Case Note & Summary
The dispute arose from the withdrawal of development rebate granted under Section 33(1)(a) of the Income Tax Act, 1961 to a registered firm engaged in the manufacture of milk powder. For the assessment year 1965-66, the Income Tax Officer allowed development rebate of Rs. 1,00,093 on the entire machinery and plant owned and used by the assessee for its business. Subsequently, a part of the machinery was sold, leaving machinery worth Rs. 85,222 eligible for development rebate. On 27 August 1969, the assessee let out the remaining machinery to M/s. Hindustan Lever Limited for a period of three years with a provision for renewal or outright purchase. The Income Tax Officer, by amendment order dated 30 March 1970, withdrew the development rebate of Rs. 1,00,093. The Appellate Assistant Commissioner dismissed the assessee's appeal, but the Income Tax Appellate Tribunal allowed the appeal, holding that no transfer was involved by the lease agreement and Section 34(3)(b) was not attracted. The Tribunal rejected the Revenue's reference application under Section 256(1), and the Allahabad High Court rejected the Revenue's application under Section 256(2) on 1 August 1977. The Supreme Court granted special leave on 21 February 1978 and ultimately withdrew the matter from the High Court to adjudicate finally. The core legal issue was whether leasing out the machinery within eight years of acquisition constituted 'otherwise transferred' under Section 34(3)(b) so as to justify withdrawal of development rebate. The Revenue contended that by entering into the lease transaction, the assessee had otherwise transferred the machinery within the prohibited period. The assessee argued that Section 34(3)(b) read with the inclusive definition of transfer in Section 2(47) did not cover a lease, as there was no sale or extinguishment of rights. The Supreme Court reasoned that development rebate under Section 33(1)(a) required not only ownership but also exclusive user of the machinery for the assessee's business. Once the machinery was leased out, the assessee was disabled from such exclusive user. The court held that the lease resulted in exclusive possession and enjoyment vesting in the lessee, and therefore the machinery was 'otherwise transferred' by the assessee before expiry of eight years. Even if the transaction did not fall within the inclusive definition of transfer in Section 2(47), the ordinary contextual meaning of transfer, which includes making over possession to another, applied. The court agreed with the Kerala High Court decision in Blue Bay Fisheries (P) Ltd. v. Commissioner of Income Tax (166 ITR 1). Accordingly, the Supreme Court set aside the orders of the High Court and the Tribunal, allowed the Revenue's appeal, and answered the question of law in the negative, in favour of the Revenue and against the assessee, with no order as to costs.
Headnote
A) Income Tax - Development Rebate - Requirement of Exclusive User and Transfer - Income Tax Act, 1961, Sections 33(1)(a), 34(3)(b) - Assessee leased machinery to a third party within eight years of acquisition, thereby disabling its exclusive user for business; the Supreme Court held that such lease amounted to 'otherwise transferred' under Section 34(3)(b) and development rebate was deemed to have been wrongly made; withdrawal by Income Tax Officer was justified. Held that exclusive possession and enjoyment of machinery by assessee no longer existed after lease, even though there was no sale or complete extinguishment of rights (Paras 7). B) Interpretation of Statutes - Definition Clause - Inclusive Meaning of 'Transfer' - Income Tax Act, 1961, Section 2(47) - The inclusive definition of 'transfer' in Section 2(47) did not exclude the ordinary contextual meaning of the word; the words 'otherwise transferred' in Section 34(3)(b) should be interpreted in the context of the main provision Section 33(1)(a) to include making over possession to another; lease transaction therefore fell within 'otherwise transferred'. Held that the definition section was inclusive and did not restrict the contextual meaning of 'transfer' (Paras 7).
Issue of Consideration
Whether leasing out machinery by the assessee within eight years of acquisition amounts to 'otherwise transferred' under Section 34(3)(b) of the Income Tax Act, 1961, enabling withdrawal of development rebate?
Final Decision
Appeal allowed; orders of Allahabad High Court and Income Tax Appellate Tribunal set aside; question formulated by Revenue answered in the negative, in favour of Revenue and against assessee; no order as to costs.
Law Points
- Development rebate under Section 33(1)(a) requires ownership and exclusive user of machinery for business
- lease of machinery within eight years disables exclusive user
- lease amounts to 'otherwise transferred' under Section 34(3)(b)
- Section 2(47) definition of transfer is inclusive and does not exclude ordinary contextual meaning
- withdrawal of development rebate justified
