ORDER
B.M. Kothari, Accountant Member
1. All these appeals involve consideration of a common point arising out of a common order passed by the CIT(A) for assessment years 1978-79 to 1980-81. Hence, these are being disposed of by a common order.
2. The Assessing Officer passed an order under Section 155(4A) on 6-10-1989 for all the three years under consideration. He issued a show-cause notice to the assessee stating that investment allowance reserve created in assessment years 1978-79 to 1980-81 has been utilised for distribution as profit amongst the partners before the expiry of 10 years in S.Y. 2041 and, therefore, investment allowance originally allowed is required to be withdrawn under Section 155(4A) of the Act. The assessee submitted letter dated 5th July, 1989 before the Assessing Officer in which it was, inter alia, submitted that they have utilised the investment allowance reserve for acquiring the new machinery and have thereafter debited the investment allowance reserve account with a corresponding credit to partners’ account. Copies of investment allowance reserve account from S.Y. 2036 till S.Y. 2041 and copy of machinery account of S.Y. 2041 were also submitted. It was further mentioned in the said letter that they have debited the investment allowance reserve account in S.Y. 2041 (assessment year 1986-87) specifically stating in the entry passed that because new machinery was purchased during the year that amount is debited to the investment allowance reserve and credited to partners’ account. According to the assessee all the conditions required for retention of the investment allowance have been fulfilled as the amount of investment allowance reserve has actually been utilised in S.Y. 2041 for purchase of new machinery. Therefore, the proposed action of withdrawing the investment allowance originally allowed in the respective years is contrary to the provisions of law.
2.1 The Assessing Officer observed that since the amount of investment allowance reserve has been debited and the amount has been credited to partners’ capital account this tantamounts to distribution of profits amongst the partners. He further observed that after purchase of new machinery in S.Y. 2041 the amount of investment allowance reserve created in the earlier years could have been transferred from investment allowance reserve account to the investment allowance utilisation account but could not have been transferred to partners’ capital account. He, therefore, passed the order under Section 155(4A) withdrawing the amount of investment allowance granted in the respective years. The details of investment allowance reserve created in the respective years, and investment allowance originally granted and withdrawn by the impugned order under Section 155(4A) are as under:
Assessment year Investment allowance Investment allowance
Reserve withdrawn
1978-79 9,38,000 9,93,099
1979-80 1,54,000 1,56,626
1980-81 1,79,601 1,93,125
12,71,601 13,43,900
The assessee purchased new plant and machinery aggregating to Rs. 14,51,597 as mentioned at page 6 of the order passed by the learned CIT(A).
3. The CIT(A) held that as the assessee in fact purchased new machineries of a higher amount and thereafter transferred the amount of reserve, there is no violation of the provisions contained in Section 32A(5). Consequently the Assessing Officer had no jurisdiction to take recourse to Section 155(4A) of the Act. He, accordingly, cancelled the orders passed under Section 155(4A) and allowed all three appeals, of the assessee. The revenue is aggrieved against the said order of the CIT).
4. The learned Sr. D.R. strongly relied on the reasons mentioned in the order under Section 155(4A). He submitted that in view of the elaborate reasons given by the Assessing Officer in the said orders, the CIT(A) ought to have confirmed the same.
5. The learned counsel for the assessee supported the order of the CIT(A) and further stated that the issue is clearly covered in favour of the assessee by a decision of the I.T.A.T., Ahmedabad Bench, in Pradeepkumar ChelaramArorav. ITO [1992] 43 ITD 50 (SMC) as well as by the judgment of Hon’ble Gujarat High Court in CIT v. Karamchand Premchand (P.) ltd. [1993] 200ITR281.
6. We have carefully considered the submissions made by the learned representatives and have also gone through the orders of the departmental authorities as well as the decisions relied upon by the learned counsel for the assessee. The provisions of Section 32A(5) provides that investment allowance granted under Section 32A in respect of any machinery or plant shall be deemed to have been wrongly made for the purposes of the Income-tax Act in the following events:
(a) If the machinery or plant is sold or otherwise transferred by the assessee to any person at any time before the expiry of 8 years from the end of the previous year in which it was acquired or installed, or
(b) if at any time before expiry of 10 years the assessee does not utilise the amount credited to the investment allowance reserve account for the purpose of acquiring new machinery or plant for the purposes of the business of the undertaking, or
(c) if at any time before the expiry of the 10 years aforesaid, the assessee utilises the amount credited to the reserve account for distribution by way of profits or dividends or for remittance outside India as profits or for creation of any assets outside India, or for any other purpose, which is not a purpose of the business of the undertaking. In such an event the provisions of Section 155(4A) will apply. The fact that the assessee acquired new item’s of plant and machinery within a period of 10 years aggregating to Rs. 14,51,597 prior to transferring the amount of investment allowance reserve to the partners’ account has not been disputed by the Assessing Officer or by the learned Sr. D.R. before us. It is thus clear that the amount of investment allowance reserve created in the years under consideration was admittedly utilised for purchase of new machinery within the time allowed under Section 32A(5). Once the amount of investment allowance reserve has been utilised for purchase of new plant and machinery within the prescribed period, it is thereafter impossible to say that the same amount of investment allowance reserve, which has already been utilised for purchase of plant and machinery, has been again utilised for the prohibited purposes prescribed in Section 32A(5)(c). A harmonious construction of the prohibitive Sub-clauses (b) and (c) of Section 32A(5) clearly indicates that the amount of investment allowance reserve is required to be utilised for purchase of new machinery or plant at any time before the expiry of 10 years from the end of the previous year in which the machinery or plant was installed. If the assessee has utilised that amount, say within a period of 7 to 8 years, for purchase of new plant and machinery, the prohibition contained in Clause (c) would thereafter not apply in those cases where the amount of investment allowance reserve had already been utilised for purchase of plant and machinery in accordance with Clause (b) of Section 32A(5). The proper construction of the two relevant Sub-clauses (b) & (c) of Section 32A(5) means that the provisions of law require the assessee either to utilise the amount for purchase of new plant and machinery at any time before the expiry of 10 years and in case the assessee cannot utilise that amount for purchase of new plant and machinery within the prescribed period of 10 years, the assessee, for that block of 10 years period, should not utilise that amount of reserve for distribution by way of dividends or profits or for other prohibitive or non-business purposes prescribed in Sub-Clause (c) of Section 32A(5). In the present case, the assessee has duly complied with the condition of purchasing the new plant and machinery within the prescribed time and, therefore, any transfer of investment allowance reserve to partners’ account after purchase of the new machinery would not result in withdrawal of the investment allowance in the facts and circumstances.
7. It will also be worthwhile to state that the assessee in the replies submitted before the Assessing Officer had clearly stated that at the time when the amount of investment allowance reserve aggregating to Rs. 12,71,601 was debited in S.Y. 2041 it has been clearly mentioned in the said entries that because new machinery was purchased during the year, the amount is debited to investment allowance reserve account and credited to the partners’ account. It has also been stated in the letter submitted before the departmental authorities that even after the transfer of this amount to partners’ capital accounts, the partners have not utilised the amount of reserve so credited in their accounts and the same has remained intact and such amount has not been utilised for any non-business purposes. This factual position has also not been disputed by the Assessing Officer or by the Sr. D.R. before us. The Assessing Officer has only indicated that the utilisation of reserve for purchase of new machinery should have been reflected in the accounting entries by debiting the investment allowance reserve with a corresponding credit to investment allowance utilisation account but not by transferring the same to partners’ capital account. Transferring it to partners’ capital account instead of investment allowance utilisation account tantamounts to distribution of profits, according to the Assessing Officer. The manner of making a book keeping entry or the account to which the amount of investment allowance reserve, after it has been utilised for purchase of plant and machinery would not in substance make any difference and will not disentitle the assessee to retain the benefit of investment allowance originally granted in all the years under consideration.
8. The Hon’ble Gujarat High Court in the case of Karamchand Premchand (P.) Ltd. (supra), after elaborately considering the similar provisions of Sections 33, 34 and 155 relating to development rebate held as under at pp. 3047305:
In the light of these established accounting practices, it becomes clear that for earning development rebate, as a condition precedent, development rebate reserve of the requisite amount as indicated by Section 34(3)(a) has to be created by the assessee during the year mentioned in the provisions. That has been done by the assessee. As discussed earlier, there is no dispute on this point. Factually, it has also been found as discussed earlier that an amount more than equivalent to the said reserve amount was actually spent by the assessee during the relevant time for installing capital assets. Therefore, the very purpose of the development rebate reserve was exhausted. That was done within eight years of the creation of such a reserve. There is no dispute that it was so done in the very next year. If that is so, how accounting entries are effected after the purpose of the reserve was exhausted is the question which is to be answered on the anvil of the established accounting practice and on which the statute is silent. Consequently, in the light of the aforesaid settled accounting practice, it was open to the assessee to deal with the development rebate reserve which had itself become a free reserve and to carry forward the said amount to the general reserve. Consequently, posting of such entries cannot be treated to be in any way illegal or contrary to established accounting practice. All that the revenue apprehended was that the dividend might have.been distributed from the general reserve out of the nucleus provided by the balance carried forward from the development rebate reserve account. We have already seen earlier that this apprehension was misconceived as in fact and also in law, dividend had to be distributed out of profits and there were huge amount of profits available for meeting the amount of Rs. 29,000 by way of dividend which was distributed. Consequently, on the facts of this case, there was no escape from the conclusion that all the conditions precedent as contemplated by Section 33 read with Section 34(3) (a) of the Act were statisfied by the assessee for not only earning development rebate but for retaining it and the prohibited purposes enumerated by Section 34(3)(a)(i) and (ii) were absent on the facts of the present case. There was no occasion for the Revenue to fall back upon Section 155(5) of the Act.
The provisions relating to development rebate are similar to the provisions relating to investment allowance contained in Section 32A except to the extent that the amount of development rebate reserve had to be utilised by the assessee during the period of 8 years for the purpose of business of the undertaking other than for distribution by way of dividend or profits while the amount of investment allowance reserve is required to be utilised by the assessee within a period of 10 years for purchase of new plant and machinery. It is, therefore, clear that the view taken by the Hon’ble Gujarat High Court in relation to withdrawal of development rebate equally applies in relation to withdrawal of investment allowance. The judgment of the Hon’ble Gujarat High Court fully supports the view taken by the CIT(A).
9. The view taken by the CIT(A) is also clearly supported by the decision of the ITAT in the case of Pradeepkwnar Chelaram Arora (supra) in which it has been held that mere debiting of the investment allowance reserve account and crediting of the capital account of the partners would not be sufficient for the ITO to withdraw investment allowance under Section 155(4A). In that case also the assessee in the very next year had purchased new machinery worth Rs. 1,96,096 and consequently it was held that the amount of investment allowance reserve had been utilised for purchase of new machinery. The withdrawal of investment allowance made under Section 155(4A) was not sustained.
10. In view of the aforesaid discussions, we are of the considered opinion that the view taken by the CIT(A) requires no interference.
11. All the appeals are dismissed.