COMMISSIONER OF INCOME TAX vs. SHREE SHANTINATH SILK MILLS

ITR/50/1997HC GujaratGJHC24020214199726 February 2008Author: HONOURABLE MR. JUSTICE D.A.MEHTA,HONOURABLE MR. JUSTICE Z.K.SAIYED11 pages
AI SummaryAllowed

What were the facts?

The assessee, Shree Shantinath Silk Mills, a registered partnership firm, is in appeal against the Commissioner of Income Tax's order. The assessment years are 1979-80 and 1980-81. The Assessing Officer passed an order under Section 155(4A) on October 6, 1989, withdrawing investment allowance granted for AY 1978-79, 1979-80, and 1980-81. The reason for withdrawal was the alleged utilization of the investment allowance reserve for distribution as profits among partners before the expiry of ten years. The total amount withdrawn was Rs. 9,93,090 for AY 1978-79, Rs. 1,56,625 for AY 1979-80, and Rs. 1,93,125 for AY 1980-81. The Commissioner (Appeals) and the Income Tax Appellate Tribunal (ITAT) ruled in favour of the assessee.

What did the High Court hold?

The High Court held that both questions referred to it should be answered in the affirmative, in favour of the assessee and against the revenue. Regarding the first issue, the Court affirmed the Tribunal's finding that the utilization of the investment allowance reserve for the purchase of new machinery and plant, which was a business purpose, precluded any further distribution of profits from that amount. The mere act of crediting the partners' capital account, after the funds had already been used for acquiring assets, did not constitute a distribution of profits. The Court noted that the purchases were made before the expiry of the ten-year period and that the amount spent on machinery exceeded the reserve amount. Regarding the second issue, the Court agreed with the Tribunal that the conditions in Section 32A(5) were disjunctive, indicated by the use of 'or'. Therefore, if the conditions in sub-clauses (a) and (c) were not violated, the provisions of Section 155(4A) would not be applicable, even if sub-clause (b) was considered. The Court relied on its own decision in CIT vs. Karamchand Premchand Pvt. Ltd. and the Supreme Court's decision in Hunsur Plywood Works Ltd. vs. CIT. The reference was disposed of accordingly.

What were the issues?

1. Whether, on the facts and in the circumstances of the case and in law, the ITAT was right in holding that crediting the partners' capital account with the amount standing to the credit of the Investment Allowance Reserve account does not result in distribution by way of profit, where the assessee utilized the reserve amount for acquiring new machinery and plant for the business. (Section 32A(5) and Section 155(4A) of the Income-tax Act, 1961). 2. Whether, on the facts and in the circumstances of the case and in law, the ITAT was right in holding that if one of the three conditions prescribed by Section 32A(5) (specifically sub-clause (b)) is satisfied, but the other two (sub-clauses (a) and (c)) are not satisfied, then the provisions of Section 155(4A) will not be applicable. Assessee's Contentions: The assessee argued that the amount in the investment allowance reserve was utilized for acquiring new machinery and plant, which was a business purpose. The subsequent credit to the partners' capital account did not constitute a distribution of profits. Revenue's Contentions: The revenue contended that the crediting of the reserve amount to the partners' capital account amounted to a distribution of profits, thereby violating the conditions for investment allowance. They relied on the fact that one condition (sub-clause (b)) was satisfied, implying the applicability of Section 155(4A).

Which sections of the Income-tax Act were involved?

Section 32A,Section 32A(5),Section 155,Section 155(4A),Section 256(2)

AI-generated summary — verify with the full judgment below

ITR/50/1997 1/11 JUDGMENT IN THE HIGH COURT OF GUJARAT AT AHMEDABAD INCOME TAX REFERENCE No.50 of 1997 For Approval and Signature: HONOURABLE MR.JUSTICE D.A.MEHTA HONOURABLE MR.JUSTICE Z.K.SAIYED =================================================== 1 Whether Reporters of Local Papers may be allowed to see the judgment ? YES 2 To be referred to the Reporter or not ? YES 3 Whether their Lordships wish to see the fair copy of the judgment ? NO 4 Whether this case involves a substantial question of law as to the interpretation

of the constitution of India, 1950 or any order made thereunder ? NO 5 Whether it is to be circulated to the civil judge ? NO =================================================== COMMISSIONER OF INCOME TAX - Applicant(s) Versus SHREE SHANTINATH SILK MILLS - Respondent(s) =================================================== Appearance : MR BB NAIK for Applicant(s) : 1, MR SN DIVATIA for Respondent(s) : 1, =================================================== CORAM : HONOURABLE MR.JUSTICE D.A.MEHTA and HONOURABLE MR.JUSTICE Z.K.SAIYED Date : 26/02/2008 ORAL JUDGMENT (Per : HONOURABLE MR.JUSTICE D.A.M

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