COMMISSIONER OF INCOME TAX vs. STAR STEEL PVT.LTD.

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ITR/156/1991HC GujaratGJHC24013389199104 September 2003Author: HONOURABLE MR. JUSTICE D.H.WAGHELA,HONOURABLE MR. JUSTICE D.A.MEHTA4 pages
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What did the High Court hold?

The High Court held that the Income Tax Appellate Tribunal was correct in law in setting aside the order passed by the Assessing Officer under Section 155(4A) of the Income Tax Act, 1961. The Court reasoned that the admitted factual position was that the "Reduction Gear Box" plant and machinery was scrapped and its scrap was utilized as raw material for manufacturing steel, which was subsequently sold. The Court found that neither the machinery nor the plant on which the investment allowance was granted was sold or otherwise transferred. The revenue's contention that "otherwise transferred" would encompass any converted form of the asset was rejected in light of the clear language of Section 155(4A)(a). The Court referred to the Apex Court's decision in VANIA SILK MILLS P. LTD. Vs. COMMISSIONER OF INCOME-TAX, which stated that the existence of the asset is a sine qua non for a transfer and that when an asset is destroyed, there is no question of transferring it. Applying this ratio, the Court concluded that since the plant and machinery was not in existence, Section 155(4A)(a) was not applicable, and the Assessing Officer could not withdraw the investment allowance. The question referred to the Court was answered in the affirmative, in favour of the assessee.

What were the facts?

The assessee, Star Steel Pvt. Ltd., claimed and was allowed investment allowance of Rs. 56,716 for Assessment Year 1977-78 on a "Reduction Gear Box" plant and machinery. During the accounting period for Assessment Year 1981-82, this machinery was scrapped due to inefficient functioning. The Assessing Officer (AO) initiated proceedings under Section 155(4A) of the Income Tax Act, 1961, to withdraw the allowance, considering the scrapping as an "otherwise transfer" under Section 2(47). The assessee's appeal before the CIT(Appeals) was unsuccessful. However, the Income Tax Appellate Tribunal (ITAT) ruled in favour of the assessee, holding that the machinery was not transferred but scrapped, and its scrap was used as raw material to manufacture steel, which was then sold.

What were the issues?

1. Whether the Appellate Tribunal was right in law and on facts in setting aside the order passed by the Income Tax Officer (ITO) under Section 155(4A) of the Income Tax Act, 1961, whereby the investment allowance allowed at the time of the original assessment stood withdrawn? Assessee's Contention (as understood from the Tribunal's decision): The assessee argued that the plant and machinery was not "transferred" in the sense contemplated by Section 155(4A). Instead, it was scrapped, and the resulting scrap was utilized as raw material for manufacturing steel, which was subsequently sold. Therefore, the conditions for withdrawal of investment allowance were not met. Revenue's Contention: The revenue, through the Commissioner of Income Tax, contended that the scrapping and subsequent utilization of the machinery, even if converted into scrap and then steel, constituted an "otherwise transfer" within the meaning of Section 2(47) of the Act. The revenue relied on the definition of "transfer" and argued that the AO was correct in withdrawing the investment allowance. The revenue cited the Supreme Court decisions in COMMISSIONER OF INCOME-TAX, GUJARAT-II VS. VANIA SILK MILLS (P) LTD. and MARYBONG AND KYEL TEA INDUSTRIES LTD. VS. COMMISSIONER OF INCOME TAX, though the former was initially relied upon by the assessee before being reversed.

Which sections of the Income-tax Act were involved?

Section 155(4A),Section 2(47)

AI-generated summary — verify with the full judgment below

IN THE HIGH COURT OF GUJARAT AT AHMEDABAD

INCOME TAX REFERENCE No 156 of 1991

For Approval and Signature:

HON'BLE MR.JUSTICE D.H.WAGHELA and HON'BLE MR.JUSTICE D.A.MEHTA

============================================================ 1. Whether Reporters of Local Papers may be allowed : NO to see the judgements?

2.

To be referred to the Reporter or not? : NO 3. Whether Their Lordships wish to see the fair copy : NO of the judgement?

4.

Whether this case involves a substantial question : NO of law as to the interpretation of the Constitution of India, 1950 of any Order made thereunder?

5.

Whether it is to be circulated to the concerned : NO Magistrate/Magistrates,Judge/Judges,Tribunal/Tribunals?

-------------------------------------------------------------- COMMISSIONER OF INCOME TAX Versus STAR STEEL PVT.LTD. -------------------------------------------------------------- Appearance: 1. INCOME TAX REFERENCE No. 156 of 1991 MR MANISH R BHATT for Petitioner No. 1 SERVED BY RPAD - (N) for Respondent No. 1 --------------------------------------------------------------

CORAM : HON'BLE MR.JUSTICE D.H.WAGHELA and HON'BLE MR.JUSTICE D.A.MEHTA

Date of decision: 04/09/2003

ORAL JUDGEMENT (Per : HON'BLE MR.JUSTICE D.A.MEHTA)

1.

This is a reference at the instance of the Commissioner of Income Tax and the following question of law has been referred to us by the Income Tax Appellate Tribunal, Ahmedabad Bench 'B' under Section 256(1) of the Income Tax Act, 1961 (for short 'the Act') :

"Whether, the Appellate Tribunal is right in law and on facts in setting aside the order passed by the I.T.O. under Section 155(4A) whereby the investment allowance allowed at the time of the original assessment stood withdrawn ?".

2.

The assessee is a Private Limited Company and for Assessment Year 1977-78 it was allowed investment allowance of Rs.56,716/= on an item of Plant & Machinery known as "Reduction Gear Box". During the accounting period relevant to Assessment Year 1981-82 the said Plant & Machinery was scrapped since it was not functioning efficiently resulting in frequent stoppages of production. In light of this accepted position, the Assessing Officer issued notice indicating intention to rectify under Section 155(4A) of the Act. The assessee resisted the proposed action. However, according to the Assessing Officer, in light of the definition of "transfer" within the meaning of Section 2(47) of the Act, there was extinguishment of rights of the assessee and hence, the condition of the Plant & Machinery being "otherwise transferred" is satisfied. Therefore, according to the Assessing Officer, the investment allowance of Rs.56,716/= granted during Assessment Year 1977-78 was required to be withdrawn. The assessee failed in its appeal before the C.I.T. (Appeals). However, the Income Tax Appellate Tribunal accepted the contention of the assessee that the assessee had not transferred the Plant & Machinery but steel which was converted from scrap of the defective Plant & Machinery.

3.

Heard Mr.M.R.Bhatt, learned Sr. Standing counsel appearing on behalf of the applicant - revenue. Though served there is no appearance on behalf of the respondent.

4.

It was contended by Mr.Bhatt that Section 155(4A) specifically lays down that if at any time before the expiry of eight years from the end of the previous year in which Plant & Machinery was installed, the Plant & Machinery was sold or otherwise transferred, the investment allowance originally granted shall be deemed to have been wrongly allowed and the Assessing Officer was, therefore, right in passing the necessary order recomputing the total income by withdrawing such investment allowance. It was submitted that the term

"otherwise transferred" would take within its sweep not only the original Plant & Machinery but also any other item which would be obtained on conversion of the original Plant & Machinery. Mr.Bhatt also, at the same time, invited our attention to the fact that before the Tribunal reliance was placed on decision of this Court in case of COMMISSIONER OF INCOME-TAX, GUJARAT-II VS. VANIA SILK MILLS (P) LTD., (1977) 107 I.T.R. 300, but the said decision has subsequently been reversed by the Supreme Court in the case of VANIA SILK MILLS P. LTD. Vs. COMMISSIONER OF INCOME-TAX, (1991) 191 I.T.R. 647. It COMMISSIONER OF INCOME-TAX (supra) the Apex Court has stated that in light of the various words and expressions used in the definition of "transfer" in Section 2(47) of the Act the existence of the asset is a sine qua non before it could be stated that the asset was transferred. It was further laid down that when an asset is destroyed, there is no question of transferring it to others.

7.

Applying the aforesaid ratio to the facts of the case it is apparent that the Plant & Machinery on which investment allowance was granted was not in existence and what was sold was steel recovered from the scrap of Plant & Machinery. Hence, in absence of the Plant & Machinery, there is no question of application of Section 155 (4A)(a) of the Act.

8.

In the result, we hold that the Tribunal was right in law in holding that the Assessing Officer could not have invoked Section 155(4A)(a) of the Act so as to withdraw investment allowance allowed at the time of original assessment.

9.

The question referred to us is, therefore, answered in the affirmative i.e. in favour of the assessee and against the revenue.

10.

This reference is disposed of accordingly. There shall be no order as to costs. [ D.H.WAGHELA,J ] [ D.A.MEHTA, J ]

* * * 'Bhavesh'

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