1. Company claimed development rebate on buses; subsequently transferred buses to a partnership firm within ten years, leading to rectification of assessment under Income-tax Act, 1922. (Para 1 )
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1965 Supreme(SC) 231
SUPREME COURT OF INDIA
P.B. GAJENDRAGADKAR, C.J.I., K.N. WANCHOO, M. HIDAYATULLAH, J.C. SHAH AND S.M. SIKRI JJ.
Chittoor Motor Transport Co. (P) Ltd., Appellant
Versus
The Income Tax Officer, Chittoor, Respondent.
Civil Appeal No. 563 of 1964.
Advocates appeared
Mr. Naunit Lal, Advocate, for Appellant; Mr. Niren De, Addl. Solicitor General of India. (M/s. R. Ganapathy Iyer and R. H. Dhebar. Advocates, with him), for Respondent.
Advocates:
NAUNIT LAL, NIREN DEY, R.Ganapathy Iyer, R.H.Dhebar
NAUNIT LAL, NIREN DEY, R.Ganapathy Iyer, R.H.Dhebar
A conditional tax rebate forfeited upon sale to a non-government entity does not violate Article 14. Additionally, a transfer of assets for consideration from a company to a partnership firm constitutes a "sale or transfer," regardless of common ownership between the two entities.
Headnote:(A) Income-tax Act, 1922 - Sections 10(2)(vib) and 35(11) - Constitution of India - Article 14 - Development rebate - Transfer of assets within ten years - Validity of provision - Whether the distinction between sale to the Government and sale to other persons is discriminatory - Condition for rebate is the same for every assessee - Choice of buyer lies with the assessee - No discrimination hit by Article 14. (Para 5)
(B) Income-tax Act, 1922 - Section 10(2)(vib) - Interpretation of "sold or otherwise transferred" - Transfer of assets from a private limited company to a partnership firm consisting of the same shareholders for consideration - Whether such transaction amounts to a sale or transfer - Transaction constitutes a sale under the Sale of Goods Act - Legal nature of the transfer is not affected by the fact that the entities are controlled by the same persons or whether the transaction resulted in profit. (Paras 6-8)
Facts of the case:
A private limited company claimed a development rebate on new buses purchased and brought into use. Subsequently, the shareholders of the company formed a partnership firm, and the company transferred the buses, including those for which the rebate was claimed, to the partnership firm for a specified consideration. The tax authorities invoked provisions to re-compute the total income, treating the rebate as wrongly allowed because the assets were transferred to a person other than the Government within ten years from the end of the year of acquisition.
Findings of Court:
The court found that the provision requiring the forfeiture of a rebate if assets are sold to anyone other than the Government does not violate the right to equality. It further found that the resolution to transfer the buses for consideration constituted a sale in any proper meaning of the word, regardless of the commonality of ownership between the company and the partnership firm.
Issues: Whether Section 10(2)(vib) of the Income-tax Act, 1922 is repugnant to Article 14 of the Constitution and whether the transfer of assets from a company to a partnership firm owned by the same shareholders constitutes a "sale or transfer" under the Act.
Ratio Decidendi: The court ruled that the condition for forfeiting a rebate upon sale to a non-government entity is applicable to all assessees uniformly and thus does not violate Article 14. Furthermore, a transfer of assets for consideration from a company to a partnership is a sale, irrespective of the relationship between the parties or the profit motive.
Result: Appeal dismissed.
Legal Category Hierarchy
Table of Contents
2. Whether Section 10(2)(vib) of the Income-tax Act violates Article 14 and whether transfer between entities with common shareholders constitutes a sale or transfer. (Para 1 )
3. The condition to forfeit rebate upon transfer to non-government entities is non-discriminatory; a transfer for consideration between a company and a partnership constitutes a sale. (Para 5 , 8 )
4. A transfer of assets for consideration between a company and a partnership constitutes a sale or transfer under Section 10(2)(vib), regardless of common ownership or profit. (Para 8 )
5. Appeal dismissed with costs. (Para 9 )
6. Does the provision requiring forfeiture of development rebate upon transfer of assets to a non-government entity within ten years violate Article 14?
No. The condition is applicable to every assessee equally. The discrimination arises from the assessee's choice to sell to a non-government entity rather than the government. (Para 5 )
7. Does a transfer of assets for consideration from a company to a partnership firm, where shareholders are the same, constitute a sale or transfer?
Yes. If the transaction involves a sale for consideration, it is a sale under the Sale of Goods Act and falls within the purview of Section 10(2)(vib), regardless of whether the entities share common ownership. (Para 8 )
8. Is the realization of profit necessary to trigger the forfeiture of development rebate under Section 10(2)(vib)?
No. The relevant factor is whether the assessee sold or transferred the assets; the outcome of the transaction in terms of profit is irrelevant to the application of the section. (Para 8 )
Judgement
SIKRI, J.: This is an appeal by certificate of the High Court of Andhra Pradesh against its judgment dismissing a petition filed under Art. 226 of the Constitution by the appellant. The appellant is a Private Limited company, hereinafter referred to as the Company, and three persons hold shares of the Company as under:
Shares Amount
Rs.
Sri C. P. Sarathy Mudaliar 2797 27,970
Sri C. P. Singaram 420 4,200
Sri C. P. Doraiswamy 500 5,000
The Company was doing transport business and for the assessment year 1959-60 (Previous year ending 31st March, 1959), it claimed a sum of Rs. 48,600/- as development rebate in respect of the four new buses purchased by it and brought to use during the year. The Income Tax Officer disallowed the amount but the Appellate Assistant Commissioner, on appeal, allowed the entire sum of Rs. 48,600/- as development rebate On May 27, 1959, the three shareholders entered into a partnership and the capital of the firm was as follows:
Rs.
C. P. Sarathy Mudaliar 25,000
C. P. Singaram 10,000
C. P. Doraiswamy 10,000
Total 45,000
On June 30, 1959, the Company passed a resolution transferring a number of motor buses, including the four in respect of which development rebate had been claimed, to the partnership firm for a sum of Rs. 2,52.000. The company was not wound up and is still in existence and carrying on business as a transport company. On February 7, 1962, the Income-tax Officer, purporting to act under S. 35 (11) of the Income-tax Act. 1922, hereinafter referred to as the Act. Issued a memorandum to the appellant stating, inter alia, that
"since the assets were transferred within 10 years I propose to invoke the provisions of S. 35 of the Act and rectify the income by including the rebate allowed as income of the assessee."
He invited the assessee to give his objections if any. The appellant thereupon filed a petition in the High Court on February 19, 1962, praying inter alia that the Income-tax Officer be prohibited from proceeding with the rectification of the Income-tax assessment for 1959-60, as per the memorandum dated February 7, 1962. Two points were taken in the petition: First that S. 10 (2) (vib) of the Income-tax Act was repugnant to Art. 14 of the Constitution; and, secondly, that assuming that S. 10 (2) (vib) was intravires, this transaction did not amount to a sale or transfer.
2. The High Court held that Section 10 (2) (vib) was not repugnant to Art. 14 of the Constitution, and that the transaction amounted to transfer within S. 10 (2) (vib).
3. The learned counsel for the appellant, Mr. Naunit Lal, has reiterated the same points before us. Section 10 (2) (vib) and S. 35 (11) are in the following terms:
"10 (2) Such profits or gains shall be computed after making the following allowances, namely:-
* * * *
(vib) in respect of a new ship 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:-
(i) in the case of ship
(ii) in the case of a ship acquired before the 1st day of January, 1958, and in the case of any machinery or plant, twenty-five per cent of the actual cost of the ship or machinery or plant to the assessee.
* * * *
and if any such ship, machinery or plant is 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 it was acquired or installed, any allowance made under this clause shall be deemed to have been wrongly allowed for the purposes of this Act."
"Section 35 (11): 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 in any year of assessment under Cl. (vib) of sub-s. (2) of S. 10, and subsequently at any time before the expiry of ten years fr
