Holding

The development rebate must be withdrawn because the original assessee ceased to exist before the eight‑year period, and the Commissioner’s power of revision under section 263 is valid and not barred by section 155.

Summary

The appellant, a partnership firm, had claimed a development rebate under sections 33(1)(a) and 34(3)(a) of the Income Tax Act for several assessment years. One partner died, causing the firm to dissolve on 3 March 1968, before the eight‑year utilisation period prescribed by section 34(3)(a). A new partnership was formed with the surviving partner and the deceased partner’s heirs, which continued the same business. The Commissioner, exercising power under section 263, withdrew the rebate, and the appellant’s challenge was rejected by the Tribunal and the Madras High Court. The Supreme Court held that the rebate is available only to the same assessee that obtained it and must be utilised for eight years; since the original firm ceased to exist, the rebate must be withdrawn. The Court also affirmed that the Commissioner’s revisional power under section 263 is distinct from, and not limited by, the rectification power under section 155, and may consider the dissolution that occurred before his order. Consequently, the appeals were dismissed.

Issues considered

Whether the development rebate granted under section 33(1)(a) and conditioned by section 34(3)(a) can be retained when the original partnership firm dissolves before the eight‑year period and a new partnership continues the business.
Whether the Commissioner of Income Tax can validly exercise his power of revision under section 263 to withdraw the rebate, notwithstanding that the order could have been rectified under section 155 and that the dissolution event occurred after the assessing officer’s order.

Legislation cited

Income Tax Act, 1961s. 155, s. 263, s. 32AB, s. 33(1)(a), s. 34(3)(a)

Subjects

development rebatepartnership dissolutionsection 33section 34section 263revision powerincome taxeight-year conditionassesseereserve account

Judgment

A MIS. SOUTH INDIA STEEL ROLLING MILLS, MADRAS
v.
COMMISSIONER OF INCOME TAX, MADRAS

FEBRUARY 25, 1997

B
(S.C. AGRAWAL AND G.B. PATTANAIK, JJ.]

Income Tax Act, 1961-Sections 33(1)(a), 34(3)(a) 155, 263-Whether
revision of assessment by the Commissioner under Section 263 withdrawing
development rebate granted to the assessee finn under section 33(1)(a) for
C the assessinent years 1962-63, 1963-64, 1967-68, 1968-69 on dissolution of the
old parlnership finn due to death of one of the partners before the expiry of
the statutory period of eight years prescribed by section 34(3)(a) is justified
and proper-Held : The new partnership firm constituted by the surviving
parlner and the legal heirs of the deceased to carry on the same business is
D not entitled for the development rebate-As the old fim1 to whom development
rebate was granted stood dissolved before the expiry of the statutory
perio~The expression "by the assessee" occurring in section 33(J)(a) and
34(3)(a) refers to the same assessee-Commissioner notprecluded from ex-
ercising power of revision under section 263 in respect of an assessment which
E could have been rectified by the Income Tax Officer under Section 155-<:om-
missioner empowered under section 263 to take into consideration the dis-
solution of ihe partnership finn which took place to passing of his order.

The assessee, a partnership firm had obtained the benefit of
"development rebate" under section 33(1)(a) of the Income Tax Act, 1961
F for the assessment years 1962-63, 1963-64, 1967-68 and 1968-69. But due to
death of one of the two partners, it stood dissolved on March 3, 1968,
before the expiry of the statutory period of eight years. A new partnership
was constituted comprising of the surviving partner and the legal heirs of
the deceased partner to carry on the same business.

G The Commissioner of Income Tax, in exercise of his powers under
S. 263 of the Act, withdrew the "development rebate"granted to the assessee
for the said assessment years since the old partnership firm stood dis-
solved before the expiry of the statutory period of eight ye_ars. The assessee
filed an appeal before the Tribunal which was rejected. At the instance of
H the assessee, the Tribunal referred to the High Court the question whether
488
SOUTH INDIA STEEL ROLLING MILLS v. C.I.T. 489

the revision of the assessment under section 263 of the Act by the Com- A
missioner withdrawing the development rebate granted for the relevant
assessment years was proper a~d justi'fied.
- . .

The High Court answered against the assessee and in favour of the
Revenue. Being aggrieved, the assessee filed this present appeal interalia
on the ground that after the dissolution of the old _partnership firm, the B
new partnership firm carried on the same busines~, the requirements of
section 33(1)(a) and 34(3)(a) of the Act were fulfilled and as such the
benefit of development rebate could not be withdrawn'

Dismissing the appeal, this Court
c
HELD : 1. The condition for grant of rebate under section 33 read
with section 34(3)(a) of the Income Tax Act, 1961, would not be satisfied
if the assessee who had availed of the rebate ceased to exist before expiry
of the period of eight years. Having regard to the words ''which is owned

- by the assessee and is wholly used for the purpose of the business carried D
on by him," occurring in section 33(1)(a), it has to be held that the benefit
of development rebate is available only to the assessee who is o'Wning the
machinery or plant or is using it wholly for the purpose· of the business
carried on by him. Similarly in section 34(3)(a) the words used are "to be
utilised by the assessee during a period of eight years next following for E
the purpose of the business of the undertaking." The grant of development
rebate under section 33(1)(a) is subject to the conditions laid down in
section 34(3)(a) which means that the assessee who has obtained the
development rebate under section 33(1){a) must also be the same assessee
who should utilise the amount credited to the reserve account during the
period of eight years next following for the purpose of the business of the F
undertaking for which the development rebate was given. The expression
"by the assessee" used in these provisions refer to the same assessee. The
High Court has rightly held that in view of section 34(3)(a) the appellant
assessee could not avail of the benefit of development rebate, as the
asses see firm had ceased to exist as a result of dissolution before· the expiry G
of the period of eight years. (496-E-F; C-E; 496-B; 497-B]

Malabar Fisheries Co. v. CIT, (1979) 4 SCC 766 and Commissioner
of Income Tax v. J.H. Golla, (1985) 4 SCC 343, referred to.

2.1. The Commissioner could not be precluded from exercising the H
490 SUPREME COURT REPORTS [1997] 2 S.C.R.

A power of revision under section 263 of the Act merely because the Income
Tax Officer could have rectified the order. The power of rectification

B
conferred on the Income Tax Officer under section 155 and the power of
revision conferred on the Commissioner under section 263 are distinct
powers. The principle that one is a special provision and the other is a
general provision has no application. The revisional power conferred on
-
the Commissioner under section 263 is of wider amplitude. It enables the
Commissioner to revise an order passed by the Assessing Officer if he '
considers it to be erroneous and prejudicial to the interest of the Revenue.
Therefore, there is no reason to limit this power by reference to section
155 of the Act. (497-E-G]
c
2.2. It can not be held that power under section 263 can only be
invoked on the basis of the record as it st60d when the order was passed
by the Income-Tax Officer and that it was not open to the Commissioner
to take into account the dissolution of the assessee firm, which took place
after the passing of the order, because that circumstance was not disclosed
D in the record before the Income Tax Officer. Explanation (b) to Section
263(1) expressly provides that "record shall include and shall be deemed
always to have included all records relating to any proceeding under this
Act available at the time of examination by the Commissioner". The death
of one of the two partners resulting in the dissolution of the assessee firm
E took place prior to the passing of the order by the Commissioner and it
could, therefore, be taken into consideration by him for the purpose of
exercising his power under section 263 of the Act. [497-C-D; H; 498-A-B]

South India Steel Rolling Mills v. CIT, (1982) 135 ITR 322 (Mad.),
affirmed.
F
CIVIL APPELLATE JURISDICTION: Civil Appeal Nos. 5332 to
5335 (NT) of 1983.

From the Judgment and Order dated 2.11.81 of the Madras High
G Court in T:C. Nos. 652-655 of 1977. -
Ms. Janki Ramachandrim for the Appellant in C.A. No. 5332-35/83.

Dr. V. Gauri Shankar, S. Rajappa, C. Radha Krishna and B. Krishna
Prasad for .the Appellant/Respondent in C.A. Nos. 1064-67/82 and C.A:
H No. 5332-35/83.
SOUTH INDIA STEEL ROLLING MILLS v. C.l.T. (S.C. AGRAWAL, J.) 491

Hari Har Lal and R.K. Maheshwari for the Respondent in C.A. No. A
1064-67/82.

The Judgment of the Court was delivered by
~

These appeals, by certificate granted under Section 261 of the In-
come Tax Act, 1961 (hereinafter referred to as 'the Act'), have been filed B
by the assessee against the judgment of the Madras High Court dated ·
November 2, 1981. By the said judgment the High Court has answered the
following question referred to it by the income Tax Appellate Tribunal
(hereinafter referred to as 'the Tribunal') against the assessee and in favour
of the Revenue :
c
"Whether on the fact and circumstances of the case the revision
of assessment under Section 263 by the Commissioner for
withdrawing the development rebate granted for assessment years
1962-63, 1963-64, 1967-68 and 1968-69 is proper and justified."
D
The assessee was a partnership firm having been constituted on
September 1, 1960. It was running a steel rolling mill. Initially, there were
four partners, namely, M/s. S.L. Nahata, M.S. Bedi, Biharilal and M.K
Raheja, in the assessee firm. Two of the partners, Biharilal and M.K
Raheja, subsequently retired from the partnership and the partnership was
reconstituted with the remaining two partners continuing the same busi- E
ness. On March 3, 1968, Shri M.S. Bedi one of the two partners died. Since
only one surviving partner was left the partnership stood dissolved. On
March 4, 1968 a new partnership was constituted comprising of Shri S.L.
Nahata and the legal heirs of Shri M.S. Bedi to carry on the business
undertaking previously carried on by the partnership firm of which Shri F
M.S. Bedi was a partner.
,~

In these appeals we are concerned with the partnership firm as it

.,... existed prior to its dissolution on March 3, 1968. The assessee firm had
obtained the benefit of Development Rebate under Section 33(1)(a) of the
Act during the assessment years in question. Since the partnership stood G
dissolved on March 3, 1968, before he expiry of the period of 8 years, the

- Commissioner of Income Tax, in exercise of the powers .conferred on him
under Section 263 of the Act withdrew the Development Rebate that had
been granted to the assessee for the said assessment years. Feeling ag-
grieved by the said order of the Commissioner, the assessee filed an appeal H
492 SUPREME COURT REPORTS (1997] 2 S.C.R.

A before the Tribunal which was decided against the assessee. At the instance
of the assessee the Tribunal referred the question above mentioned for the
opinion of the High Court.

The question raised Involved interpretation of the proV1s10ns of
•
Sections 33(1)(a) and 34(3) which at the relevant time read as under :
B
"Development Rebate

33(1)(a). In respect of a new ship or new machinery or plant (other
than office applications or road transport vehicles) which is owned
c by the assessee and is wholly used for the purposes of the business
carried on by him, there shall, in accordance with and subject to
the provisions of this section and of Section 34, be allowed a
deduction, in respect of the previous year in which the ship was
acquired or the machinery or plant was installed or, if the ship;
machinery o~ plant is first put to use in the immediately succeeding
D previous year, then, in respect of that previous year, a sum by way
of development rebate as specified in clause (b);"

"Conditions for depreciation allowance and development rebate.

34(3)(a). The deduction referred to in Section 33 shall not be
E
allowed unless an amount equal to seventy five per cent of the
Development Rebate to be actually allowed is debited to the profit
and loss account of the relevant previous year and credited to a
reserve account to be utilised by the assessee during a period of
eight years next following for the purposes of the business under-
F taking, other than -- (

(i) for distribution by way of dividends or profits; or

(ii) for· remittance outside India as profits or for the creation of
any asset outside India :
G
Provided that this clause shall not apply where the assessee is
a company, being a licensee within the meaning of the Electricity
(Supply) Act, 1948 (54 of 1948), or where the ~hip has been
acquired or the machinery or plant has been installed before the
H 1st day of January, 1958.
SOUTII INDIA STEEL ROLLING MILLS v. C.I.T. [S.C AGRAWAL, J.] 493

Provided further that where a ship has been acquired after the A
28th day of February, 1966 this clause shall have effect in respect
of such ship as if for the words "seventy five", the word "fifty" had
been substituted.

Explanation. - For the removal of doubts, it is hereby declared that
the deduction referred to in section 33 shall not be denied by B
reason only that the amount debited to the profit and loss account
of the relevant previous year and credited to the reserve account
aforesaid exceeds the amount of the profit of such previous year
{as arrived at without making the debit aforesaid) in accordance
with the profit and loss account. C

(b) If any ship, machinery or plant is sold or otherwise transferred
by the assessee to any person at any time before the expiry of eight
years from the end of the previous year in which it was acquired
or installed, any allowance made under section 33 or under the
. corresponding provisions of the Indian Income-tax Act, 1922 ( 11 D
of 1922), in respect of that ship, machinery or plant shall be
deemed to have been wrongly made for the purposes of this Act,
and the provisions of sub-section (5) of section 155 shall apply
accordingly :
E
Provided that this clause shall not apply --

(i) where the ship has been acquired of the machinery or plant
has been installed before the Ist day of January, 1958; or

(ii) where the ship, machinery or plant is sold or otherwise F
transferred by the assessee to the Government, a local
authority, a corporation established by a Central, State or
Prm~ncial Act or a Government company as defined in sec-
tion 617 of the Companies Act, 1956 (1 of 1956); or

(iii) where the sale or transfer of the ship, machinery or plant is G
made in connection with the amalgamation or succession
referred to in sub-section (3) or sub-section (4) of section 33."

These provisions indicate that under Section 33(1)(a) the benefit of
D~velopment Rebate was available in respect of a new ship or new H
494 SUPREME COURT REPORTS [1997] 2 S.C.R.

A machinery or plant which was (i) owned by the assessee and (ii) was wholly
used for the purposes of the business carried on by him. The availability
of the said benefit of Development Rebate under Section 33(1)(a) was,
however, subject to the provisions of Section 34, Under clause (a) of
sub-section (3) of Section 34 deduction under Section 33 was permissible
B only if an amount equal to 75% of the amount of Development Rebate that
was actually allowed was credited to a reserve account to be utilised by the
assessce during a period of eight years next following for the purposes of
the business of the undertaking. In clause (b) it was prescribed that in the
event of the ship, machinery or plant in relation to which development
C rebate has been allowed being sold or otherwise transferred by the assessee
before the expiry of the period of eight years from the end of the previous
year in which it was acquired or installed, the allowance made in respect
of it shall be deemed to have been wrongly made and the Assessing Officer
may recompute the total income of the assessee for the relevant previous
year and made the necessary amendment under Section 155(5) of the Act.
D This is, however, subject to the exceptions contained in the proviso to
clause (b).

The High Court has held :

E "As part of the fundamental requirement for the grant of Develop-
ment Rebate, that creation of a Development Rebate is a neces-
sary first step. But that alone is not enough. The reserve account
has got to be utilised by the assessee for the purposes of the
business of the undertaking for a period of eight years running
immediately following the installation of the machinery. The im-
F plication of these conditions are that where the assessee does not
utilise the reserve account for the purposes of his business during
a period of 8 years, then the very condition on which the rebate is
granted would remain unfulfilled. Hence the original grant of
Development Rebate itself must perforce be regard as having been
G made without the necessary condition being fulfilled therefor."

The High Court has observed that in the present case the assessee
furn became extinct before the expiry of the eight-years period and whar
came afterwards was a different entity even if it comprised only the
H surviving partner and the deceased partners' legal representatives. Accord-
-1'.
SOUTH INDIA STEEL ROLLING MILLS v. C.I.T. [S.C. AGRAWAL, J.] 495

ing to the High Court there was a basic failure of the fact situation in the A
assessee's case to fit in with the terms of the statutory grant of Development
Rebate implicit in t?e statutory provisions.

Ms. J anki Ramachandran, the learned counsel appearing for the
assessee, has submitted that Development Rebate is granted in respect of
B
a business and that under Section 33(1)(a) and Section 34(3)(a) what is
required is that the business must be continued for the prescribed period
-:.·:::°"
of eight years and that in the present case after the dissolution of the old
partnership, the new partnership carried on the same business and, there-
fore, the benefit of the Development Rebate could not be withdrawn. The
learned counsel has placed reliance on the decisions of this Court in c
Malabar Fisheries Co. v. Commissioner of Income Tax, Kerala, (1979) 120
ITR 49 and Commissioner of Income Tax, Bangalore v. J.H. Gotta, (1985)
1,56 ITR 323. The learned counsel has also invited our attention to the
Statement of Objects and Reasons appended to the Finance Bill, 1958
whereby the provisions relating to grant of Development Rebate as con- D
tained in Section 10 of the Income Tax Act, 1922 were amended.

Dr. Gauri Shankar, the learned senior counsel appearing for the
Revenue, has, on the other hand, suhmitted that the High Court has rightly
construed the provisions contained in Sections 33(1)(a) and 34(3)(a) of the
E
Act and the said view taken by the High C~urt is in consonance with the
object sought to be achieved by the said provisions. He has, in this context
invited our attention to the report of the Taxation Enquiry Commission
(1953-54) which was the basis for introducing the provisions relating to
development rebate in the Income Tax Act, 1922. It has been pointed that
the said report shows that the object underlying the grant of development F
rebate is that it would afford as a direct stimulus to expansion and quicker
replacement an aid the efficiency and competitive power of the industries.
The submission is that having regard to the object underlying the said
provision the development rebate can .be available only to a particular
assessee in respect of his business. Dr. Gauri Shankar has also pointed out G
that wherever the Legislature intended to extend a particular tax benefit in
circumstances where the partnership stood dissolved, an express provision
' has been made in that regard and he has invited our attention to sub-sec-
tion (SA) of Section 32AB wherein express provisions has been made for
withdrawal of the amount standing to the credit of the assessee in the H
496 SUPREME COURT REPORTS [1997] 2 S.C.R.

A Investment Deposit Account before the expiry of the period of five years
from the date of deposit in the event of dissolution of a firm. The learned
counsel has urged that since the provisions contained in Sections 33(l)(a)
and 34(3)(a) do not make any provision regarding dissolution of a partner-
ship firm and speak of the assessee only, it must be held that the expression
B "assessee" in these provisions means the partnership firm as it stood before
dissolution and would not cover a newly constituted firm after the dissolu-

-
tion of the old firm.

Having regard to the words "which is owned by the assessee and is
wholly used for the purposes of the business carried on by him," in Section
c 33(1)(a), it must be held that the benefit of development rebate is available
only to the assessee which is owning the machinery or plant and is using it
wholly for the purpose of the business carried on by him. Similarly in
Section 34(3)(a) the words used are "to be utilised by the assessee during
a period of eight years next following for the purpose of the business of
D the undertaking". The grant of development rebate under Section 33(l)(a)
is subject to the conditions laid down in Section 34(3)(a) which means that
the assessee who has obtained the development rebate under Section
33(1)(a) must also be the assessee who should utilise the amount credited
to the Reserve account during the period of eight years next following for
E the purpose of the business of the undertaking for which the development
rebate was given. In other words, the expression "by the assessee" in these
provisions refer. to the same assessee. The condition for grant of rebate
under Section 33 read with Section 34(3)(a) would not be satisfied if the
assessee who has availed the rebate ceases to exist before the expiry of the
period eight years.
F
The decisions on which reliance has been placed by Ms.
Ramachandran have not direct bearing on the point in issue. In Malabar
Fisheries Co. (supra) this Court has construed the expression "transfer" in
the context of Section 34(3)(b) of the Act. In the instant case, we are not
G concerned with transfer of machinery or plant by the appellant-assessee.
Here the assessee firm had cased to exist as a result of dissolution before
the expiry of the period of eight years. In Commissioner of Income Tax v.
"'=
J.H. Got/a (supra) this Court, while considering the provisions of Section
16(1)(c) of the Income Tax Act, 1922, has observed that where the plain
H literary interpretation of a statutory provision produces a manifestly unjust
SOUTH INDIA STEEL ROLLING MILLS v. C.I.T. [S.C. AGRAWAL, J.] 497

result which could never been intended by the Legislature, the Court might A
modify the language so as to achieve that intention of the Legislature and
produce a rational construction. We are unable to hold that the said
principle requires to be invoked w~ile construing Sections 33(1)(a) and
34(3)(a) in the present case. The High Court, in our opinion, has rightly
held that in view of Section 34(3)(a) the appellant-assessee could not avail B
the benefit of development rebate. ).
',
The other contention of Ms. Ramachandran was that the Commis-
sioner could not invoke his jurisdiction under Section 263 of the Act and
that the matter could be dealt with only by the Income Tax Officer in
exercise of his power of rectification under Section 155 of the Act. The C
submission is that since Section 155 is a special provision dealing with the
partnership firms, the general provision contained in Section 263 could not
be invoked. It was also contended that the power under Section 263 can
only be invoked on the basis of the record as it stood when the order was
passed by the Income Tax Officer and that it was not open to the Com- D
missioner to take into account the dissolution of the assessee firm, which
took place after the passing of the order, because that circumstance is not
disclosed in the record before the Income Tax Officer. As pointed out by
the High Court, no question as to the competence of the Commissioner to
exercise his powers of decision was raised by the assessee either before the E
Commissioner or before the Tribunal. Even otherwise there is no merit in
this contention. Merely because the Income Tax Officer could have rec-

- tified the order, the Commissioner could not be precluded from exercising
the power conferred on him under Section 263. The power of rectification
conferred on the Income Tax Officer under Section 155 and the power of
revision conferred on the Commissioner under Section 263 are distinct F

- powers. The principle that one is a special provision and the other is a
general provision has no application. The revisional power conferred on
the Commissioner under Section 263 is of wide amplitude. It enables the
Commissioner to revise an order passed by the Assessing Officer if he
considers it to be erroneous and prejudice to the interests of the Revenue. G
We find no reason to limit this power by reference to Section 155.

As regards his taking into consideration an event which had occurred
subsequent to the passing of the order by the Income Tax Officer, it may
be stated that in Explanation (b) in Section 263 · there is an express H
498 SUPREME COURT REPORTS [1997] 2 S.C.R.

A provision wherein it is prescribed that "record shall include and shall be
deemed always to have included all records relating to any proceeding
under this Act available at the time of examination by the Commissioner".
The death of one of the two partners resulting in the dissolution of the
assessee firm on account of such death took place prior to the passing of
B the order by the Commissioner and it could, therefore, be taken into
consideration by him for the -purpose of exercising his powers under
Section 263 of the Act.

For the reasons aforementioned, we do not find any merit in the
appeals and the same are accordingly dismissed But in the circumstances
C there will be no order as to costs.

H.K. Appeals dismissed.

.....