Case: M/s. Mahabir Cold Storage Vs. Commissioner of Income Tax

K RAMASWAMY J. 1. This appeal by the assessee is directed against the judgment of the Division Bench, Patna High Court, made in Tax Case No. 30 of 1972 (CIT v. Mahabir Cold Storage 1975 (100) ITR 686 dated September 11, 1974, answering in favour of the Revenue and against the assessee the question reframed thus (at page 697 of 100 ITR) "Whether, on the facts and in the circumstances of the case, the order of the Tribunal allowing the unabsorbed development rebate in respect of the plant and machinery not installed by the assessee under section33(1) of the Income-tax Act, 1961, was legal and proper?" * The Tribunal referred the question at the instance of the Revenue to the High Court under section 256(1) of the Income-tax Act, 1961 (for short "the Act), which reads thus (at p. 688 of 100 ITR) "Whether, in the facts and circumstances of the case, the order of the tribunal holding that the conditions under section 33(1) of the Income-tax act are satisfied, is legal and proper?" * 2. The appellant-assessee is a registered partnership firm under a deed executed and registered on November 10, 1958, between Prayagchand Periwal and Hanumanmal Periwal and Messrs. Periwal and Co. P. Ltd. having its business at Purnea in Bihar State. It derives income from the business of cold storage Messrs. Prayagchand Hanumanmal a partnership firm, consists of Prayagchand and Hanumanmal Periwal with 50 per cent share each and started its business with its head office at Calcutta and a branch office at Purnea. It stated functioning with effect from May 3, 1956. The branch office at Purnea carried on the business in the name and style of Shri Mahabir Cold Storage. The partners had taken a loan form Periwal and Co. P. Ltd. for erection of a cold storage plant and for its running capital. later, the company was taken as a partner for better management and financial assistance. Prayagchand and Hanumanmal each has 25 per cent. and periwal and Co, P. Ltd. has the remaining 50 per cent share in the profits of the newly constituted partnership, Messrs. Mahabir Cold Storage, at Purnea. The new partnership also obtained registration under the Indian Income-tax filed voluntary returns and it was separately assessed form the assessment year 1960-61 and thereafterIn the assessment year 1959-60 Messrs. Prayagchand Hanumanmal installed machinery of the value of Rs. 5, 80, 055 in Shri Mahabir Cold Storage. For one reason or the other, development rebate on the capital asset, namely the machinery, was not claimed till the assessment year 1962-63 in which year the appellant claimed development rebate. The Income-tax Officer and on appeal the Appellate Assistant Commissioner disallowed the claim on the finding that the new firm had neither inherited the claim as a transferee, or did it amount to a succession. But on second appeal, the Tribunal held infavour of the appellant with the following finding (at p. 689 of 100 ITR) "it is no doubts true that the machinery was installed by Messrs. Prayagchand Hanumanmal but the firm has been reconstituted with the three partners under the name and style of Messrs. Mahabir Cold Storage, the appellant herein. The firm s legal personality will survive its reconstitution. Reconstitution of the firm does not bring into existence a different legal entity, nor can, it be stated that the original identity of the firm is lost as a result of reconstitution. The business as a unit continued unbroken and it was only the interest of the partners that came to be altered as a result of the reconstitution of the firm. Since the appellant firm is none other than the old firm of Messrs. Prayagchand Hanumanmal with a change in the constitution and the continuity of the business remained intact, we have no hesitation in coming to the conclusion that the appellant is the owner of the plant and machinery installed in the assessment year 1959-60." * 3. At the request of the Revenue, the Tribunal referred the question as indicated above and the High Court reframed the question extracted hereinbefore and answered with the finding infavour of the Revenue and against the assessee with the reasoning that the old firm retained its identity carrying on its business separately at Calcutta. It was a separate entity for the purpose of taxation. The whole firm was not reconstituted. The business at Purnea was carried on by a new reconstituted partnership firm which itself claimed to be a separate identity under the Income-tax Act and claimed separate registration and was separately assessed to income-tax act and claimed separate registration and was separately assessed to income-tax. An assessee who installed the new plant or machinery must carry on the business with them in order to get development rebate and he must carry on the business with them in order to get development rebate and he must not transfer them before the expiry of eight years If the identity of the two firms was different. assessable identity was clearly so; then it was plain that, in respect of the plant or machinery installed by the old partnership firm at Calcutta, the new firm at Purnea, a distinct and different assessable identity could not claim development rebate either under the repealed Act or the Act. The appellant which had not installed the new machinery and plant worth Rs. 5 lakhs odd installed in the previous year relating to the assessment year 1959-60 by Messrs. Prayagchand HanumanmalShri B. Sen, learned senior counsel for the appellant, raised a two- fold contention. According to learned counsel, Messrs. Prayagchand Hanumanmal, consisting of original partners, Prayagchand Periwal and Hanumanmal Periwal, merely had taken Messrs. Periwal and Co. P. Ltd. for the purpose of better management and financial assistance. The old partnership admittedly having started its branch at Purnea in cold storage business has been continuing to have its identity as an assessable entity whose character has not been lost by taking a new partner, Messrs. Periwal and Co. (P) Ltd., for the purpose of benefit of profits only. Therefore, the assessee is entitled to development rebate under section 33 of the Act. Alternatively, it is contended that, in the books of account of Messrs. Prayagchand Hanumanmal as a creditor with a sum of Rs. 3, 50, 000 in all on two dates in its accounts for the year ended October 31, 1959, debited the amount of the three partners of the assessee as they stood in the books of the old firm. Correspondingly, the new firm also in its turn transferred Rs. 3, 50, 000 to the credit of the partners account by debiting the account of the old firm Correspondingly, the new firm also in its turn transferred Rs. 3, 50, 000 to the credit of the partners account by debiting the account of the old firm showing the opening balance of Rs. 4, 25, 606. It would, thus, show that there is a transfer of the capital asset to the appellant and thereby the appellant is an owner under section 33 of the Act, Accordingly, it is entitled to development rebate. Shri Bhatnagar, learned counsel for the Revenue, contended that the appellant is not "the assessee", nor the owner of the machinery and plant. The owner is Messrs. Prayagchand Hanumanmal and as such the assessee is not entitled to development rebateTo appreciate the contentions, it is necessary to see the relevant provisions under the repealed Act and the Act Development rebate was first introduced by the Finance Act, 1955, with effect form April 1, 1955. Clause (vib) of sub-section (2) of section 10 of the repealed Act was introduced by section 8 of the said Finance Act, which was subsequently amended by section 7 of the Finance Act, 1958, with effect from April 1961, with effect from April1, 1961, which is relevant for the purpose of this case, and read thus: "10. (2) Such profits or gains shall be computed after making the following allowances, namely(vib) in respect of a new hip acquired or new machinery or plant installed after the 31st day of March, 1954, which is wholly used for the purposes of the business carried on by the assessee, a sum by way of development rebate in respect of the year of acquisition of the ship or of the installation of the machinery or plant, equivalent to, - " * Section 33(1) of the new Act reads: "33(1) In respect of a new ship acquired or new machinery or plant (other than office appliances or road transport vehicles) installed after the 31st day of March, 1954, which is owned by the assessee and is wholly sued for the purposes of the business carried on by him, a sum by way of development rebate, equivalent to" * The other sub-sections are not relevant. Hence, omitted. 4. Under both the repealed Act as well as the Act, two conditions precedent are required to be fulfilled for entitlement to development to rebate, namely, a new ship acquired or new machinery or plant installed must be (1) owned by the assessee, and (2) wholly used for the purpose of the business carried on by him. It is an admitted case that the plant and machinery was wholly used for the purposes of the cold storage business carried on by the original firm, Messrs. Prayagchand Hanumanmal, and also by the appellate. The only dispute is whether the appellant owned the plant and machinery purchased and erected as a part of the capital asset to run the cold storage business by Messrs. Prayagchand Hanumanmal. In the context of section 33(1) of the Act, the ownership consists of a bundle of rights, namely title to, possession of and beneficial enjoyment thereof. It is an indisputable legal position that the sum to be allowed by way of development rebate was to be only such amount as was sufficient to reduce the total income to nil. The development rebate, to the extent to which it had not been allowed in the previous assessment year or succeeding years, was to be carried forward to the following year or years up to a maximum of eight years during which time the entire amount invested is computed in the manner prescribed under the act to nil. The object thereby is that the development rebate in the manner specified under the repealed Act or the Act, was to be allowed in full. If any residue remains after the expiry of eight years, that amount was not to be adjusted and no balance could be carried forward to the 9th yearThe capital asset, namely the ship, plant or machinery, should be owned by the assessee during the relevant accounting year and wholly used in the business carried on by the assessee during the previous year in question. There must exist unity of ownership and user in the business. The emphasis for entitlement to rebate accrues from the use of the machinery or the plant by the owner for the purpose of its business resulting in the manufacture of the goods or services. It is not the ownership of the goods or the resultant end product of the raw materials used that is relevant. The only relevant consideration is that, during the previous year of part of the relevant period, ownership of the asset shall remain with the assessee. Only the successor-in-interest of the business, in accordance with the provisions of the Act, so long as the twin requirements under section 33(1) are fulfilled, is entitled to the benefit. But, when the unity of ownership and use of the asset in the business are disrupted or a branch of an earlier business is taken over by a new firm which exists simultaneously with the other branches of the old business, the benefit of development rebate under section 33(1) does not extend to either firm. Take, for instance, a case where an assessee leases the asset to another person during the previous accounting year, the use of the plant and machinery is not for the business of the assessee for which the development allowances were accorded under section 33(1) since the machinery was not wholly used by the assessee for his/its business during the previous accounting year. Suppose the plant or machinery was used for a purpose other than the business of the assessee, then also the assessee is not eligible for development rebate, obviously for the reason that the plant or machinery was not used for the purpose of the business of the assessee in the previous accounting year or a portion thereofThe crucial question, therefore, is whether the appellant is the owner of the machinery and plant in the relevant assessment year 1962-63. Acquisition of ownership is a condition precedent for availing of the development rebate under section 33(1) of the Act. It is now fairly clear from the statement of facts that the old and the new partnership firms are separately registered under the Act and the old one was doing its business at Calcutta and the new one at Purnea. They have been separately assessed as independent assessable entities. Only the new firm was reconstituted consisting of the two partners of the old firm, Messrs. Prayagchand Hanumanmal and Periwal and Co. (P) Ltd. Prayagchand and Hanumanmal individually an entitled to 25 per cent share each of the profits in the appellant firm and Periwal and Co. (P) Ltd. has 50 per cent. share of profit. Under the Indian Partnership Act, 1932, the partnership firm registered thereunder is neither a person nor a legal entity. It is merely a collective name for the individual members of the partnership. A firm as such cannot be a partner in another firm though its partners may be partners in the other firm in their individual capacity. Either under the repealed Act or the Act a firm is liable to be separately assessed to tax as well as all its partners in their capacity as individuals if they have taxable income. the appellant is separately registered under section 26A of the 1822 Act and assessed to tax from the assessment year 1960- 61 and onwards. there is no reconstitution of the original firm, Prayagchand Hanumanmal, inducting Periwal and Co. (P) Ltd. as its partner. Thus, it is not a successor-in -interest of the old firm as per the provisions of the Act. the question then is whether the assessee is entitled to development rebate under section 33(1) of the Act (under section 10(2) (vib) of the repealed Act.) Section 33(1) gives right to development rebate only to the owner who has acquired the ship or installed the machinery or plant. the necessary implication is that the assessee who claims development rebate should continue to remain to be the owner of the ship or plant or machinery during the relevant previous assessment year/years and the relevant previous assessment year or the succeeding assessment years carried forward up to eight years and not thereafterThe entries in the books of account of the appellant would amount to an acknowledgment of the liability to Messrs. Prayagchand Hanumanmal within the meaning of section 18 of the Limitation Act, 1963, and extend the period of limitation for the discharge of the liability as debt. Section 2(47) of the Act defines "transfer" in relation to a capital asset under clause (i) as sale, exchange or relinquishment of the asset, or (ii) the extinguishment of any right therein, or - (clauses(iii) to (vi) are not relevant hence omitted). Unfortunately, the assessee did not bring on record the necessary material facts to establish that it became owner by any non testamentary instrument acquiring right, title and interest in the plant and machinery nor was the point argued before the High Court and we do not have the benefit in this regard either of the Tribunal or of the High Court. In this view, we decline to go into the question but confine ourselves to the first question and agree with the High Court answering the reference in favour of the Revenue and against the assessee that the appellant is not entitled to the development rebate under section 33(1) of the Act. 5.

Decision reasoning: 0[ds]Under both the repealed Act as well as the Act, two conditions precedent are required to be fulfilled for entitlement to development to rebate, namely, a new ship acquired or new machinery or plant installed must be (1) owned by the assessee, and (2) wholly used for the purpose of the business carried on by him. It is an admitted case that the plant and machinery was wholly used for the purposes of the cold storage business carried on by the original firm, Messrs. Prayagchand Hanumanmal, and also by the appellate. The only dispute is whether the appellant owned the plant and machinery purchased and erected as a part of the capital asset to run the cold storage business by Messrs. Prayagchand Hanumanmal. In the context of section 33(1) of the Act, the ownership consists of a bundle of rights, namely title to, possession of and beneficial enjoyment thereof. It is an indisputable legal position that the sum to be allowed by way of development rebate was to be only such amount as was sufficient to reduce the total income to nil. The development rebate, to the extent to which it had not been allowed in the previous assessment year or succeeding years, was to be carried forward to the following year or years up to a maximum of eight years during which time the entire amount invested is computed in the manner prescribed under the act to nil. The object thereby is that the development rebate in the manner specified under the repealed Act or the Act, was to be allowed in full. If any residue remains after the expiry of eight years, that amount was not to be adjusted and no balance could be carried forward to the 9th yearThe capital asset, namely the ship, plant or machinery, should be owned by the assessee during the relevant accounting year and wholly used in the business carried on by the assessee during the previous year in question. There must exist unity of ownership and user in the business. The emphasis for entitlement to rebate accrues from the use of the machinery or the plant by the owner for the purpose of its business resulting in the manufacture of the goods or services. It is not the ownership of the goods or the resultant end product of the raw materials used that is relevant. The only relevant consideration is that, during the previous year of part of the relevant period, ownership of the asset shall remain with the assessee. Only the successor-in-interest of the business, in accordance with the provisions of the Act, so long as the twin requirements under section 33(1) are fulfilled, is entitled to the benefit. But, when the unity of ownership and use of the asset in the business are disrupted or a branch of an earlier business is taken over by a new firm which exists simultaneously with the other branches of the old business, the benefit of development rebate under section 33(1) does not extend to either firm. Take, for instance, a case where an assessee leases the asset to another person during the previous accounting year, the use of the plant and machinery is not for the business of the assessee for which the development allowances were accorded under section 33(1) since the machinery was not wholly used by the assessee for his/its business during the previous accounting year. Suppose the plant or machinery was used for a purpose other than the business of the assessee, then also the assessee is not eligible for development rebate, obviously for the reason that the plant or machinery was not used for the purpose of the business of the assessee in the previous accounting year or a portion thereofThe crucial question, therefore, is whether the appellant is the owner of the machinery and plant in the relevant assessment year 1962-63. Acquisition of ownership is a condition precedent for availing of the development rebate under section 33(1) of the Act. It is now fairly clear from the statement of facts that the old and the new partnership firms are separately registered under the Act and the old one was doing its business at Calcutta and the new one at Purnea. They have been separately assessed as independent assessable entities. Only the new firm was reconstituted consisting of the two partners of the old firm, Messrs. Prayagchand Hanumanmal and Periwal and Co. (P) Ltd. Prayagchand and Hanumanmal individually an entitled to 25 per cent share each of the profits in the appellant firm and Periwal and Co. (P) Ltd. has 50 per cent. share of profit. Underthe Indian Partnership Act, 1932, the partnership firm registered thereunder is neither a person nor a legal entity. It is merely a collective name for the individual members of the partnership. A firm as such cannot be a partner in another firm though its partners may be partners in the other firm in their individual capacity. Either under the repealed Act or the Act a firm is liable to be separately assessed to tax as well as all its partners in their capacity as individuals if they have taxable income. the appellant is separately registered under section 26A of the 1822 Act and assessed to tax from the assessment year 1960- 61 and onwards. there is no reconstitution of the original firm, Prayagchand Hanumanmal, inducting Periwal and Co. (P) Ltd. as its partner. Thus, it is not a successor-in -interest of the old firm as per the provisions of the Act. the question then is whether the assessee is entitled to development rebate under section 33(1) of the Act (under section 10(2) (vib) of the repealed Act.) Section 33(1) gives right to development rebate only to the owner who has acquired the ship or installed the machinery or plant. the necessary implication is that the assessee who claims development rebate should continue to remain to be the owner of the ship or plant or machinery during the relevant previous assessment year/years and the relevant previous assessment year or the succeeding assessment years carried forward up to eight years and not thereafterThe entries in the books of account of the appellant would amount to an acknowledgment of the liability to Messrs. Prayagchand Hanumanmal within the meaning of section 18 ofthe Limitation Act, 1963, and extend the period of limitation for the discharge of the liability as debt. Section 2(47) of the Act defines "transfer" in relation to a capital asset under clause (i) as sale, exchange or relinquishment of the asset, or (ii) the extinguishment of any right therein, or - (clauses(iii) to (vi) are not relevant hence omitted). Unfortunately, the assessee did not bring on record the necessary material facts to establish that it became owner by any non testamentary instrument acquiring right, title and interest in the plant and machinery nor was the point argued before the High Court and we do not have the benefit in this regard either of the Tribunal or of the High Court. In this view, we decline to go into the question but confine ourselves to the first question and agree with the High Court answering the reference in favour of the Revenue and against the assessee that the appellant is not entitled to the development rebate under section 33(1) of the Act.