LAXMI WEAVING FACTORY Vs. ADDITIONAL COMMISSIONER OF INCOME TAX

JUDGEMENT

(1.) SINCE the question involved in both these references is the same question though arising in different sets of circumstances, we will dispose of both these references by this common judgment. The assessee concerned in each of these references was originally a partnership firm and the question is as to what is to happen to development rebate allowed to the partnership firm during its subsistence after the partnership firm is dissolved and the surplus assets of the partnership are distributed amongst the partners. The revenue contends that on the distribution taking place, the development rebate granted to the firm can be withdrawn and the necessary rectification proceedings either under S. 155(5) of the IT Act, 1961, or S. 35(11) of the Indian IT Act, 1922, can be adopted, whereas the assessee in each of these cases contends that it cannot be withdrawn in this manner.

(2.) IN Income-tax Reference No. 1 of 1973, the following question has been referred to us by the Tribunal at the instance of the assessee.

(3.) THE question arose in the rectification proceedings taken up under S. 155(5) of the Act of 1961 whether there was a transfer of the machinery in respect of which the development rebate had been allowed and, secondly, whether on the dissolution of the partnership the assessee, that is, the original partnership firm, had failed to carry out the terms oil which the development rebate was allowed and had become liable because of utilisation of the reserve otherwise than in accordance with law, failing to utilise it for the purposes of the undertaking. Before the Tribunal it was urged oil behalf of the assessee that there was no transfer of the powerlooms by the assessee and, following the Supreme Court decision in CIT vs. Dewas Cine Corporation (1968) 68 ITR 240, the Tribunal accepted that contention. However, the Tribunal held that under the scheme of allowance of the development rebate, the rebate must be utilised for the purposes of the business of the undertaking to which the development rebate was allowed and relying on certain observations of the Supreme Court in the case of Indian Overseas Bank Ltd. vs. CIT ( 1970) 77 ITR 512 and the observations of the Madras High Court in CIT vs. Veeraswami Nainar (1965) 55 ITR 35, the Tribunal held that the purpose of allowing development rebate was to develop the assessee's business out of the reserve fund which in turn was meant for the development of the business as a whole and the Tribunal held that when the assessee-firm was dissolved, there could possibly be no utilisation of the reserve for the purpose of the business of the undertaking. Under these circumstances the Tribunal upheld the action of the Revenue authorities in withdrawing the development rebate under the provisions of S. 155. Thereafter, at the instance of the assessee the question set out hereinabove has been referred to us.