B.P.JEEVAN REDDY, C.J. - (1.) UNDER section 256(1) of the Income-tax Act, 1961, the Tribunal has stated the following question for the opinion of this court : Whether, on the facts and circumstances of the case, the Appellate Tribunal was justified in holding that conversion of the assessees proprietary business into a partnership amounted to a transfer of the assets of the proprietary business to the partnership and, in that view, holding that the development rebate on plant and machinery of the proprietary business transferred to the partnership within eight years was wrongly allowed within the meaning of clause (b) of sub-section (3) of section 34 of the Income-tax Act, 1961, which could be withdrawn under section 155(5) of the Income-tax Act, 1961 ?
(2.) THE assessee is an individual. During the accounting year relevant to the assessment years 1965-66, 1969-70, 1970-71 and 1971-72, he was carrying on the business of printing and publication as proprietary business up to May 31, 1972. On the plant and machinery employed in the said business, he claimed development rebate during the said year which was granted to him. THE said proprietary business was converted into a partnership business on and with effect from April 1, 1972. THE partnership consisted of the petitioner and his two sons wherein the assessees share was 1/3rd. THE Income-tax Officer held that inasmuch as there was a transfer of the said plant and machinery within a period of eight years, the assessee became disentitled to the said rebate and, accordingly, revoked the said benefit by passing orders under section 155(5) of the Income-tax Act. THE Income-tax Officer was of the view that there was a transfer of the said assets on the formation of the partnership. This view was questioned in appeal by the assessee but without success. THEn the matter was taken to the Tribunal which too disagreed with him and dismissed the appeal. Section 33 of the Income-tax Act provides for development rebate. Sub-section (3) of section 34 provides that the development rebate provided under section 33 shall not be allowed unless an amount equal to 75% of the development rebate actually allowed is debited to the profit and loss account of the previous year in respect of which the said deduction is allowed and credited to a reserve account. This reserve has to be maintained for a period of eight years. Clause (b) of sub-section (3) of section 34 further provides that : 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.
(3.) SUB-section (5) of section 155 provides precisely for such a situation. SUB-section (5) reads as under : 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 the 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 - (a) for distribution by way of dividends or profits; or (b) for remittance outside India as profits or for the creation of any asset outside India; or (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 utilised. The question that arises for our consideration is where a person places his personal individual assets in a partnership of which he is a partner, whether it amounts to a transfer of those assets within the meaning of section 34(3)(b). This very question had arisen before the Karnataka High Court in Addl. CIT v. M. A. J. Vasanaik, 1979 116 ITR 110. It was held that, on the conversion of the property of an individual into property of a firm of which he is a partner, there is a transfer of interest of the individual to the partnership and section 34(3)(b) of the Act is attracted, where the development rebate had been allowed in respect of the assets which pass to the partnership. This decision has been expressly approved by the Supreme Court in Sunil Siddharthbhai v. CIT, 1985 156 ITR 509 though this was a case arising under section 45 of the Income-tax Act. The Supreme Court considered the question now arising before us elaborately. It took note of the several decisions of High Courts and the Supreme Court on the subject and held that (at p. 520) when the assessee brought the shares of the limited companies into the partnership firm as his contribution to its capital, there was a transfer of a capital asset within the meaning of the terms of section 45 of the Income-tax Act. In this view of the matter, we agree with the conclusion reached by the Kerala High Court in Abdul Rahim (A.), Travancore Confectionery Works v. CIT, 1977 110 ITR 595, the Karnataka High Court in Addl. CIT v. M. A. J. Vasanaik, 1979 116 ITR 110 and by the Gujarat High Court in the judgment under appeal.;