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Kishandas Dilberdas Vs. Commissioner of Income-tax, Bombay City Ii - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtMumbai High Court
Decided On
Case NumberIncome-tax Reference No. 59 of 1964
Judge
Reported in[1974]96ITR638(Bom)
ActsIncome Tax Act, 1961 - Sections 10(2)
AppellantKishandas Dilberdas
RespondentCommissioner of Income-tax, Bombay City Ii
Appellant AdvocateS.P. Mehta, Adv.
Respondent AdvocateR.M. Hajarnavis, Adv.
Excerpt:
.....share of partnership firm - held, assessee cannot set-off loss as only partnership entitled to claim depreciation. - maharashtra scheduled castes, scheduled tribes, de-notified tribes (vimukta jatis), nomadic tribes, other backward classes and special backward category (regulation of issuance and verification of) caste certificate act (23 of 2001), sections 6 & 10: [s.b. mhase, a.p. deshpande & p.b. varale, jj] caste certificate petitioner seeking appointment against the post reserved for member of schedule tribe his caste certificate was invalidated subsequently held, his appointment would not be protected. the observations/directions issued by supreme court in para 36 of judgment in the case of state v millind reported in 2001 91) mah. lj sc 1 is not the law declared by..........furniture, as the case may be;...' 8. a mere reading of this clause makes it clear that a right to claim depreciation is permitted if the conditions in the main paragraph of clause (vi) are fulfilled. while unabsorbed depreciation for the earlier years can be carried forward in subsequent years provided the condition laid down in proviso (b) are fulfilled, the provisions of proviso (c) make it clear that the aggregate amount of all allowances in respect of depreciation can in no event exceed the original cost to the assessee of the buildings, machinery, plant or furniture, as the case may be. 9. the main part of clause (vi) makes it amply clear that a claim for depreciation can only be made an assessee in respect of machinery and plant used for the purpose of the business provided it is.....
Judgment:

Kantawala, C.J.

1. By this reference under section 66(1) of the Indian Income-tax Act, 1922 (hereinafter referred to as 'the Act') the following two questions are referred for our determination at the instance of the assessee :

'1. Whether, on the facts and in the circumstances of the case, the assessee was entitled to a set-off in respect of the loss determined under section 10 of the Act including unabsorbed depreciation of Rs. 37,103 relating to assessment years 1957-58 and 1958-59 and pertaining to the business carried on by him as sole proprietor against his share of income for assessment years 1951-60 and 1960-61 from the same business converted into partnership firms, consisting of himself and his sons

2. Whether, on the facts and in the circumstances of the case, the assessee was entitled to a set-off in respect of the loss determined under section 10 of the Act including therein unabsorbed development rebate of Rs. 65,484 relating to the assessment years 1957-58 and 1958-59 and pertaining to the business carried on by him as sole proprietor against his share of income for assessment years 1959-60 and 1960-61 from the same business converted into partnership firms, consisting of himself and his sons ?'

2. So far as question No. 2 is concerned, it has not been pressed by the assessee and accordingly it is unnecessary for us to answer the same. We will briefly state the facts which are necessary for consideration of question No. 1 only.

3. The assessee originally carried in the business in the name and style of Messrs. Kumandas Kishandas and Messrs. Kala Silk Factory as the sole proprietor thereof. Such sole proprietor business was continued by him in that capacity up to October 24, 1957. For the assessment years 1957-58, the assessee suffered loss in the business and such loss was determined at Rs. 84,304 in his individual case as comprising of three items, (1) Rs. 55,530 as unabsorbed development rebate. For the assessment year 1958-59, he also suffered loss and such loss was determined at Rs. 18,917 as comprising of the following two items :

1. Rs. 8,953 being unabsorbed depreciation, and 2. Rs. 9,964 being unabsorbed development rebate.

4. For the assessment year 1959-60 and 1960-61 to which this reference relates, the assessee was only a partner in the two business and his total income for these two years as finally determined included the amount of Rs. 64,714 being his share of the profit from those firms for the assessment year 1959-60 and the amount of Rs. 1,03,541 being the share of his profit from those firms for the assessment years 1960-61.

5. For both these assessment year 1959-60 and 1960-61 the assessee claimed byway of set-off the total loss of Rs. 84,304 for the assessment year 1957-58 and the total loss of Rs. 18,917 for the assessment year 1958-59. The Income-tax officer rejected the claim of the assessee. On an apply by the assessee the Appellate Assistant Commissioner rejected the appeal. On a further appeal by the assessee before the Income-tax Appellate Tribunal, the Tribunal slightly modified the order and held that the assessee was entitled to carry forward and set-off the business loss of Rs. 634, but he was not entitled to set off either the amount of unabsorbed depreciation or unabsorbed development rebate for the assessment year 1957-58 and 1958-59. As in the opinion of the Tribunal a question of law arose for decision, question No. 1 alone survives for our determination, which relates to the right to set off unabsorbed depreciation of Rs. 37,103 relating to the assessment year 1957-58 and 1958-59 and pertaining to the business carried on by him as sole proprietor against his share of income for assessment years 1959-60 and 1960-61 from the same business converted into partnership firms, consisting of himself and his sons.

6. Under section 10 of the Act tax is payable by an assessee under the head 'profits or gains of business, profession or vocation' in respect of the profit or gains of business, profession or vocation carried on by him. What allowances are to be taken into account for computing such profits or gains are enumerated in sub-section (2) thereof. We are concerned with the relevant for the present purpose is an under :-

'10. (2) Such profits or gains shall be computed after making the following allowances, namely :- (vi) in respect of depreciation of such buildings, machinery, plant or fertiliser being the property of the assessee.... to such percentage on the original list thereof to the assessee as may in any case of class of case be prescribed and in any other case, to such percentage on the written down value thereof as may in any case or class of cases be prescribed;..'

7. There are three proviso to this clause (vi) and we are concerned with the provisions of the provisos (b) and (c) which are as under :

'Provided that -...

(b) where, in the assessment of the assessee or if the assessee is a registered firm, in the assessment of its partners, full effect cannot be given to any such allowance in any year not being a year which ended prior to the April 1, 1939, owing to there being no profits or gains chargeable for that year, or owing to the profits or gains chargeablebeing less than the allowance, then subject 24, the allowance or part of the allowance to which effect has not been given, as the case may be, shall be added to the amount of the allowance for depreciation for the following year and deemed to be a part of that allowance, or if there is no such allowance for that year, be deemed to be the allowance for that year, and so on for succeeding years; and

(c) the aggregate of all allowances in respect of depreciation made under this clause and clause (via) or under any Act repealed hereby, or, under the Indian Income-tax Act, 1886 (II of 1886), shall, in no case, exceed the original cost to the assessee of the buildings, machinery, plant or furniture, as the case may be;...'

8. A mere reading of this clause makes it clear that a right to claim depreciation is permitted if the conditions in the main paragraph of clause (vi) are fulfilled. While unabsorbed depreciation for the earlier years can be carried forward in subsequent years provided the condition laid down in proviso (b) are fulfilled, the provisions of proviso (c) make it clear that the aggregate amount of all allowances in respect of depreciation can in no event exceed the original cost to the assessee of the buildings, machinery, plant or furniture, as the case may be.

9. The main part of clause (vi) makes it amply clear that a claim for depreciation can only be made an assessee in respect of machinery and plant used for the purpose of the business provided it is the property of the assessee. Even the percentage of depreciation which can be claimed depends upon the original cost of such machinery and plant to the assessee. If during the relevant year the plant and machinery cease to be the property of the assessee then no claim for depreciation can ever be made by such an assessee under the first part of clause (vi).

10. The claim for set-off is in respect of unabsorbed depreciation for the assessment years 1957-58 and 1958-59, when the assessee was the sole proprietor of both the business. With effect from October 24, 1957, a partnership was formed of the assessee and his sons and for the two assessment years in questions, namely, 1959-60 and 1960-61, it is this firm which is assessed and so far as the assessee is concerned his share in the profits of these two business carried on as partnership has been determined as subject to tax. The question to be considered is whether at any time during the assessment year 1959-60 and/or 1960-61 the assessee could be regarded as the owner of the plant and machinery or whether such plant or machinery could be regarded as his property. Answer to this question is concluded by a decision of the Supreme Court in Narayanappa v. Bhaskara Krishnappa. In this case, the Supreme Court has, inter alia, taken the view that the provisions of section 14, 15, 29, 32, 37, 38 and 48 of the Partnership Act, 1932, make it clear that whatever may be the character of the property which is brought in by the partners when the partnership is formed or which may be acquired in the course of the business of the partnership is becomes the property of the firm and what a partner is entitled to is his share of profits, if any, according to the partnership from the realisation of this property, and upon dissolution of the partnership to a share in the money representing the value of the property. No doubt, since a firm has no legal existence, the partnership property will vest in all the a partners and in that sense every partner has an interest in the property of the partnership. During the subsistence of the partnership, however, no partner can deal with any portion of the property as his own. Nor can be assign his interest in a specific item of the partnership property to anyone. His right is to obtain such profits, if any, as fall to his share from time and upon the dissolution of the firm to a share in the assets of the firm which remain after satisfying the liabilities set out in clause (a) and sub-clauses (i), (ii) and (iii) of clause (b) of section 48. The whole concept of partnership is to be embark upon a joint a venture and for that purpose to bring in as capital money or even property including immovable property. Once that is done whatever is brought in would cease to be the exclusive property of the person who brought it in. It would be the trading asset of the partnership in which all the partners would have interest in proportion to their share in the joint venture of the business of partnership. The person who brought it in would, therefore, not be able to claim or exercise any exclusive right over any property which he has brought in, much less over any other partnership property. He would not be able to exercise his right even to the extent of his share in the business of the partnership.

11. This being the nature of the interest of a partner in the partnership assets, the assessee, even though he was at one time the sole proprietor of the plant and machinery used for the business, ceased to be such owner of the said plant and machinery after the partnership was formed and the plant and machinery became the property of the partnership. There is no controversy whatsoever that during the relevant accounting periods for the assessment years 1959-60 and 1960-61 all the plant and machinery formed part of the assets of the partnership and belonged to the partnership as such. Thus, during the relevant accounting periods for both the assessment years the plant and machinery was not the property of the assessee. Simply on that ground the allowance for depreciation permitted under the main paragraph of clause (vi) of sub-section (2) of section 10 will not be available to the assessee in respect of any of the two assessment year. Further, it should not be overlooked that the depreciation allowance permitted is a sum equivalent to a percentage on the original cost of the plant and machinery to the assessee himself. Once the plant and machinery cease to be the property of the assessee and became the assets of the partnership in which all partners have interest, it cannot be said that in respect of such plant and machinery the assessee bore any original cost as they ceased to be his personal property as owner. Thus, it will not be permissible to the assessee to claim any depreciation for any of the two assessment year in question for the plant and machinery which were used in the partnership business during the relevant accounting periods.

12. The question, however, arises whether notwithstanding the fact that during the relevant accounting period for the two assessment years in question, the plant and machinery ceased to be the personal property of the assessee and became the property of the partnership in which he was interested as a partner, is he entitled to claim set-off in respect of unabsorbed depreciation of the plant and machinery during the period that he was the sole proprietor of the business such a claim can only be made if it is covered by the conditions laid down in proviso (b) to clause (vi) above referred to. In this proviso two types of persons are referred to who are entitled to claim set-off or allowance in respect of unabsorbed depreciation. Either it can be claimed in the assessment of the assessee or if the assessee is a registered firm it can be claimed in the assessment of its partners. It is not the contention of Mr. Mehta on behalf of the assessee that the assessee is making any claim as a partner of any registered firm. His submission is that such a claim in respect of unabsorbed depreciation can be made by the assessee in his assessment as such. Omitting unnecessary words from the proviso, it lays down :

'Where, in the assessment of the assessee full effect cannot be given to any such allowance in any year not being a year which ended prior to the April 1, 1939, owing to there being no profits or gains chargeable for that year, or owing to the profits or gains chargeable being less than the allowance, then, subject to the provisions of clause (b) of the proviso to sub-section (2) of section 24, the allowance or part of the allowance to which effect has not been given as the case maybe shall be added to the amount of the allowance for depreciation for the following year.'

13. The proviso also contains provisions for further carrying over of such unabsorbed depreciation. It is implicit in the language of this proviso that the unabsorbed depreciation has to be added to the amount of the allowance for depreciation for the following year. This condition, therefore, lays down that for the following year the assessee is entitled to claim depreciation. If he is not entitled to claim depreciation for the following year the question of adding unabsorbed depreciation of the earlier years does not arise at all. Undoubtedly, as a partner of the partnership during the two assessment year, the assessee has been subjected to tax in respect of his share of profits in the business of the partnership, and partnership alone that will be entitled to claim depreciation during both the relevant assessment years and there is no question of the assessee being entitled to claim any depreciation allowance. The benefit of proviso (b) of carrying forward of unabsorbed depreciation is available to only those assessees who under the main paragraph of clause (vi) above referred to will be entitled to claim depreciation. Clearly, the assessee is not one of those type a of persons and, therefore, he is not entitled to set off the unabsorbed depreciation for the two earlier years against his share of profits in the partnership business for the assessment years 1959-60 and 1960-61.

14. A contention was, however, urged by Mr. Mehta that a claim to carry forward unabsorbed depreciation in respect of the earlier years can possibly arise even though during the year in question the assessee may not be entitled to claim any depreciation in respect of the plant and machinery used in the business. Such a contingency is hypothetically possible. The language of proviso (c) to this clause makes it clear that the aggregate of all allowances in respect of depreciation, shall, in no case, exceed the original cost to the assessee of the plant and machinery. It was suggested by way of illustration that if 99% of the original cost of plant and machinery was set off against the profits of the earlier year, but 1% of the could not be set off because there were insufficient profits; in such a case, even though in the subsequent year the assessee is not entitled to claim any depreciation as such, still he will be entitled to make a claim for allowance in respect of unabsorbed depreciation of the earlier years. Such a case, in our opinion, cannot be equated to a case where the plant and machinery in respect of which the depreciation is claimable has ceased to be the property of the assessee, during the assessment years in question. Under proviso (c) it is possible to imagine cases where even though for the assessment year in question the assessee may not have been entitled to any claim for depreciation, still he may claim allowance for unabsorbed ordinarily he is not entitled to make a claim for depreciation, but the right in respect of depreciation gets exhausted once the aggregate of all allowances in respect of depreciation amounts to the original cost of plant and machinery. Such a situation which can possibly arise under proviso (c) cannot be any assistance to the assessee is not entitled to claim set-off or allowance for unabsorbed depreciation relating to the assessment year 1957-58 and 1958-59 against his share of income for the assessment years 1959-60 and 1960-61 from the business converted into the partnership firms.

15. Accordingly, our answer to question No. 1 referred to us is in the negative. The assessee shall pay the costs of the revenue.


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