CASE NO.: Appeal (civil) 563 of 1964 PETITIONER: Chittoor Motor Transport Company Private Limited RESPONDENT: Income Tax Officer, Chittoor DATE OF JUDGMENT: 06/10/1965 BENCH: P.B. GAJENDRAGADKAR(CJ) & K.N. WANCHOO & M. HIDAYATULLAH & J.C. SHAH & S.M. SIKRI JUDGMENT:
JUDGMENT
1966 AIR (SC) 570
The Judgment was delivered by SIKRI J.
SIKRI J.
This is an appeal by certificate of the High Court of Andhra Pradesh
against its judgment dismissing a petition filed under article 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 2, 797 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 section 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 section 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 section 10(2)(vib) of the Income-tax Act was repugnant to
article 14 of the Constitution; and, secondly, that assuming that section
10(2) (vib) was intra vires, this transaction did not amount to a sale or
transferThe High Court held that section 10(2)(vib) was not repugnant to
article 14 of the Constitution, and that the transaction amounted to
transfer within section 10(2)(vib)
The learned counsel for the appellant, Mr. Naunit Lal, has reiterated the
same points before us. Section 10(2)(vib) and section 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, —
(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.”
” 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 clause (vib) of sub-section (2) of section 10,
and subsequently at any time before the expiry of ten years from the end of
the year in which the ship was acquired or the machinery or plant was
installed—
(i) the ship, machinery or plant is sold or otherwise transferred by the
assessee to any person other than the Government ; orthe development rebate
originally allowed shall be deemed to have been wrongly allowed, and the
Income-tax Officer may, notwithstanding anything contained in this Act,
proceed to re-compute the total income of the assessee for the relevant
year as if the re-computation is a rectification of a mistake apparent from
the record within the meaning of this section, and the provisions of sub-
section (1) shall apply accordingly, the period of four years specified
therein being reckoned from the end of the year in which the transfer takes
place or the money is so utilised.”
There is no doubt that on the true interpretation of section 10(2)(vib) it
is clear that if an assessee sells to a person other than the Government at
any time before the expiry of ten years from the end of the year in which
the motor vehicle was acquired, the allowance is deemed to have been
wrongly allowed for the purposes of the Act, but if the assessee sells it
to the Government, no such consequence follows
The learned Additional Solicitor-General says that the object was to help
in the development of industry; indeed the rebate was called “development
rebate”; and in order to achieve this object a condition was put that if
the assessee did not utilise it in his own business, the rebate would be
forfeited or deemed to have been allowed wrongly, i.e., not really for
development purposes. He said that by a sale to the Government this object
was not defeated because the legislature assumes that the Government will
act in the public interest. In our opinion, there is no discrimination
which is hit by article 14 of the Constitution in this case. The
legislature has directed the giving of a rebate on conditions which are
exactly the same for every assessee, one condition being that if the
assessee sells before the expiry of ten years from the end of the year in
which it was acquired, to a person other than the Government, he would
forfeit such rebate. This condition is applicable to every assessee and an
assessee has a choice of either selling to a person other than the
Government and forfeiting the rebate or selling to the Government and
keeping the rebate with himself. The discrimination, if any, arises on the
choice made by the assessee. The legislature perhaps presumes that if the
machinery is offered to the Government for sale, the Government will only
buy it at a price which will take into consideration the rebate taken by
the assessee. In our opinion, therefore, it has not been established that
section 10(2)(vib) violates article 14 of the ConstitutionMr. Naunit Lal
then urges that in this case there has been no sale or transfer within
section 10(2)(vib). He says that the company consisted of the same three
persons as the partnership firm. He further says that it is not a
commercial transaction at all and what the latter part of section 10(2)
(vib) contemplates is a commercial sale or transfer. In this connection he
relies on Commissioner of Income-tax v. Sir Homi Mehta’s Executors, Rogers
& Co. v. Commissioner of Income-tax and Commissioner of Income-tax v.
Mugneeram Bangur . In the first case the facts in brief were these. The
assessee and his sons formed a private limited company and transferred to
that company shares in several joint stock companies which the assessee had
held jointly with his sons for Rs. 40, 97, 000 which was the market value
of the shares at that time. It was found that these shares had cost to the
assessee only Rs. 30, 45, 017 and the income-tax authorities levied income-
tax on the difference between the market price and the cost price of the
shares on the ground that the assessee had made a profit to that extent by
this transaction. The High Court held that though the assessee and his sons
on the one hand and the private limited company formed by them were
distinct entities in law but in truth and substance the only result of this
particular transaction was that Sir Homi Mehta and his sons held these very
shares in a different way from the way they held before the transaction. It
observed that ” they adopted a different mode, the mode of the formation of
the limited company with all its advantages, in order to hold these shares
and to deal with these shares and to make profit out of these shares. It
further held that Sir Homi Mehta did not deal with these shares in the
ordinary course as a businessman when he transferred these shares to the
private limited company. In our opinion, this case has no relevance to the
question of the interpretation of the words “sold or otherwise transferred”
in the latter part of section 10(2)(vib)The second case, Rogers & Co. v.
Commissioner of Income-tax , is on the same lines. The Calcutta High Court
in Commissioner of Income-tax v. Mugneeram Bangur followed Doughty’s case,
but there too they were not concerned with the interpretation of the words
“sold or otherwise transferred”
If we look at the resolution dated June 30, 1959, it is quite clear that it
is a sale for consideration of a number of buses by the limited company to
the partnership. It would be a sale under the Sale of Goods Act and it
would be a sale in any other proper meaning which might be given to the
word “sale”. We are not concerned whether any profit resulted to the
assessee but what we are concerned with is whether the assessee had sold or
transferred these buses to the partnership. To us the answer seems to be
plain that whether the transaction resulted in profit to the company or
not, the transaction comes within the purview of the latter part of section
10(2)(vib)
In the result the appeal fails and is dismissed with costs