The main legal point established is that the transfer of assets to individual partners constitutes a transfer under the Income-tax Act, leading to the withdrawal of development rebate under section 155(5)(i) and section 34(3)(b).

Venkataramiah, J.

1. At the instance of the assessee, the Income-tax Appellate Tribunal, Bangalore Bench, had made the above reference under section 256(1) of Income-tax Act, 1961 (hereinafter referred to as "the Act"), requesting this court to give its opinion on the following question :

"Whether, on the facts and in the circumstances of the case, the development rebate allowed in the assessment for the year 1965-66 was rightly withdrawn under section 155(5)(i) of the Income-tax Act, 1961 ?"

The facts leading to the above reference are as follows :

The assessee is a firm carrying on business at Arsikere. During the assessment year 1965-66, it was carrying on business as mundy merchants and it also owned a cinema theatre, a rotary oil mill and a coir factory. Development rebate of plant and machinery used in the oil mills and coir factory under section 33 of the Act, and the same had been allowed by the assessing authority. The firm consisted of 7 partners. 2 minors had also been admitted to the benefit of the partnership. On March 31, 1965, the partners of the firm entered into an arrangement whereby the coir factory was transferred exclusively in favour of four of them, by name, K. Ananthanagaraj, K. A. Chandrakanth, K. A. Satheeshkumar and K. A. Manohar. Similarly, the rotary oil mills belonging to the firm was transferred by all the partners in favour of three of them, namely, A. S. Narayana Setty, K. Ramachandra Setty and K. Ananthakrishna Setty. By virtue of the above agreement each group of partners became exclusive owner of the items of property which it took over under the arrangement referred to above. Thereafter, the partners who took over the items of properties under the arrangement referred to above, entered into separate deeds of partnership among themselves and some new persons in respect of those items of business. But the assessee-firm continued to carry on the business of Rathna Talkies, etc., referred to in paragraph 5 of the agreement, dated March 31, 1966, which is enclosed as annexure "A" to the statement of the case submitted by the Tribunal.

2. On coming to know that the agreement dated March 31, 1965, and the deeds of partnership referred to above had come into existence, the II Income-tax Officer, Hassan, who was the assessing authority under the Act, took action under section 155(5) of the Act, to rectify the order of assessment relating to the assessment year 1965-66, in view of the provisions of section 34(3)(b) of the Act, as he was of the opinion that the machinery and plant in respect of which development rebate had been allowed, had been transferred by the assessee within the stipulated time. After hearing the parties, he made an order rectifying the order of assessment by withdrawing the rebate and called upon the assessee to pay to the deficient tax due and payable. The appeal filed by the assessee before the Appellate Assistant Commissioner of Income-tax and the further appeal filed before the Tribunal were dismissed. Hence, this reference.

Section 34(3)(b) of the Act provides :

"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...."

It was contended by the assessee before the income-tax authorities, that it was not open to them to withdraw the rebate that had been granted to the assessee during the assessment year 1965-66, as there was no transfer in the eye of law, of the machinery and plant in respect of which rebate had been allowed under section 23 during the relevant year. The above contention was founded on the a