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The Commisioner of Income-tax Vs. the Mazagaon Dock Limited - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtMumbai
Decided On
Case NumberCivil Reference No. 10 of 1937
Judge
Reported in(1938)40BOMLR343
AppellantThe Commisioner of Income-tax
RespondentThe Mazagaon Dock Limited
Excerpt:
indian income-tax act (xi of 1922), sections 10(2) (vi), 2(2), 26 (2)]-' assessee ' -interpretation-change in constitution of firm-business of firm acquired by company-company taking over business on a reduced value of buildings, machinery and plant-company making return of income earned by firm in previous year-depreciation of machinery-allowance for-whether depreciation can be counted on the original cost to the firm.; the assessee company, the mazagaon dock, ltd., took over and acquired the business from a firm known as the mazagaon dock, on april 1, 1935. the buildings, machinery and plant were revalued and purchased by the company at a price which was less than the original price paid by the firm. on an assessment under section 26(2) of the indian income-tax act, 1922, the company.....john beaumont, kt., c.j.1. this is a reference made by the income-tax commissioner under section 66(2) of the indian income-tax act raising the question, whether, in the circumstances of the case, the income-tax officer has correctly computed the depreciation allowance under section 10(2) (vi) of the act on the original cost to the assessee company itself, notwithstanding the fact that it was being assessed under section 26 [2) of the act as the successor to the partnership firm known as the mazagaon dock.2. the facts giving rise to the reference admit of no doubt. the year of assessment is the year 1935-36, soi that the previous year expired on march 31, 1935. on april 1, 1935, the assessees, the mazagaon dock, ltd., acquired from a firm known as the mazagaon dock the assets of that.....
Judgment:

John Beaumont, Kt., C.J.

1. This is a reference made by the Income-tax Commissioner under Section 66(2) of the Indian Income-tax Act raising the question, whether, in the circumstances of the case, the Income-tax Officer has correctly computed the depreciation allowance under Section 10(2) (vi) of the Act on the original cost to the assessee company itself, notwithstanding the fact that it was being assessed under Section 26 [2) of the Act as the successor to the partnership firm known as the Mazagaon Dock.

2. The facts giving rise to the reference admit of no doubt. The year of assessment is the year 1935-36, soi that the previous year expired on March 31, 1935. On April 1, 1935, the assessees, the Mazagaon Dock, Ltd., acquired from a firm known as the Mazagaon Dock the assets of that firm, The assessees made a return of their income for the year ending March 31, 1935, based on the profit and loss account for that year of the vendor firm, the assessees themselves having no income for the year ending March 31, 1935. The assessees claimed to deduct from the profits made by the vendor firm during the previous year the allowance for depreciation which would have been permissible to the vendor firm had they not disposed of their business. The Commissioner of Income-tax disallowed the claim, and the question is whether his decision is right.

3. The position turns upon the construction of Section 26 (2), read with Section 10 of the Indian Income-tax Act. Section 26 was introduced by an Amending Act passed in the year 1928, the previous section having been couched in much more general terms, though probably its effect was much the same as that of the amending section. By Sub-section (2) of the existing section it is provided that ' where at the time of making an assessment under Section 23 it is found that the person carrying on any business, profession or vocation has been succeeded in such capacity by another person, the assessment shall be made on such person succeeding, as if he had been carrying on the business, profession or vocation throughout the previous year, and as if he had received the whole of the profits for the year,' In the absence of authority to the contrary it would certainly seem that in calculating the profits for the previous year, deduction to which the predecessor would have been entitled must be allowed. In the case of a business (and the present assessment relates to a business) Section 10(2) provides that the profits or gains shall be computed after making the following allowances. The income therefore is ascertained only after deduction of the allowances. The first allowance is in respect, of rent paid for the premises in which such business was carried on, which must mean the premises on which the predecessor's business was carried on, and there is a proviso that when any substantial part of the premises has been used as a dwelling house by the assessee, there is to be a deduction from the allowance. ' Assessee ' in that clause must, I think, mean the predecessor of the actual assessee, on whose profits the assessee is being assessed. The successor in the present case who is being assessed was not in existence during the year 1934-35 and could not have occupied the premises. The next allowance is in respect of repairs where the assessee is the tenant only of the premises, and has undertaken to bear the cost of such repairs. Here again ' the assessee' must mean the predecessor of the person being assessed, who would be the tenant and person liable for the repairs. The third allowance is in respect of capital borrowed for the purposes of the business, and there again the business must be that of the predecessor. Then sub-paragraph (vi) is the one material for the purposes of the present reference. That subsection authorises an allowance in respect of depreciation of buildings, machinery, plant or furniture being the property of the assessee, of a sum equivalent to such percentage on the original cost thereof to the assessee as may in any case or class of cases be prescribed. In the absence of authority I should say that ' assessee ' in that sub-clause, in the case of an assessment under Section 26(2) based on the profits of a predecessor, must refer to such predecessor. Otherwise in the present case no effect can be given to the allowance, since during the year under assessment the property did not belong to the actual assessee, nor had the cost thereof to him been ascertained. It is true that the construction which I am suggesting of Section 10 involves some extension of the definition of ' assessee' contained in Section 2(2) of the Act so as to make the word include not only a person by whom income-tax is payable but also a person on whose income, profits or gains an assessment is being based. It is to be noted that the definitions in the Act are to yield to the context. The Court has to construe the Income-tax Act as a whole and the only alternative to the construction of Section 10 which I suggest is to hold that in the case of an assessment under Section 26(2) the assessee can claim no allowance in respect of depreciation of buildings, machinery, plant or furniture. This in my view is not the true meaning of the Act. I may observe that a similar difficulty would arise under Section 11 in the case of the assessment of the profits of a profession or vocation under Section 26(2).

4. The Advocate General has not seriously contended that any other rational construction can be given to Section 10 as applied to an assessment under Section 26 (2), but he says that the words of Section 10 read with the definition of ' assessee' are plain and must be given effect to whatever the consequences and further that the case is covered by the decision of the Privy Council in Commissioner o4 Income-tax, Madras v. The Buckingham and Carnatic Co., Ltd. I.L.R. (1935) Mad. 175 : 38 Bom. L. R. 133 It is necessary therefore to see exactly what that case decided. Before the decision of that case there had been a difference of opinion between High Courts in India as to the construction to be placed upon Section 10(2) (vi). The High Court of Madras considered that the original cost to the assessee referred to in that sub-section was the original cost to the vendor and not to the actual assessee, whereas this High Court and the High Court of Patna had held that the original cost was the original cost to the actual assessee, viz. the purchaser : see Commissioner of Income-tax, Bombay Presidency v. The Saraspwr Mills Co., Ahmedabad I.L.R. (1931) Bom. 129 : 34 Bom. L. R. 104 and Motiram Rosan Lal Coal Company, Limited v. Commissioner of Income-tax I.L.R. (1932) Pat. 12 In the Buckingham and Carnalic Co. case the Privy Council decided in favour of the view taken by this High Court and the High Court at Patna, and it is, therefore, clearly settled that in respect of all subsequent assessments upon the present assessee depreciation will have to be based on the price paid by the assessee to Mazagaon Dock, and not on the original cost to Mazagaon Dock. But in none of the cases referred to did the question arise in relation to an assessment under Section 26(2) in respect of the year previous to the purchase. It would appear from a statement made by the Commissioner of Income-tax in Motiram Rosan Lal Coal Company, Limited v. Commissioner of Income-tax I.L.R. (1932) Pat. 12 that in that case the assessee had desired to raise a question as to an assessment under Section 26, but the Income-tax Commissioner expressed the view that in the year aftersuccession the depreciation was always calculated on the cost to the predecessor and he accordingly refused to raise a question on Section 26.

5. In the Buckingham and Carnatic Company case the Privy Council were dealing with an assessment for the year 1931-32, although the business had originally been acquired by the assessee on December 4, 1920. Four questions had been raised in that case by the Income-tax Commissioner, the fiist being whether the Buckingham and Carnatic Co., Ltd., which succeeded to the business of the five companies therein mentioned, is entitled under Section 10(2) (vi) of the Act to depreciation allowance on the assets taken over from the five predecessor companies calculated on the original cost of those assets to such predecessor companies or on the value at which those assets were taken over by the Buckingham and Carnatic Co., Ltd., from the predecessor companies. The Privy Council answered that question in the sense in which the Bombay and Patna High Courts had answered it, namely, that the depreciation was to be based on the value at which the assets were taken over by the purchasing company. The second question raised was in these terms : Whether the Buckingham and Carnatic Co., Ltd., is entitled to have the depreciation allowance from the years 1921-22 to 1930-31 re-calculated on the basis of that decision, and to claim that the excess depreciation not allowed in those years should be allowed in its subsequent assessments or whether the claim for such excess depreciation lapses altogether. Their Lordships of the Privy Council considered that it was not necessary to express any opinion on that question, or on the other question raised, for those questions would have arisen only if the answer to the first question had been other than that which the Privy Council gave to it. It is therefore clear that the Privy Council did not actually decide whether the assessment for the year 1921-22 was correct or not. It is however suggested that their Lordships indicated the view that the assessment for that year, which had been based on the profits of the vendor companies, was correct. But it is to be noticed that the year 1921-22 was before the coming into operation of the Income-tax Act of 1922, and the Income-tax Act of 1918 contained no section corresponding to Section 26 of the later Act. It is moreover plain that an assessment ten years old could not have been re-opened. It is no doubt true that the ratio decidendi in the Buckingham and Carnatic Company case, as in the decisions of the High Courts which it approved, was that assessee in Section 10(2) (vi) means the successor and not the predecessor. I apprehend however that it would be open to their Lordships of the Privy Council to say that that view was limited to the case of an ordinary assessment on the profits of the assessee such as they were dealing with, and that they had not considered the question in relation to a hypothetical assessment on the profits of the previous year under Section 26 (2). If that course be open to the Privy Council, it must be open to this Court also, and in my opinion it would be wrong to hold that the decision of the Privy Council applies to a case which was not before the Board and was not adverted to in the opinion of the Board. In my opinion, therefore, it is open to this Court to consider on its merits the question whether in the case of a fictional assessment under Section 26(2), assessee in Section 10(2) (vi) has the same meaning as it bears for the purpose of subsequent assessments, and means the person being assessed, or whether it means the person on whose profits the assessment is based and who was the owner of the premises on which depreciation is claimed during the year in which the profits were earned. For the reasons given above I am of opinion that the latter view is right, and that the question raised by the Income-tax Commissioner should be answered in the negative.

Blackwell, J.

1. This is a reference by the Commissioner of Income-tax under Section 66 (2) of the Indian Income-tax Act, XI of 1922, at the instance of a company, named the Mazagaon Dock, Limited, of a question of law which has arisen out of the income-tax and super-tax assessments of the company for the financial year 1935-36 which ended on March 31, 1936.

2. The company has been, as from April 1, 1935, carrying on business as shipbuilders and repairers. Before that the business was carried on by a partnership firm known as the Mazagaon Dock. As the business of the partnership firm was taken over by the company from April 1, 1935, the Income-tax Officer assessed the company under Section 26 (2) of the Act for the financial year 1935-36 on the profits earned by the firm in the year which ended on March 31, 1935, which was the ' previous year' of the firm as defined in Section 2(11) of the Act.

3. In arriving at the tax payable by an assessee in accordance with Section 10 of the Act under the head ' business ' in respect of the profits or gains of any business carried on by him, certain allowances are to be made, and among them an allowance is to be made on account of depreciation on buildings, machinery, plant or furniture as laid down in s. (10) (2) (vi) of the Act which reads as follows :-

(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 furniture being the property of the assessee, a sum equivalent to such percentage on the original cost thereof to the assessee as may in any case or class of cases be prescribed :

Provided that-

(a) the prescribed particulars have been duly furnished;

(b) where full effect cannot be given to any such allowance in any year 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, 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 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 such allowances made under this Act or any Act repealed hereby, or under the Indian Income-tax Act, 1886, shall, in no case, exceed the original cost to the assessee of the buildings, machinery, plant, or furniture, as the case may be; '

4. The company claimed that Section 26 (2) of the Act required that the allowance should be computed on the original cost to the old firm and not to the company, and that all the unabsorbed depreciation due to the old firm under proviso (b) to Section 10(2) (vi) of the Act should also be allowed. The Income-tax Officer relying upon the judgment of the Privy Council in the case of Commissioner of Income-tax, Madras v. The Buckingham and Camatic Co., Ltd. I.L.R. (1935) Mad. 175. 38 Bom. L. R. 133 declined to accede to the contention of the company and computed the total depreciation allowable at Rs. 51,929 taking into account the original cost to the company itself and not the original cost to the old firm, and he assessed the company on an income of Rs. 2,36,985 under an assessment order dated October 2, 1936, exhibit A. If the allowance had been computed on the original cost to the old firm and if the unabsorbed depreciation allowance had been added thereto, the total allowance for depreciation would have exceeded the total assessable income and the company would have been exempted.

5. The company appealed to the Assistant Commissioner of Income-tax by a petition, dated November 27, 1936, exhibit B. The Assistant Commissioner heard the appeal and confirmed the assessment by his order dated January 4, 1937, exhibit C.

6. Thereupon the company applied to the Commissioner requesting him to refer the matter to the Court under Section 66 (2) of the Act, and he has accordingly submitted with a statement of the case the following question of law :-

Whether in the circumstances of the case, the income-tax officer has correctly computed the depreciation allowance under Section 10(2) (vi) of the Act on the original cost to the assessee company itself, notwithstanding the fact that it was being assessed under Section 26(2) of the Act as the successor to the partnership firm known as the Mazagaon Dock.

Mr. Coltman for the company contended that the case of Commissioner of Income-tax, Madras v. The Buckingham & Camatic Co., Ltd. I.L.R. (1935) Mad. 175 : 38 Bom. L. R. 133 has no application to the facts of the present case. He said that in that case the assessment was for the year 1931-32, the company having succeeded to the business some ten years before, and that it was not a case in which the company was being assessed upon the profits of the previous year as if it had been carrying on the business during the previous year and had received those profits. Mr. Coltman relied upon Section 26 (2) which is in the following terms :-

Where, at the time of making an assessment under Section 23, it is found that the person carrying on any business, profession or vocation has been succeeded in such capacity by another person, the assessment shall be made on such person succeeding, as if he had been carrying on the business, profession or vocation throughout the previous year, and as if he had received the whole of the profits for that year.

He contended that this was a mere collecting section and that the profits of the old firm must first be ascertained before the assessment is made. He further contended that those profits could not be ascertained unless they were ascertained upon the same basis as they would have been ascertained if the former firm were being assessed. He drew attention to Sub-sections (i) (ii) and (in) of Section 10(2) and argued that the company would be: entitled to the benefit of all the allowances under those heads to which the old firm would have been entitled if the old firm were being assessed. He submitted that notwithstanding that the depreciation allowed by Sub-section (vi) of Section 10(2) of the Act is depreciation of buildings, machinery, plant or furniture which are the property of the asaessee and that that allowance is to be a sum equivalent to such percentage on the original cost thereof to the assessee, the company was nevertheless entitled to depreciation on the original cost to the old firm and not to the company. He said that Section 26 (2) as it now stands only came into existence by virtue of the Indian Income-tax (Amendment) Act, 1928 (III of 1928), that no reference was made to this section in the Privy Council case, and that the Privy Council decision in that case has no bearing upon the question now before this Court.

7. I do not agree with Mr. Coltman's contentions. When the Buckingham and Carnatic Co., Ltd., was assessed in 1921-22, the Indian Income-tax Act of 1918 was then in force. That Act contained no section similar to Section 26 which was introduced into the Act of 1922, or to Section 26 which is now in force. But, as was pointed out in the course of the judgment of their Lordships, in 1921-22 the year subsequent to the amalgamation, the company was in fact assessed upon the entire profits of the five companies as having succeeded to their business, and during the assessment the company claimed to deduct depreciation on the buildings and machinery calculated on the original cost thereof to the five companies, but this claim was disallowed, and depreciation calculated on the written down cost, namely, the actual cost to the company only was allowed. Although their Lordships were dealing with the assessment for the year 1931-32, Mr. Hills in the course of his argument for the company is reported to have said (p. 177) :-

Here the successor who is taxed is carrying on, continuing the same business. It is fair that he should be taxed as his predecessor would have been i he had continued the business. Normally 'assessee' means assessee for the taxing year, but original cost to the assessee might mean to the assessee from whom the purchase was made.

This is an argument similar to that of Mr. Coltman based upon Section 26 (2), and although the question of the correctness of the assessment for 1921-22 was not directly before their Lordships, the argument of Mr. Hills certainly raised that question, and there is not a word in their Lordships' judgment which suggests that their Lordships thought that the claim was in that year wrongly disallowed, or that a different meaning should be given to the words used in Section 10(2) (vi) if the question arises in the year immediately after the succession to the business from the meaning which should be given to them if the question arises either in the next year after that or ten years later.

8. In the present case the language of Section 26 (2) appears to me to be against the company rather than in its favour. Under that section the company is to be assessed as if it had been carrying on the business throughout the previous year, and as if it had received the whole of the profits for that year. It is an artificial assessment upon the company as if it, and not the firm, had been carrying on the business during the previous year. It has been argued that the company did not exist in the previous year, that it was not the owner of the buildings, machinery and plant in that year, and that consequently in ascertaining the profits of the firm for the previous year depreciation must be calculated with reference to the original cost to the firm. This argument appears to me to be fallacious. The question as to what allowance is to be made for depreciation arises when the return is made. Under Section 3 of the Act income-tax is to be charged for the year at the rate applicable to the total income of the assessee for that year in respect of the profits of the previous year. The return of income which the company was required by Section 22 to furnish was a return of its own income during the previous year, and although the company did not exist during the previous year, it is to be deemed by Section 26 (2) to have existed, and to have been carrying on the business. Consequently the company must be treated as having made a return of its own profits during the previous year, and as having been the owner of the buildings, machinery and plant during the previous year. Apart from this the question of allowance for depreciation does not arise until the return of income is made, and when the return was made the company was the owner of the buildings, machinery and plant and the original cost thereof to the company had been ascertained and determined. Seeing that the assessment is an artificial assessment upon the company as if it, and not the firm, had been carrying on the business, during the previous year, quite apart from the words of Section 10(2) (vi), which in my opinion are too plain to be got rid of, it seems to me impossible to hold that the word ' assessee ' in Section 10(2) (vi) can be taken to refer to the firm.

9. In the Privy Council case their Lordships in their judgment observed that the learned Judges of the High Court of Madras expressed the opinion that the legislature in Section 10(2) (vi) was not envisaging any case of a successor company, and that what was in mind was the original company. That opinion did not commend itself to their Lordships of the Privy Council. The argument for the company in the present case appears to me to involve the supposition that the legislature intended that Section 10(2) (vi) when it was first enacted should have one meaning in the case of an original assessee being taxed- and another meaning in the case of a successor being taxed on the profits for the previous year as if it had been carrying on the business during the previous year if the Act were subsequently amended in that behalf. I cannot suppose that the legislature had any such intention. Certainly if that had been the intention when Section 26 was introduced it would have been perfectly simple to employ appropriate language in reference to Section 10(2) (vi) to say so. It may be that it would be just to amend the Act to meet a case like the present, but that is a matter for. the legislature, and upon the plea that justice requires it I do not feel myself at liberty to place upon Section 10(2) (vi) a strained and artificial meaning in the first year after a succession, while giving to it, as I am bound to do by the ordinary canons of construction and upon authority, its plain and natural meaning in the years following.

10. It is said that difficulties will arise in giving effect to Section 10(2) (i) (ii) and (iii) in the case of a successor to a business. But the fact that difficulties may arise in reference to the other allowances contemplated by Section 10(2) cannot in my opinion outweigh the plain meaning of the words used in Section 10(2) (vi).

11. In the Privy Council case their Lordships emphasized three points :- (1) There is no ambiguity in. the provisions of Section 10(2) (vi), and the ordinary and natural meaning of the words must be taken ; (2) the word ' assessee' is used in the sub-section in two places, first, with regard to the ownership of the property, and secondly with regard to the original cost thereof, and in the ordinary and natural meaning of the sub-section, the word ' assessee ' so used must refer to the same person, namely, the person who owns the property, while the depreciation is to be based on the original cost of such property to such person; and (3) if there were any doubt about the interpretation, it would be removed by reference to the definition of ' assessee' contained in Section 2(2) of the Act, namely, the person by whom income-tax is payable.

12. The reasoning of their Lordships in the Privy Council case appears to me plainly to be applicable to the facts of the present case, and Section 26 (2) of the Act makes no difference in my opinion to its applicability. Applying that reasoning, and construing the words used in Section 10(2) (vi), read with the definition of 'assessee' in Section 2(2), in their ordinary and natural meaning, I am of opinion that the question submitted should be answered in the affirmative. I answer it accordingly.

Rangnekar, J.

1. This is a reference made by the Commissioner of Income-tax, Bombay, under Section 66 (2) of Act XI of 1922. The facts are simple and not in dispute. It appears that there was a firm called the Mazagaon Dock, carrying on business in Bombay as ship-builders and repairers up to March 31, 1935. On April 1, 1935, the firm was converted into a limited company, and its business was taken over by the limited company, known as the Mazagaon Dock, Limited. Under Section 26 (2) of the Act the company was assessed by the Income-tax Officer, Companies' Circle, for the tax year, beginning on April 1, 1935, on the profits earned by the firm for the year ended March 31, 1935, which was the previous year of the firm as defined in Section 2(11) of the Act.

2. In computing the income of the company under the head 'business,' an allowance on account of depreciation of building, machinery, plant or furniture is to be made at the prescribed rates as laid down in Section 10(2) (vi) of the Act. The company claimed that the allowance should be computed on the original cost of the building, machinery, plant, etc., to the firm, and not on the cost paid by the company which succeeded to; the business of the firm. The company further claimed that, in addition, all the unabsorbed depreciation due to the firm under proviso (b) to Section 10(2) (vi) of the Act should be allowed. The Income-tax Officer relying on the Privy Council decision in Commissioner of Income-tax, Madras v. The Buckingham and Carmtic Co., Ltd. I.L.R. (1935) Mad..175 : 38 Bom. L. R. 133. rejected the claim and computed the total depreciation allowance by reference to the cost of the building, machinery, etc., paid by the company to the firm. The company appealed to the Assistant Commissioner of Income-tax, who, however, confirmed the assessment made by the Income-tax Officer.

3. If the claim made by the company had been allowed, the total allowance for depreciation would have exceeded the total assessable income of the company, and, as the Commissioner points out, the company would have been exempted. That is the importance of the question.

4. The company, then, appealed to the Commissioner of Income-tax, and he has referred the question of law arising on the facts of the case, which is set out in paragraph 6 in these words :-

Whether in the circumstances of the case, the Income-tax Officer has correctly computed the depreciation allowance under Section 10(2) (vi) of the Act on the original cost to the assessee company itself, notwithstanding the fact that it was being assessed under Section 26 (2) of the Act as the successor to the partnership firm known as the Mazagaon Dock.

The Commissioner was of opinion that the question should be answered against the company. The question thus raised turns upon a true construction of Section 2(2) read with Section 10 and Section 26 (2). Section 2,6 (2) was re-cast by the Income-tax (Amendment) Act of 1928, being Act III of 1928. The section, so far as material, is in the words following :-

Where, at the time of making an assessment under Section 23, it is found that the person carrying on any business, profession or vocation has been succeeded in such capacity by another person, the assessment shall be made on such person succeeding, as if he had been carrying on the business, profession or vocation throughout the previous year, and as if he had received the whole of the profits for that year.

It is plain, therefore, that the assessment to be made under this section is a hypothetical assessment, and the successor to a business is to be assessed, and he becomes liable to pay tax, not on his income-in this case, admittedly, he had none-but on the income of his predecessor for the previous year. How is that income to be ascertained For that we must turn to Section 10. That section provides that the profits or gains of any business shall be computed after making certain allowances mentioned in the section. The only allowance which need be considered in this case is that allowed by Section 10(2) (vi), which is in these words :-

(vi) in respect of depreciation of such buildings, machinery, plant or furniture being the property of the assessee, ... as may in any case or class of cases be prescribed :

Provided that-

(a) the prescribed particulars have been duly furnished;

(b) where full effect cannot be given to any such allowance in any year 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, 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 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 such allowance made under this Act or any Act repeated hereby, or under the Indian Income-tax Act, 188S, shall, in no case, exceed the original cost to the assessee of the buildings, machinery, plant, or furniture, as the case may be.

So far then the position seems to be simple. A successor to a business is to be assessed not on his own income but on the income made by his predecessor and that income can only be ascertained after making certain deductions sanctioned by Section 10(2) (vi). The dispute between the parties is as to the manner in which the allowance in respect of depreciation of the buildings, machinery, etc., is to be calculated. It is argued on behalf of the Commissioner of Income-tax that in calculating the allowance regard must be had to the actual price paid by the company to the firm when the former acquired the business in question from the latter. The Advocate General says that the words ' original cost' of the buildings, etc., ' to the assessee ' in Section 10(2) (vi) must refer to the company as it is the 'assessee' in question as defined by Section 2(2). On the other hand, the argument on behalf of the company is that in the circumstances of the case the word ' assessee ' can only refer to the firm and the allowance must be calculated on the basis of the original cost of the building, etc., to the firm. In my opinion, it is difficult to accept the contention raised on behalf of the Commissioner of Income-tax.

5. Section 2(2) no doubt defines an 'assessee' as a person by whom income-tax is payable. But the section itself provides that the word 'assessee' is to be understood in this sense unless 'there is anything Tepugnant in the subject or context', and that in my opinion is the case here. It is only after a person's income is ascertained or assessed under Section 23 that that person becomes an 'assessee'. The liability to tax can only be determined after a person's income is computed, and it seems to me doubtful that the term ' assessee ' is always used in the strict sense of the definition throughout the Act. Apart from this, to hold that the company in this case is the ' assessee ' within the meaning of Section 10 would give rise to considerable difficulty.

6. As stated above, Section 10 provides that before computing the profits or gains of a business certain deductions are to be made in favour of the owner of the business whose profits or gains are being assessed under Section 23. If a question as to the method of calculating all the allowances other than the depreciation allowance in respect of building, etc., had arisen in this case, then it is clear that in doing so, the position of the firm would have had to be taken into consideration. I shall refer to these allowances to make my meaning clear.

7. The first allowance under Section 10 relates to-

any rent paid for the premises in which such business is carried on, provided that when any substantial part of the premises is used as a dwelling-house by the assessee, the allowance under this clause shall be such sum as the Income-tax Officer may determine having regard to the proportional part so used ;

Under Section 10(3) the word ' paid' means actually paid or incurred according to the method of accounting upon the basis of which the profits or gains are computed under this section. Now, what is the rent which will have to be considered and, who paid the rent in the previous year Surely, it would be the rent actually paid by the predecessor; the successor has admittedly paid no rent in the year in question. Similarly, if part of the premises were used as a dwelling-house, the allowance is to be calculated in a particular manner. If part of the premises is used by the predecessor during the previous year, then it is difficult to see how the word ' assessee ' could be used with reference to the successor. The next clause refers to repairs :

(ii) in respect of repairs, where the assessee is the tenant only of the premises, and has undertaken to bear the cost of such repairs, the amount paid on account thereof, provided that, if any substantial part of the premises is used by the assessee as a dwelling-house, a proportional part only of such amount shall be allowed;

If any allowance is claimed for repairs, it can only be granted on the basis of the cost of the repairs to the predecessor of the company in the previous year, the company not being in existence in that year. The third allowance is for capital, and that can only refer to the capital borrowed by the predecessor for the purposes of business. Then there is an allowance for current repairs to the building. That can only apply to repairs in the previous year 1934-35, which could only have been done by the predecessor and not by the successor. Similarly, in the clause under consideration now, the building, etc., could only be the property of the predecessor in the previous year, and it can hardly be said that it was the property of the successor company in that year. Then, let us look at Section 10(2) (vii). The allowance there sanctioned is in respect of any machinery or plant which in consequence of its having become obsolete has been sold or discarded, and it is to be calculated on the difference between the original cost to the assessee of the machinery or plant as reduced by the aggregate of the allowances made in respect of depreciation under Clause (vi). It a question as to this allowance had arisen in this case, how would the allowance have been calculated It could only have been calculated on the original cost to the firm in respect of the machinery sold. If then the word ' assessee ' in this clause means the ' firm ', it is difficult to see why in Clause (vi) it should mean the 'company'. Then, again, in the next Clause (vii) (a) referring to animals used for the business which have died, the same consideration would apply. Clause (viii) refers to the allowance in respect of land revenue, local rates and municipal taxes paid in respect of the premises used for the purposes of the business. How can this apply to the company in this case ?

8. As I have said, the assessment is hypothetical. It is the income of the predecessor that has to be assessed, and that income cannot be ascertained except by making certain deductions. To accept the argument submitted on behalf of the Commissioner of Income-tax would result in the adoption of a fictitious method of ascertaining the true income of the predecessor. That is to say, in ascertaining the income for the year 1934-35 of the predecessor, you have to take into account the allowance calculated not on the original cost to him, but on the original cost to somebody else. How can it then be said that the incomes arrived at in this fictitious manner represents the true taxable income of the predecessor Is there anything which compels us to say that? I think, not. Otherwise, the result is this, that not only the assessment is hypothetical, but the method of calculating the income of the predecessor must also be hypothetical. But the legislature has not said so. In my opinion, where that is the position, the Court ought to adopt the construction which is most favourable to the subject.

9. The difficulties that I have pointed out are not denied by the Advocate General. But he says that under Section 26 (2), the assessee is the successor and he must be treated as if he was carrying on business in the previous year, and he relies in support of this argument on the Privy Council decision in the case of Commissioner of Income-tax, Madras v. The Buckingham and Carnatic Co., Ltd. I.L.R. (1935) Mad. 175 : 38 Bom. L. R. 133 He submits that the point which is now raised is covered by the decision of their Lordships in that case. In my opinion, there is nothing in that case which is applicable to the facts of this case. The case arose under the Act of 1922, and in that case, their Lordships were not considering a hypothetical assessment under Section 26 (2). Section 26 (2) was not even referred to. Their Lordships were dealing with the case of an ordinary assessment of income earned by the assessee himself, and that was the only question. In such a case, it is perfectly plain that in calculating the income actually earned by the successor of a business, he would be entitled to a deduction on the basis of the actual cost of the machinery, etc., paid by him to his predecessor. No difficulty such as I have pointed out above on the language of Section 10 can arise in such a case. That is the view we took in the case of Commissioner of Income-tax, Bombay Presidency v. The Saraspur Mills Co., Ahmedabad. I.L.R. (1931) Bom. 129 : 34 Bom. L. R. 104 But, here, the position is quite different. This is not a case of an ordinary assessment of income actually made by the successor. The point with which I have to deal in this case was included in the second question raised in the Privy Council case, but their Lordships did not consider it necessary to express any opinion on the question. I am therefore unable to hold that the question raised here is covered by that decision. Upon the whole, therefore, I have reached the conclusion that in this case where we are only concerned with a hypothetical assessment in the very) first year of a successor taking over a business from his predecessor, apart from the fact that the words ' original cost' would be inappropriate, it would be difficult to hold that depreciation should be allowed on the original cost to the successor and not on the original cost to the predecessor.

10. I would answer the question submitted in the negative.


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