MAHABIR COLD STORAGEversusCOMMISSIONER OF INCOME TAX, PATNA

                    MAHABIR COLD STORAGE
                                                                               A
                                     v.
          COMMISSIONER OF INCOME TAX, PATNA

                          DECEMBER 7, 1990

         [KULDIP SINGH AND K. RAMASWAMY, JJ.]                                  B

      Income Tax Act, 1961-Section 31( 1)-Development rebate-
Entitlement to unity of ownership and use of asset in business not to be
disrupted.

       The appellant-assessee is a registered fll"DI. It started functioning
w .e.f. May 3, 1956 at Purnea as the branch office of tbe partnership          c
firm M/s Prayagchand and Hanumanmal Periwal with its Head Office
at Calcutta. The fll"DI consisted of two partners Prayagchand Periwal
and Hanumanmal Periwal.

      The partners had taken loan from Periwal & Co. Pvt. Ltd for              D
erection of cold storage at Purnea and for its running capital. Later,
Periwal & Co. was taken as a partner in the Purnea Branch for better
management and financial assistance. The newly constituted partner-
ship obtained separate registration under the Income Tax Act, 1922 as
well as under the income Tax Act, 1961 and was separately assessed
from the assessment year 1960-61.                                              E

      In the assessment year 1959-60 Prayagchand Hanumanmal instat. ·
led machinery of the value of Rs.5,80,055 in Sri Mahabir Cold Storage.
For one reason or the other development rebate on the capital asset,
namely, the machinery, was not claimed till the assessment year 1962-
63 in which year the appellant claimed development rabate. The F
Income-tax Officer, and on appeal the Assistant Appellate Commis-
sioner, disallowed the claim on the fmding that the new fll"DI had
neither inherited the claim as a transferee, nor did it amount to a
succession. But on second appeal, the Tribunal held that the appellant
firm was nothing more than the old frrm of M/s. Prayagchand Hanu-
manmal with a change in the constitution, and tbe continuity of the G
business remained in tact; hence the appellant was the owner of the
plant and machinery installed in the assessment year 1959-60.

      The High Court answered the question referred to it in favour of
the Revenue. The High Court held that the business at Purnea was
carried on by the newly constituted partnership frrm which itself H

                                   469
    470           SUPREME COURT REPORTS                  [1990] Supp. 3 S.C.R.

J\ claimed to be a separate identity under the Income Tax Act, and had
    obtained separate registration. The High Court observed that in
    respect of the plant or machinery installed by the old partnership firm
    at Calcutta, the new firm at Purnea. a distinct and different assessable
    identity. could not claim development rabate either under the repealed
    Act or the 1961 Act.
B
           Before this Court it was inter alia contended that (i) M/s.
    Prayagchand Hanumanmal consisting of original partners, bad taken
    M/s. Periwal and Co. merel~ for the purpose of better management and
    financial assistance; (ii) the old partnership had been continuing to have
    its identity as an assessable entity whose character had not been lost by
C   taking as new partber M/s Periwal and Co. (Pvt) Ltd. for the purpose of
    benefit of profits only, and hence the asessee was entitled to the develop-
    ment rebate under section 33 of the Income-Tax Act.

         On befalf of the Revenue it was contended that the appellant was
    not "the assessee", nor the owner of the machinery and plant; the
D   owner was M/s. Prayagchand Hanumanmal and as such the assessee
    was not entitled to the development rebate.

          Dismissing the appeal, this Court.,

          HELD: (1) Under both the repealed Act as well as the 1961 Act
E   two conditions precedent were required to be fulf"dled for entitlement to
    development rebate, namely, the new machinery or plant installed must
    be (1) owned by the assessee and (2} used wholly for the purpose of tlte
    business carried on by hint. There must exist unity of ownership and
    use in the business. [475A, Fl

F         (2) Only the successor In interest of the business, in accordance
    with the provisions of the Act, so long as the twin requirements under
    section 33(1) are fulf"Illed, is entitled to the benefit. [475G]

          (3) When the unity of ownership and use of the asset in the busi-
    ness is disrnpted or a branch of an earlier business is taken over by a
G   new firm which exists sintultaneously with the other branches of the old
    business, the benefit of development rebate under Section 33(1) does not
    extend to either firm. [475H]

        _ ~) The appellant assessee is a new identit.i under the Act. It is not
H   a successor in interest of the old firm as per the provisions of the Act. [476G]
         MAHABIR COLD STORAGE v. C.l.T. [K. RAMASWAMY, J.J                     471

      (5) Section 33(1) gives right to development rebate only to the
                                                                                      A
owner who has acquired the ship or installed the machinery or plant
The necessary implication is that the assessee who claims development
rebate should continue to remain to be the owner of the ship or plant or
machinery during the relevant previons assessment year /years and the
owner alone i<I entitled to the development rebate till it becomes nil. [476H-477A]
                                                                                      B
     CIVIL APPELLATE JURISDICTION: Civil Appeal No.
469(NT) of 1976.

     From the Judgment and On~'r dated 11.9.1974 of the Patna High
Court in Tax Case No. 30 of 1972.

       B. Sen, S.K. Gambhir and Vivek Gambhir for the appellant.
                                                                                      c
     K.P. Bhatnagar, S.K. Garg and Ms. A. Subhashini (NP) for the
respondent.

      The Judgment of the Court was delivered by                                      D

      K. RAMASWAMY, J. This appeal by the assessee is directed
against the judgment of the Division Bench, Patna High Court made in
Tax Case No. 30 of 1972 dated September 11, 1974 answering in favour
of the Revenue and against the assessee the question reframed thus:
                                                                                      E
             "Whether on fhe facts and in the circumstances of this case
             the order of the Tribunal allowing the unabsorbed develop·
             ment rebate in respect of the plant and machinery not
             installed by the assessee, under section 33(1) of the Income
             Tax Act was lagal and proper".
                                                                                      F
     The Tribunal referred the question, at the instance of the
Revenue, to the High Court under section 256(1) of the Income-Tax
Act, 1961 (for short 'the Act') which reads thus:

             "Whether in the facts and circumstances of the case, the
             order of the Tribunal holding~ that the conditions under                 G
             section 33(1) of the Income Tax Act are satisfied, is legal
             and proper".

     The appellant-assessee is a registered partnership firm under a
deed executed and registered on November 10, 1958 between Prayag-
chand Periwal and Hanumanmal Periwal and Mis l'eriwal and Co. Pvt.                    H
    472         SUPREME COURT REPORTS                [1990] Supp. 3 S.C.R.

A Ltd. having its business at Purnea in Bihar State. It derives income
  from the business of cold storage. M/s Prayagchand Hanumanmal,
  partnership firm consists of Prayagchand and Hanumanmal Periwal
  with 50 per cent share each and started its business with its Head
  Office at Calcutta and a Branch Office at Purnea. It started function-
  ing w.e.f. May 3, 1956. The Branch Office at purnea carried on the
B business in the name and style of Shri Mahabir Cold Storage. The
  partners had taken loan from Periwal & Co. Pvt. Ltd. for erection of
  Cold Storage and for its running capital. Later the Company was taken
  as a partner for better menagement and financial assistance. Prayag-
  chand and Hanumanmal each has 2~per cent and Periwal and Co. (P)
  Ltd. has the remaining 50 per cent shares in the profits of the newly
  constituted partnership Mis Mahabir Cold Storage at Purnea. The new
C partnership also obtained registration under the Indian Income-tax
  Act 1922 (for short 'the repealed Act') and later under the Act. It filed
  voluntary returns aud it was separately assessee from the assessment
  year 1960-61 and thereafter.

D         In the assessment year 1959-60 Mis Prayagchand Hanumanmal
    installed machinery of the value of Rs.5,80,055 in Sri Mahabir Cold
    Storage. For one reason or the other development rebate on the capi-
    tal asset, namely, the machinery was not claimed till the assessment
    year 1962-63 in which year the appellant claimed development rebate.
    The Income-tax Officer and on appeal the Asst!. Appellate Commis-
E   sioner disallowed the claim on the finding that the new firm had
    neither inherited the claim as a transferee, nor it amounts to a succes-
    sion. But on second appeal, the Tribunal hdd in favour of the appel-
    lant with the following finding:

               "It is no doubt that the machinery was installed by M/s
F              Prayagchand Hanumanmal but the firm has been reconsti-
               tuted with the three partners under the name and style of
               Mis Mahabir Cold Storage, the appellant herein. The
               firm's legal . personality will survive its reconstitution.
               Reconstitution of the firm does not bring into existence a
               different legal entity, nor can it be stated that the original
G              identity of the firm is lost as a result of reconstitution. The
               business as a unit continued unbroken and it was only the
               interest of the partners that came to be altered as a result of
               the reconstitution of the firm. Since the appellant firm is
               nothing more than the old firm of Mis Prayagchand Hanu-
               manmal with a change in the constitution and the contin-
H              uity of the business remained intact, we have no hesitation
        MAHABIR COLD STORAGE v. C.l.T. [K. RAMASWAMY, J.]             473

            in coming to the conclusion that the appellant is the owner
                                                                             A
            of the plant and machinery installed in the assessment year
            1959-60"'

      At the request of the Revenue the Tribunal referred the question
as indicated above and the High Court reframed the question extrac-
ted hereinbefore and answered with the finding in favour of the              B
Revenue and against the assessee with the reasoning that the old firm
retained its identity carrying on its business separafoly at Calcutta. It
was a separate entity for the purpose of taxation. The whole firm was
not reconstituted. The business at Purnea was carried on by a new
reconstituted partnership firm which itself claimed to be a separate
identity under the Income-tax Act and claimed separate registration
and was separately assessed to Income-tax. An assessee who installed         c
the new plant or machinery must carry on the business with him in
order to get development rebate and it must not transfer them before
the expiry of 8 years. If ,the identity of the two firms was different, an
assessable identity was clearly so, then it was plain that in respect of
the plant or machinery installed by the old partnership firm at Calcutta     D
the new firm at Purnea, a distinct and different assessable identity,
could not claim development rebate either under the repealed Act or
the Act. The appellant which had not installed the new machinery and
plant was not entitled to any development rebate in respect of machi-
nery and plant worth Rs.5 lakhs and odd installed in the previous year
relating to the assessment year 1959-60 .by Mis Prayagchand                  E
Hanumanmal.

      Shri B. Sen, learned Sr. Counsel for the appellant raised two fold
contentions. According to the learned counsel Mis Prayagchand
Hanumanmal consisting of original partners Prayagchand Periwal and
Hanumanmal Periwal, merely had taken Mis Periwal and Co. (P) Ltd. F
for the purpose of better management and financial assistance. The
old partnership admittedly having started its branch at Purnea in Cold
Storage business has been continuing to have its identity as an.
assessable entity whose character has not been lost by taking new
partner Mis Periwal imd Co. (P) Ltd. for the purpose of benefit of
profits only. Therefore, the assessee is entitled to the development G
rebate under section 33 of the Act. Alternatively it is contended that in
the books of account of Mis Prayagchand Hanumanmal as a creditor
with a sum of Rs.3,50,000 in all on two dates in its accounts for the
year ended October 31, 1959 debited the amount of the three partners
of the assessee as they stood in the books of the old firm. Correspond-
ingly the new firm also in its turn transferred Rs.3,50,000 to the credit H
    474         SUPREME COURT REPORTS                [1990] Supp. 3 S.C.R.

                                        ' account of the old firm showing
A of the partners account by debiting the
  the opening balance of Rs.4,25,606. It would, thus, show that there is
  a transfer of the capital asset to the appellant and thereby the appel-
  lant is an owner under section 33 of the Act. Accordingly it is entitled
  to development rebate. Shri. Bhatnagar, the learned counsel for the
B Revenue contended that the appellant is not "the assessee", nor the
  owner of the machinery and plant. The owner is Mis Prayagchand
  Hanumanmal and as such the assessee is not entitled to the develop- ·
  ment rebate.

       To appreciate the contentions it is necessary to see the relevant
  provisions under the repealed Act and the Act. Development rebate
C was first introduced by the Finance Act, 1955 with effect from 1st
  April, 1955, clause (vib) of sub section (2) of Section 10 of the
  repealed Act was introduced by Section ·8 of the said Finance Act,
  which was suJ:>seqnently amended by Section 7 of the Finance Act,
  1958 with effect from 1st April, 1958 and then again it was amended by
D Section 6 of finance Act, 1961 with effect from 1st April, 1961 which is
  relevant for the purpose of this case, read thus:

               "10.(1) ...... .

               (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 nseQ for the purposes of the business carried on by
               the assessee., a snm by way of development rebate in
               respect of the year of acquisition of the ship or of the instal-
F              lation of the machinery or plant, equivalent to"

    Section 33( 1) of the new Act reads:

                "33(1) In respect of a new ship acquired or new machinery
                or plant (other than office appliances or road transport
G               vehicles) installed after the 31st day of March, 1954, which
                is owned by the assessee and is wholly used for the purposes
                of the business carried on by him, a sum by way of develop-
                ment rebate, equivalent to-"

          The other sub-sections are not relevant. Hence omitted.
H
       MAHABIR COLD STORAGE v. C.I.T. [K. RAMASWAMY, l.I            475

      Under both the repealed Act as well as the Act two. conditions A
precedent are required to be fulfilled for entitlement to development
rebate, namely, a new ship acquired or new machinery or plant instal-
led must be (1) owned by the assessee and (2) is wholly used for the
purpose of the business carried on by him. It is an admitted case that
the plant and machinery was wholly used for the purposes of cold
storage business carried on by the original firm. M/s Prayagchand B
Hanuma!lmal and also by the appellant. The only dispute is whether
the appellant owned 'the pland and machinery purchased and erected
as a part of the capital asset to run the cold storage business by Mis
Prayagchand Hanumanmal. In the context of Section 33(1) of the Act
the ownership consists of bundle of rights, namely, title to; possession
of and beneficial enjoyment thercor. It is an indisputable legal position C.
that the sum to be allowed by way of development rebate was to be
only such amount as was sufficient lo reduce the total income to nil. If
the development rebate to the extent lo which it had not been allowed
in the previous assessment year or succeeding years, the aforesaid sum
was to be carried forward to the following year or years upto a
maximum of 8 years during which time the entire amount invested is D
computed in the.manner ·prescribed under the Act to ·nil. The object
thereby is that the development rebate in the manner specified under
the repealed Act or the Act was to be allowed in full. If any, residue
remains after the expiry of eight years, that amount was not to be
adjusted ·and no balance could be carried forward to the 9th year.
                                                                           E
       The capital asset, namely, the ship, plant or machinery should be
owned by the assessee during the relevant accounting year. and wholly
used in the business carried on by the assessee during the previous year
in question. There must exist unity of ownership and used in the busi-
ness. The emphasis for entitlement to rebate accrues from the use of
the machinery or the plant by the owner for the purpose of its business F.
resulting in the manufacture of the goods or service. It is not the
ownership of the goods or the resultant end product of the raw mate-
rials used that is relevant. The only relevant consideration is that dur-
ing the previous year or part of the relevant period ownership of the
asset shall remain with the ·assessee. Only the successor in interest of
the business, in accordance with the provisions of the Act, so long as G
the twin .requirements under section 33(1) are fulfilled is alone entitled
to the benefit. But when the unity of ownership and use of the asset in
the business is disrupted or a branch of an earlier business is taken
over by a new firm which exists simultaneously with the other branches
of the old business, the benefit of development rebate under section
33(1) does not extend to either firm. Take for instance, an assessee H
    476          SUPREME COURT REPORTS                [1990] Supp. 3 S.C.R.

    leases the asset to another person during the previous accounting year,
A
    the use of the plant and machinery is not for the business of the
    assessee for which the development allowances were accorded under
    section 33( 1) since the machinery was not wholly used by the assessee
    for his/its business during the previous accounting year. Suppose a
    plant or machinery was used for a purpose other than the business of
B   the assessee, even then also the assessee is not. eligible for develop-
    ment rebate, obviously for the reason. that the plant or machinery was
    not used for the purpose of the business of the assessee in the previous
    accounting year or a portion thereof.

          The crucial question, therefore, is whether the appellant is the
    owner of the machinery and plant in the relevant assessment year
c   1962-63. Acquisition of ownership is a condition precedent to avail of
    the development rebate under section 33(1) of the Act. It is now fairly
    clear from the statement of facts that the old and the new partnership
    firms are separately registered under the Act and the old one was
    doing its business at Calcutta and the new one at Pumea. They have
D   been separately being assessed as independent assessable entities.
    Only the new firm alone was reconstituted consisting of the two part-
    ners of the old firm M/s. Prayagchand Hanumanmal and Periwal &
    Co. (P) Ltd. Prayagchand and Hanumanmal individually are entitled
    to 25 per cent shares each for the profits in the appellant firm and

E
    Periwal & Co. (P) Ltd. has 50 per cent shares of profit. Under the
    Indian Partnership Act, 1932 the partnership firm registered there-
    under is neither a person nor a legal entity. It is merely a collective
                                                                                   -
    name for the individual members of the partnership. A firm as such
    cannot be a partner in another firm though its partners may be part-
    ners in another firm in their individual capacity. Either under the
    repealed Act or the Act a firm is liable to be separately assessed to tax
F   as well as all its partners in their capacity as individuals if they have
    taxable income. The appellant is separately registered under section
    26A of the Act and assessed to tax from the assessment year 1960-61
    and onwards. There is no re-constitution of the original firm Prayag-
    chand Hanumanmal inducting Periwal & Co. (P) Ltd. as its partner.
    Thus it is clear that the appellant assessee is a new identity under the
G   Act. It is not a successor in interest of the old firm as per the provisions
    of the Act. The question then is whether the assessee is entitled to
    development rebate under section 33(1) of the Act. (under section
     10(1) (vib) of the repealed Act). Section 33(1) gives right to develop-
     ment rebate only to the owner who has acquired the ship or installed
    the machinery or plant. The necessary implication is that the assessee
H   who claims development rebate should continue to remain to be the
                 MAHABIR COLD STORAGE v. C.l.T. [K. RAMASWAMY, J.l             477

        owner of the ship or plant or machinery during the relevant previous          A
        assessment year/years and the owner alone is entitled to the develop-
        ment rebate till it becomes nil in the relevant previous assessment year
        or the succeeding assessment years carried forward upto 8 years and
        not thereafter.
                                                                                      B
               The entries in the books of accounts of the appellant would
        amount to an acknowledgement of the liability to M/s. Prayagchand
        Hanumanmal whithin the meaning of Section 18 of the Limitation Act,
        1963 and extend the period of limitation for the discharge of the liabi-
        lity as debt. Section 2(47) of the Act defines 'transfer' in relation to a
        capital asset under clause (i) the sale, exchange or relinquishment of
        the asset or (ii) the extinguishment of any right thereof of-(Clauses         c
....'   (iii) to (vi) are not relevant hence omitted). Unfortunately the asses-
        see did not bring on record the necessary material facts to establish
        that he became owner by any non-testamentary instrument acquiring
        right, title and interest in the plant and machinery nor the point was
        argued before the High Court and we do not have the benefit in this
        regard either of the Tribunal or of the High Court. In this view we           D
        decline to go into the question but confine to the first question and agree
        with the High Court answering the reference in favour of the revenue
        and against the assessee that ihe appellant is not entitled to the
        development rebate under section 33( 1) of the Act. The appeal is
        accordingly dismissed with costs quantified at Rs.5,000.
-       R.S.S.                                                 Appeal dismissed.
                                                                                      E