc., of all the beneficiaries but also provide them (sons and their wives) with assets, properties and the like, i.e., corpus of the trust property vide clauses 2(a), 2(b) and 4(a) of the trust deed. Thus there is not only transfer of income but also the corpus to the beneficiaries. Therefore, the assessee is no longer the owner of the business in general and the asset in particular on which the investment allowance was granted earlier. The business is also no longer carried on by the assessee. As sole trustee he is carrying on the business for and on behalf of the beneficiaries. As per the trust, the assessee is not entitled to have any benefit or enjoyment from the income or property of the trust. The taxing authorities are not required to put on blinkers while looking at 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 Durga Prasad More [1971] 82 ITR 540 at page 545. The McDowell principle is also required to be applied in [1985] 154 ITR 148 (SC). According to the Salmond 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 interests 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 to tax planning. Thus, the assessee who has hitherto been the owner of the trust property ceases to be so with effect from April 1, 1981, by virtue of the trust created. The trust is said to be irrevocable though it could be terminated earlier if all the beneficiaries agreed to do so, vide para 5(ii) or as decided by the trustee/board of trustees.
3. Section 63 defines "transfer" as including any settlement trust, covenant, agreement or arrangement. Thus transfer is involved when the trust was created which in this case took place on April 1, 1981. Such transfer was made by the assessee indirectly to his family members otherwise than for adequate consideration through the medium of trust in terms of sub-section (2) of section 64 of the Income-tax Act, 1961.
4. Let us consider what the other provisions say. The phrase "sold or otherwise transferred" also occurs in sub-section (2) of section 45.
Section 45 deals with assessment of profits or gains arising from the transfer of a capital asset. Section 45(2) deals with profits arising on conversion of capital asset as stock-in-trade which is 'sold or otherwise transferred'. Section 47 enumerates the cases of transfer which are not liable to capital gains of which the transfer of a capital asset under a gift or will or an irrevocable trust is one.
Thus, the exception shows the creation of a trust involves transfer of property which in this case is the entire business carried on by the assessee. However, the trust created by the assessee is not an excepted category under section 32A(5).
5. Section 2(xii) of the Gift-tax Act, 1958, defines "gift" including transfer or conversion of any property referred to in section 4 which is deemed to be a gift.
6. Section 2(xxiv) defines "transfer of property" inclusive of the creation of a trust in property and any transaction entered into by any person with intent to diminish directly or indirectly the value of his own property and to increase the value of the other person.
7. In the circumstances and in view of the statutory provisions considered above the phrase 'otherwise transferred" is applicable when the proprietary business were converted as trust property or corpus of the trust for the benefit of the assessee's own family members.
8. Sub-section (4) of section 32A permits deduction if the conditions mentioned therein are satisfied. One of the conditions is that the reserve must be utilised in acquiring new machinery, etc., within ten years. Sub-section (5) provides that the allowance made shall be deemed to have been wrongly made if the machinery, etc., is sold or otherwise transferred to any person before the expiry of ten years or the assessee does not utilise the amount credited to reserve account for acquiring new machinery or before the expiry of ten 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 sub-section (5) are applicable in the facts and circumstances of the case. Even clause (e) of that sub-section can also be said to be applicable in so far 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 by him at his discretion and even the trust could be determined as per his discretion.
10. The trust created by the assessee is not a successor to the erstwhile proprietary business so as to be entitled to the benefit of carry forward and set off of investment allowance. It is not also bound to utilise the reserve for the purpose for which it was created.
Consequently clause (a) and clause (b) of section 155(4A) of the Income-tax Act, 1961, are attracted and, therefore, the investment allowance already granted is to be withdrawn.
11. The case of conversion of proprietary business into partnership business has been held to be "transfer" in terms of section 34(3)(b) of the Income-tax Act, 1961, so as to warrant the withdrawal of development rebate by relying on the ratio of the Supreme Court in the case of Sunil Siddharthbhai v. CIT [1985] 156 ITR 509, CIT v. Shantilal Rukhbaji Desai [1987] 163 ITR 245 (Guj). The decision of the Madras High Court in the case of Dalmia Magnesite Corporation [1979] 117 ITR 930 (Mad) and in the case of South India Steel Rolling Mills [1982] 135 ITR 322 (Mad) are applicable which are binding on us. The observation of the Madras High Court in the case of S. Balasubramanian [1982] 138 ITR 815 (Mad), relied upon by the counsel for the assessee to the effect that the decision in the case of Dalmia Magnesite Corporation [1979] 117 ITR 930 (Mad), requires reconsideration in the light of the Supreme Court in the case of Malabar Fisheries Co. v. CIT [1979] 120 ITR 49, does not help the case of the assessee. In fact this decision of the Madras High Court in the case of S. Balasubramanian, [1982] 138 ITR 815 (Mad) was duly considered by the Tribunal "B" Bench, Madras in the case of ITO v. Wilson Industries. The Tribunal in its order in (I.T.A. Nos. 1374, 1375, 1104 and 1376 (Mad) of 1985 dated April 11, 1986) held that the scope of observation made by the Madras High Court in S. Balasubramanian's case [1982] 138 ITR 815 (Mad) could not be equated with the ratio of the Madras High Court in the case of Dalmia Magnestic Corporation [1979] 117 ITR 930 (Mad), and which judgment was not held to be any longer good law or was overruled. In that case the investment allowance was granted to the firm. When all the partners retired and the assets and liabilities were taken over by one of the partners, the Income-tax Officer had withdrawn the investment allowance granted earlier. The Tribunal upheld the order of the Income-tax Officer under section 155(4A) withdrawing the investment allowance already granted.
12. It is well-settled that in a taxing statute one has to look at what is clearly said. One has to look fairly at the language used.In R. B. Jodha Mal Kuthiala v. CIT [1971] 82 ITR 570, the Supreme Court observed that equitable construction are irrelevant in interpreting tax laws. They are to be interpreted reasonably and in consonance with justice.
14. In view of these reasons, I am of the opinion that the authorities were justified in invoking section 155(4A) read with section 32A(5) and withdrawing the investment allowance already granted for these years under consideration.
15. Consequently the orders of the Commissioner of Income-tax (Appeals) are upheld and the appeals filed by the assessee are dismissed.
1. 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.
1. 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 ?" 2. The then President constituted himself as Third Member to resolve the difference as per Head Office's order communicated to the Vice-President (SZ) in U.O. No. F of 232(AT), dated February 2, 1988.
As successor President, I resumed jurisdiction to hear and dispose of this Third Member case. I have heard Shri Devanathan, learned advocate for the assessee, and Shri Ganapathy Iyer, learned Departmental Representative. All the necessary facts were brought in the learned judicial Member's order. I have thoroughly gone through the orders of the judicial Member as well as the Accountant Member. Reiteration of facts once again is felt quite unnecessary and hence except the bare facts necessary for appreciating the legal points, no others are felt necessary to be brought in this order.
3. Shri T. R. Ganapathy Chettiar and his wife, Mrs. G. Amma Kannu Ammal, constituted a joint family. The joint family had been running several businesses like Ganapathy Refineries, Ganesha Mills, Lorry Division, Fertilizer Division and Kerosene Division. Four assessment years are involved. While disposing of the second appeals for these years, differences between the Members arose. Originally, the Assessing Officer had allowed investment allowance in favour of the assessee-Hindu undivided family for each of these assessment years as follows :1978-79 1,37,9511979-80 (together with carry-forward 2,39,188investment allowance the loss was determined at)1980-81 (carry forward investment allowance 1,12,843from the earlier year and a sum of Rs. 59,988 4. Admittedly, the karta of the Hindu undivided family, T. R. Ganapathy Chettiar, had declared on April 11, 1981, by means of an indenture that the business was carried on by him as trust property held for the benefit and maintenance of 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 constituted himself 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 provisions of section 32A(5) read with section 155(4A) of the Income-tax Act. Therefore, he issued notices under section 154 to the assessee on January 22, 1985. The assessee-Hindu undivided family filed its objections on May 29, 1985.
In the objections, it was contended that by a mere declaration of trust relating to the assessee's business assets, there was neither sale nor transfer. It was contended that a transfer should always be in favour of a person who was in existence, whereas in the case on hand the trust came into existence only at the time of declaration and never before.
Therefore, there was no element of transfer in the declaration of trust and so clause (a) of section 155(4A) was not attracted or applicable.
It was also contended that since the investment allowance granted for these four years was already utilised for purchase of new assets, the conditions laid down in section 32A were all fulfilled and, therefore, it could not be withdrawn. The provisions of clause (c)(iii) of section 155(4A) were also not contravened. The Assessing Officer did not accept any of the objections filed and elaborated before him on behalf of the assessee at the time of hearing, By separate order passed for each of the years dated February 12, 1985, he withdrew the investment allowances granted or allowed to be carried forward and adjusted in the income or loss incurred for these years. He stated in his impugned orders that as per clause (3)(a) of the trust deed the entire assets and liabilities of the businesses run by him under the name and style of "T. R. Ganapathy Chettiar" and "Ganapathy Refineries" including all tangible and intangible benefits attached thereto have become the properties of the trust. Under clause 3(d), the author of the trust declared that from the date of the execution of the trust the beneficiaries alone shall be entitled to all the benefits, gains and income with all kinds of description accruing or arising and receiving in relation to the trust property. According to clause 4(a), the properties, vested in the trust deed shall be held for the benefit of the beneficiaries mentioned in the trust deed. He also found that actually with effect from April 1, 1981, the assessee-Hindu undivided family had started receiving rental income from the factory and other buildings used by the trust to carry on the businesses. This indicated that the Hindu undivided family, retaining its immovable properties to itself, had permitted to carry on the business of the trust from April 1, 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 Income-tax 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 of 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.
5. Against the orders dated February 12, 1985, for these four years, the assessee went in appeal before the Commissioner of Income-tax (Appeals), Coimbatore. The assessee was not successful in the appeals.
Hence, the appeals were dismissed by separate orders dated July 21, 1986, for the assessment year 1978-79, December 30, 1985, for the assessment year 1979-80, November 13, 1985, for the assessment years 1980-81 and 1981-82. Challenging the orders of the Commissioner of Income-tax (Appeals), the assessee-Hindu undivided family came up in the second appeal before this Tribunal.
6. These appeals were taken up together and the Bench sought to dispose of them by a common order. The then learned judicial Member, by his order dated August, 1987, proposed to allow the appeals. However, the then learned Accountant Member did not agree with the learned judicial Member for the reasons stated in his dissenting order dated October 9, 1987. The learned Members identified their difference of opinion as already extracted above and referred the matter to Third Member. Thus, the matter stands for my consideration.
7. The learned judicial Member traced out the origin of the investment allowance right from the Finance Act, 1955. Ultimately, he traced out that section 32A, which provided investment allowance came into the statute book under the Finance Act of 1976. He held that the conditions prescribed for relief under section 32A were the same as in the case of development rebate except that there was now a positive obligation to utilise the reserves within a period of ten years for acquiring new assets for the purposes of the same business. He also held that section 32A, as is relevant for these years under consideration, excludes conversion of own property into property of the company, as well as amalgamation by one company to another from the operation of the conditions relating to the transfer of plant and machinery as in the case of development rebate earlier. He also held that section 155(5) reproduced the provision in old section 35(11) for rectification of assessment to withdraw the development rebate in the case of breach of conditions. He also held that section 155(4A) made a similar provision to meet any breach of conditions relating to investment allowance given under section 32A. Then, the learned judicial Member had rightly took up the question as to what should be the true meaning of the words "sold or otherwise transferred" which occurred in section 32A. He had also considered the impact of the Supreme Court decision rendered in the case of Chittoor Motor Transport Co. Pvt. Ltd. v. CIT [1966] 59 ITR 238 in which the provisions of section 32A were challenged as unconstitutional on the ground that it was discriminatory inasmuch as a sale to the Government was excepted. The learned judicial Member pointed out that the Supreme Court took the stand that the Legislature perhaps presumed that if machinery was offered to the Government for sale, the Government would only buy 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 the 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 Income-tax Act, in paragraphs 12 and 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 Hindu undivided family and later on behalf of the trust. Thus, the learned judicial Member found that in substance there was no abuse of the provisions which was required to be met by treating the transaction as a transfer within the scope of the expression "sold or otherwise transferred". He went to the extent of holding that, no doubt, the conversion of the property of the Hindu undivided family into the property of the trust by declaration of the trust constituted a transfer under the general law but it would not be a transfer within the restricted meaning of the expression "sold or otherwise transferred" keeping in mind the object and intention of Parliament in enacting this provision. He distinguished the Kerala High Court decision in the case of Radhas Printers v. CIT [1981] 132 ITR 300 where the development rebate was withdrawn when a business of a firm Was converted into a trust. The distinguishing feature, according to him, was that in that case it was not disputed that the transfer by creation of a trust did not fall within the expression "otherwise transferred" as the only objection was that there was no transfer at all. Though the Revenue relied; upon the Madras High Court decisions in the cases of South India Steel Rolling Mills v. CIT [1982] 135 ITR 322 and Addl. CIT v. Dalmia Magnesite Corporation [1979] 117 ITR 930 where the development rebate was denied because the firm which made the investment in plant and machinery had not utilised the reserve for the purpose of purchasing further plant and machinery within the prescribed period of ten years since the firm itself was dissolved within that period. He had distinguished them by approvedly quoting a later Madras High Court decision in CIT v. S. Balasubramanian [1982] 138 ITR 815 in which it was opined that the decision in Addl. CIT v. Dalmia Magnesite Corporation [1979] 117 ITR 930 (Mad) referred to above required reconsideration and purporting to follow the same in CIT v. S.Balasubramanian [1982] 158 ITR 815 (Mad), he held that there was nothing in the Act which prevented the successor-in-interest fulfilling the conditions stipulated for, the grant of development rebate especially when that development rebate was allowed to be carried forward and set off in computing the income of the business even in the hands of the successor-assessee. In para. 18, ultimately, his conclusion was that there was 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 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 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.
8. 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 Income-tax 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 v. CIT [1953] 24 ITR 506, 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 dated April 1, 1981, that beneficiaries under the trust deed were the beneficial owners as well as the legal owners of the trust property, he held that the author of the trust was desirous of not only making provision for the welfare, well being and prosperity, etc., of all the beneficiaries but also provided them (sons and their wives) with assets, properties and the like, i.e., corpus of the trust property vide clauses 2(a), 2(b) and 4(a) of the trust deed. Thus, he held that there was not only transfer of income but also the corpus to the beneficiaries. Therefore, he held that the assessee was no longer the owner of the business in general and the asset in particular on which the investment allowance was granted earlier. He held that the business was no longer carried on by the assessee; the assessee could be said to be carrying on the business for and on behalf of the beneficiaries as sole trustee under the trust deed. As per the terms of the trust deed, he found that the assessee was not entitled to have any benefit or enrollment from the income or property of the trust. He relied upon the Supreme Court decision in Durga Prasad More's case [1971] 82 ITR 540, at page 545 and McDowell's case [1985] 154 ITR 148 (SC), while holding that the taxing authorities were not required to put on blinkers while looking at documents but the surrounding circumstances, the realities of the recitals made in the document were all to be considered. He cited Salmond on Jurisprudence in which it was held that trusteeship was to protect the rights and interests of persons such as unborn, infants, lunatic, etc., who, for any reason, were unable effectively to protect them for themselves. He held that in this case the creation of the trust was nothing but a device for ulterior purposes or as a measure of tax planning. He cited section 63 of the Income-tax Act where the word "transfer" was defined as including any settlement, trust, covenant, agreement or arrangement. He held that the creation of the trust on April 1, 1981, involved transfer and that transfer was made by the assessee to his family members otherwise than for adequate consideration through the medium of trust in terms of sub-section (2) of section 64 of the Income-tax Act. Ultimately, he came to the conclusion that the phrase "otherwise transferred" was applicable when the proprietary businesses were converted as trust property for the benefit of assessee's own family trust. The 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 the Madras High Court decisions cited in para. 10 (page 451) of his order that the conversion of proprietary business into partnership business involved transfer. He held that the obiter in CIT v. S. Balasubramanian [1982] 138 ITR 815 (Mad) holding that the decision in the case of Dalmia Magnesite Corporation [1979] 117 ITR 930 (Mad) required reconsideration in the light of the Supreme Court decision in Malabar Fisheries Co. v. CIT [1979] 120 ITR 49 did not help the assessee and this was duly considered by the Madras B-Bench of the Tribunal in ITO, City Circle III(1), Coimbatore v. Wilson Industries, Peelamedu, in ITA Nos. 1374, 1375, 1104 and 1376/Mds. of 1985 which were all disposed off by a consolidated order dated April 11, 1986, wherein it was held that the scope of the observation of the Madras High Court in CIT v. S.Balasubramanian [1982] 138 ITR 815 could not be equated with the ratio of the Madras High Court in the case of Dalmia Magnesite Corporation [1979] 117 ITR 930 and on that scope the ratio of Dalmia Magnesite Corporation [1979] 117 ITR 930 (Mad) could not lose its binding nature over the Madras Tribunal. Ultimately, he justified the withdrawal of investment allowance under section 155(4A) read with section 32A(5) of the Income-tax Act. In view of the conflicting views expressed by the learned Members, the difference was referred to the then President and thus the matter now stands for my consideration.
9. I have heard Shri Devanathan, learned counsel for the assessee, and Shri Ganapathy Iyer, learned junior Departmental Representative. Shri Devanathan fully adopted the reasoning given by the learned judicial Member in his order and thus he fully supported his order. He, inter alia, contended the following : 10. It would appear that the learned Accountant Member did not differ with the interpretation put by the learned judicial Member on section 32A(5) of the Income-tax Act and, therefore, the question is to be decided in favour of the assessee. He also contended that the learned Accountant Member adopted the meaning of the word "transfer" given under sections 2(xii) and 2(xxiv) of the Gift-tax Act and also under section 45(2) of the Income-tax Act, which were not in existence in the assessment years 1978-79 to 1981-82, with which we are concerned in these appeals.
11. The Assessing Officer, while passing orders under section 155(4A), held that the assessee contravened the provisions contained in section 155(4A)(a) and he did not record any contravention having been made either under clause (b) or clause (c) of section 155(4A).
12. The provisions of the Gift-tax Act are not in pari materia with the provisions of the Income-tax Act as far as the interpretation of the words "transfer" and "gift" was concerned and, therefore, the meaning given to the word "transfer" under the Gif-tax Act was most inappropriate to apply to the facts of the case, as had been done by the learned Accountant Member.
13. Section 2(47) of the Income-tax Act defined "transfer" and the said definition was applicable only while deciding the question of capital gains under section 45.
14. He also contended that purposive interpretation of statute is approved in the First Leasing Co. of India Ltd.'s case [1995] 216 ITR 455 (Mad) at page 464.
15. 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 argue 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 Addl. 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 [FB] in support of the elaborate discussion made by the learned 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 Hindu undivided family, 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 a pivotal contention that the relief of investment allowance was attached to the plant and machinery for which it is to be granted and the relief does not belong to a person who is the owner of the plant and machinery.
(3) In the facts and circumstances of this case, if at all the Tribunal holds that there was a transfer it should be taken that the transfer is not only of assets but also liabilities incurred by the business and the transfer was effected with regard to a going concern.
(4) He relied upon Circular No. 378 (see [1984] 149 ITR (St.) 1), dated March 3, 1984 - [1991] Taxmann, volume 1 page 781, and letter No. F. 15/5/63, dated December 13, 1963, under section 80J. (5) He also cited and relied upon CIT v. Narang Dairy Products [1996] 219 ITR 478, 484 (SC) and CIT v. P. K. Ramaswamy Raja [1997] 223 ITR 324 (Mad) to convey the true meaning of the words "otherwise transferred".
(6) When I brought to his notice that the decisions were given against the assessee, Shri Devanathan maintained that his purpose to rely upon them was only to distinguish them from the facts on hand.
I brought to his notice that the Madras High Court in CIT v. P. K. Ramaswamy Raja [1997] 223 ITR 324 did not adopt purposive approach as has been done in the case of First Leasing Co. of India Ltd. [1995] 216 ITR 455 (Mad).
(7) Similarly, he cited in George Da Costa v. CED [1967] 63 ITR 497 (SC) only to distinguish it from First Leasing Co. of India Ltd.'s case [1995] 216 ITR 455 (Mad), decided by the Madras High Court and to highlight that rule of ejusdem generis was not considered by the Madras High Court in the First Leasing Co. of India Ltd.'s case [1995] 216 ITR 455.
16. According to the assessee's counsel, the learned Accountant Member had rightly felt that while interpreting section 32A, the purposive approach of the legislation is to be kept in view, and since that view is perfectly justified, the decisions reported in CIT v. Narang Dairy Products [1996] 219 ITR 478 (SC); CIT v. Ramaswamy Raja (P.K.) [1997] 223 ITR 324 (Mad); George Da Costa v. CED [1967] 63 ITR 497 (SC) and CIT v. Vaidyanathan (K.S.) [1985] 153 ITR 11 (Mad) [FB], should be held to be distinguishable on that ground. Since they have not considered the purposive interpretation of section 32A, they should be held distinguishable and the order of the learned Accountant Member should not be maintained.
17. As against the above argument of learned counsel for the assessee, Shri Ganapathy Iyer, learned Departmental Representative, contended the following (1) Before he commenced his arguments, I had brought to his notice the observation of the learned judicial Member that the gift-tax assessment was made on March 28, 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 learned counsel for the assessee also agreed. However, the learned Departmental Representative was unable to provide the gift-tax appeal number pending with the Tribunal.
(2) The learned 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 learned Departmental Representative 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 CIT v. Narang Dairy Products [1996] 219 ITR 478 (SC), which was cited for the assessee, the learned departmental Representative submitted that the issue there was about the withdrawal of development rebate. He submitted that the ultimate decision in this case was in favour of the department. He further submitted that the Supreme Court duly took into consideration the fact that plant and machinery changed hands and that itself empowered the withdrawal of development rebate.
(5) The ratio of the above decision clearly applies to the facts of this case. Here also, the ownership changed hands and not merely user.
(6) He submitted that the withdrawal of development rebate under section 34(3)(b) is analogous to withdrawal of development rebate under section 32A(5). So, according to him, the decision in CIT v. Narang Dairy Products [1996] 219 ITR 478 (SC), though given with reference to the withdrawal of development rebate, equally applies to the case of withdrawal of investment allowance also.
(7) He invited my attention to the decision of the Supreme Court in the case of South India Steel Rolling Mills v. CIT [1997] 224 ITR 654. The Supreme Court decision represents an appeal preferred against the Madras High Court decision in South India Steel Rolling Mills v. CIT [1982] 135 ITR 322, which was already followed by the learned Accountant Member in his order. In that case, after the development rebate was granted within eight years of the grant, the firm was dissolved, though the business was carried on by a new firm. The question was whether the development rebate was liable to be withdrawn.
In fact, the Madras High Court in its judgment held that it was liable to be withdrawn. While dismissing the appeal against the Madras High.
Court judgment, the Supreme Court in South India Steel Rolling Mills v.CIT [1997] 224 ITR 654 in a part of the headnote at page 655 held the following : "Held, dismissing the appeal, (i) that having regard to the words 'which is owned by the assessee and is wholly used for the purposes of the business carried on by him', in section 33(1)(a), it must be held that the benefit of development rebate is available only to the assessee, which is owning the machinery or plant and is using it wholly for the purpose of the business carried on by him. Similarly, in section 34(3)(a), the words used are 'to be utilised by the assessee during a period of eight years next following for the purpose of the business of the undertaking'. The grant of development rebate under section 33(1)(a) is subject to the conditions laid down in section 34(3)(a), which means that the assessee who was 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 ceases 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." 18. 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 eight years next following for the purpose of the business of the undertaking-for which the development rebate was given. Since the firm which had been granted the rebate had been dissolved and ceased to exist before the expiry of eight years, the rebate was liable to be withdrawn. The learned Departmental Representative also cited and relied upon the Delhi High Court decision in CIT v. Northern India Iron and Steel Co. Ltd. [1997] 226 ITR 342 (Delhi). In that case, the plant and machinery were leased out and development rebate was claimed by the lessor. The Delhi High Court refused to grant the development rebate on the ground that the assessee after leasing out the machinery had no control over the use of the machinery and could not be said to be manufacturing and producing articles. The learned Departmental Representative had drawn my attention to the Supreme Court's decision in Sunil Siddharthbhai v. CIT [1985] 158 ITR 509, wherein it was held that an asset belonging to an individual partner was brought to the partnership business towards his capital. The transaction, no doubt, amounted to a transfer. In this case also, the transfer is very much involved when once the businesses of the Hindu undivided family were transferred to the trust by means of the trust deed. He also cited the instructive decisions of the Supreme Court rendered by justice Chinnappa Reddy in the case of Asst. Collector of Central Excise v.Dunlop India Ltd. [1985] 154 ITR 172, wherein he held that the better wisdom of the court below must yield to the higher wisdom of the court above and, therefore, on the basis of this, he argued that the learned judicial Member ought to have followed the Supreme Court's decision rather than deciding the issue on first principles as if the point at issue is for the first time arising before him and was never the subject matter of before any court or Tribunal.
19. Shri N. Devanathan tried to distinguish the above authorities cited by the learned Departmental Representative and stressed a point that in the decision of the learned judicial Member the principle of ejusdem generis and the concept of going concern discussed were not controverted by the learned Accountant Member and, therefore, Shri Devanathan, in his reply, argued that this is a case where it should be taken that two views were possible about the interpretation of section 32A(5) read with section 155(4A), and since the view taken by the learned judicial member supports giving relief to the assessee, it should be preferred over the view taken by the learned Accountant Member, and in support of this proposition he relied on in CIT v. Podar Cement Pvt. Ltd. [1997] 226 ITR 625 (SC).
20. 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 April 1, 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 culled out from the trust deed, the following appears to be the relationship between the author of the trust and the several beneficiaries under the trust deed T. R. Ganapathy Chettiar S/o. Ramaswamy Chettiar Mrs. Ammakannu Ammal (W-(B1)) |--------------------|---------------------|--------------------| (B2) Gunasekharan (S2) Prabhakaran Mrs. Maragatham Raghunathan (S1) (B5) (S3) (B6) W/o G. Balachandran Mrs. Rani (W) Sundaravalli (W)(B5) Shanti (W) (B8) | | (B4) | |-------------| |-------------| | |--------------|Master Vinayaka- Abira- Kalaivani | Miss Gay- Miss Ani- Ramas- murthy masun- (B12) Master atri (B14) tha (B15) wamy (B10) dari Sudhakar (B9) (B11) (B13) 21. Clause 3 of trust deed states that the whole of the schedule properties including the assets and liabilities of the business run by him under the name and style of T. R. Ganapathy Chettiar and Ganapathy Refineries, including all other tangible and intangible rights and benefits attached thereto, are declared to be trust properties and Shri Ganapathy Chettiar declared himself to be the author of the trust as well as the sole trustee and he further declared that he held and stands possessed of the trust properties and funds for the objects set out in the deed. He further declared in clause 3(b) that from the date of execution of the trust deed, the beneficiaries alone shall be entitled to all the benefits, gains and income of all kinds and descriptions accruing or arising in respect of the trust property 9 in the ratios mentioned in clause 4. Further, in clause 4, it is stated that on determination of the trust, the corpus of the trust shall be divided and distributed amongst the beneficiaries in the ratio of their beneficial interest. The duration of the trust was declared to be 20 years. In clause 15, it is stated that the trust is irrevocable and the author of the trust specifically declared that he does not retain any power to revoke or derive any benefit from the trust. In this case, I am concerned with the assessment years 1978-79, 1979-80, 1980-81 and 1981-82. The trust deed was executed, on April 1, 1981. The question was whether the trust properties could be taken to have been held in trust in each of the accounting years in question. In the deed of trust, the author declares himself to be holding the properties in trust for the beneficiaries. The question was whether the trust could come into existence even before the trust deed was executed. In the commentary of Shri O. P. Aggarwala on the Indian Trusts Act, 1882, (1970) sixth edition, at page 223, the following is what is held : "Where a transfer of property is made to a person in such a manner or in such circumstances that he is thereby constituted, not the absolute owner, but a trustee thereof for disposer, the disposer may at any time afterwards declare a specific trust of the property".
22. 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 April 1, 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 Supreme Court as well as the Bombay High Court, the expression "property" used in section 11 of the Income-tax Act has the widest amplitude and it includes a business undertakingJ. K. Trust v. CIT [1957] 32 ITR 535 (SC); (2) CIT v. Breach Candy Swimming Bath Trust [1995] 27 ITR 279 (Bom); and (3) Dharma Vijaya Agency v. CIT [1960] 38 ITR 392 (Bom).
23. 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 learned judicial Member, in the course of his order, conceded the position that under general law declaration of trust amounts to transfer, though the Word "transfer" under section 32A(5) does not include creation of a trust. The basis or the sheet-anchor for the edifice built subsequently in the judicial Member's order was that investment allowance relief goes along with plant and machinery whoever may the owner of the plant and machinery.
In my humble opinion, the very foundation has no legal basis. My reasons are as follows.
24. Section 29 of the Income-tax Act lays down the broad procedure for computing the income from profits and gains in which it is stated that it should be computed in accordance with the provisions of sections 30 to 43D. The heading of section 28 is "profits and gains of business or profession" carried on by the assessee at any time during the previous year. Section 32A is one of the sections which should be taken into consideration for determining the income of an assessee during the previous year. Thus, the relief under section 52A is very much attached to the person who is the owner of the plant and machinery rather than attached to the plant and machinery itself, irrespective of the fact which the assessee holds the plant and machinery. Further, my reasoning is also supported by the provisions of section 32A(3). Under the provisions of the said sub-section, investment allowance allowable to an assessee in any assessment year can be allowed till his income becomes "nil" and when the whole of the investment allowance granted, exceeds his total income computed, it can be carried forward and adjusted from out of the income of the later years. Thus, the process of carrying forward can be extended to a maximum period of eight years.
If it is the intention of the Legislature that investment allowance can be granted if the plant and machinery is used for business purposes irrespective of the fact as to who is the owner of the plant and machinery, the question of adjustment of carried forward investment for eight years would not fit into the scheme of assessment contemplated by the Legislature. Therefore, the under-current argument, which permeates throughout the main discussion involving the point at issue in the judicial Member's order, that what is essential for grant of investment allowance is continued user of plant and machinery in the business and not who is the owner of the said plant and machinery, is wrong, with due deference 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; ..." 25. It is an agreed position that in order to claim investment allowance, 75 per cent. of the amount of investment allowance claimed should be debited to the profit and loss account and credited to a separate reserve account and that is the requirement prescribed under section 32A(4). However, if the plant and machinery on which the investment allowance was granted was "sold or otherwise transferred" before the expiry of eight years after the installation of plant and machinery by the assessee or, if within ten years after the installation of plant and machinery the amount in the reserve account was not utilised for the purpose of acquiring a new ship, a new aircraft, new machinery or plant, it must be deemed that the investment allowance was wrongly allowed and should be brought to tax by rectifying the order of assessment under section 155(4A). In South India Steel Rolling Mills v. CIT [1997] 224 ITR 654 (SC), the correctness of the decision given by the Madras High Court in South India Steel Rolling Mills v. CIT [1982] 135 ITR 322 was considered and its view confirmed. In that case also, the facts are that the assessee-firm was constituted with four partners on September 1, 1960.
Two of them retired and the partnership was reconstituted with the remaining two partners who continued the same business. On March 3, 1968, one of the two partners died. As a result, the partnership firm stood dissolved on March 4, 1968. A new partnership was constituted comprising the surviving partner and the legal heirs of the deceased partner. In the assessment made against-the partnership firm, the benefit of development rebate under section 33(1)(a) had been granted.
However, on the ground that the firm entitled for the development rebate benefits stood dissolved on March 4, 1968, before the expiry of eight years from the grant of development rebate, the Commissioner of Income-tax sought to revise the assessment order under section 263.
The. Supreme Court upheld the Madras High Court decision and the ratio of the Supreme Court is already cited while extracting the arguments of the learned Departmental Representative and the same can be usefully referred to here. In my humble opinion, what is held good for development rebate equally holds good even while considering the investment allowance. If really the grant of development rebate depends only upon the continued user of plant and machinery in the business without concern as to who is the owner of such plant and machinery and such a view represents the correct law, the Supreme Court would not have upheld the revisionary order passed under section 263 in the facts of that case before them. In CIT v. Shaan Finance (P.) Ltd. [1998] 231 ITR 308, the Supreme Court, inter alia, considered the legality and correctness of CIT v. First Leasing Co. of India Ltd. [1995] 216 ITR 455 (Mad). At page 312, the following pre-conditions are to be fulfilled by any assessee before being entitled to investment allowance (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." 26. 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 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 for the purpose of the business of the assessee. Had it been the decision of the Supreme Court that user of plant and machinery itself entitled the person using them for investment allowance, then the lessee in that case should have been granted investment allowance but not the lessor. I also came across a decision of the Gujarat High Court in CIT v. Nandiniben Narottamdas [1983] 140 ITR 16. There, the question was whether it is a case to which section 60 can apply. In that case also, the share of the assessee in a firm was assigned and donated to specified beneficiaries and also declared himself that thereafter he holds the share in the firm as trustee and not as owner. In the facts of that case, the Gujarat High Court held that the assessee can no longer be held to be the owner of the share in the firm, since it was divested in favour of the beneficiaries and thus section 60 was held not applicable iii that case. However, that was never the case. Therefore, viewed from any angle, the decision of the learned judicial Member does not appear to be correct under law. On the other hand, the decision given by the learned Accountant Member appears to be correct on facts and in law.
Therefore, I hold that withdrawal of investment allowance under section 155(4A) by the order of the Assessing Officer dated February 12, 1985, is perfectly justified and it is fully supportable under section 32A(5) read with section 155(4A) of the Income-tax Act.
27. In view of my above decision, the matter should now go back to the Division Bench who will decide the same according to the majority.