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Commissioner of Income-tax, Bombay Vs. the Mazagaon Dock Ltd. - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtMumbai
Decided On
Case NumberCivil Ref. No. 10 of 1937
Reported in[1938]6ITR124(Bom)
AppellantCommissioner of Income-tax, Bombay
RespondentThe Mazagaon Dock Ltd.
Excerpt:
- [couto; m.l. pendse, jj.] in the first instance the order passed under s. 132(5) is an order of a summary nature and does not conclude the rights of the petitioners, because while passing the assessment order, it is always open to the petitioners to point out that the assets recovered in the search were not undisclosed to point out that the assetsrecovered in the search were not undisclosed income. secondly, the order passed under s. 132(5) is appealable under the provisions of the act and if there is any violation in the exercise of the power, then the proper remedy is to lodge an appeal before the appellate authority. thirdly, even assuming that there is some breach in exercise of power s. 132(5) such breach is not so fatal as to warrant quashing the entire order. income tax act.....beaumont, c.j. - this is a reference made but he income-tax commissioner under sec. 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 sec. 10(2) (vi) of the act on the original cost to the assessee company itself, notwithstanding the fact that it was being assessed under sec. 26(2) of the act as the successor to the partnership firm known as the mazagaon dock.the facts giving rise to the reference admit of no doubt. the year of assessment is the year 1935-36, so that the previous year expired not he 31st march, 1935. on the 1st april 1835, the assessee, the mazagaon dock ltd., acquired from a firm known as the mazagaon dock the assets of that firm. the assessee.....
Judgment:

BEAUMONT, C.J. - This is a Reference made but he Income-tax Commissioner under Sec. 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 Sec. 10(2) (vi) of the Act on the original cost to the assessee Company itself, notwithstanding the fact that it was being assessed under Sec. 26(2) of the Act as the successor to the partnership firm known as the Mazagaon Dock.

The facts giving rise to the Reference admit of no doubt. The year of assessment is the year 1935-36, so that the previous year expired not he 31st March, 1935. On the 1st April 1835, the assessee, the Mazagaon Dock Ltd., acquired from a firm known as the Mazagaon Dock the assets of that firm. The assessee made a return of their income for the year ending 31st March 1935, based not the profit and loss account for that year of the vendor firm, the assessee themselves having no income for the year ending 31st March, 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 this decision is right.

The position turns upon the construction of Sec. 26(2) read with Sec. 10 of the Income-tax Act. Sec. 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 Sec. 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'. In the absence of authority to the contrary it would certainly seem that in calculating the profits for they 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) Sec. 10(2) provides that the profits or gains shall be computed after making the following allowances. The income therefor is ascertained only after deduction of the allowance. The first allowance is in respect of rent paid for the premises in which such business was carried don, which must mean the premises in which the predecessors business was carried on, and there is a proviso that when any substantial part of the premises has been used as a dwelling house but he 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 on not in existence during tree year 1934-35 and could not have occupied the premises. The next allowance is in respect of repairs where the assessee is tree tenant only of the premises and has undertaken to bear the costs 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 sub-section authorize 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 not 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 day that 'assessee' in that sub clause, in the case of an assessment under Sec. 26(2) based on the profits of a predecessor, must refer to such predecessor. Other wise in the present case no effect can be given to the alliance, 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 Sec. 10 involves some extension of the definition of 'assessee' contained in Sec. 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 Sec. 10 which I suggest is to hold that in the case of an assessment under Sec. 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 Sec. 11 in the case of the assessment of the profits of a profession or vocation under Sec. 26(2).

The Advocate-General has not seriously contended that any other rational construction can be given to Sec. 10 as allied to an assessment under Sec. 26(2), but he says that the words of Sec. 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 but the decision of the Privy Council in Commissioner of Income-tax, Madras v. The Buckingham and Carnatic Co., Ltd. I.L.R. (1935) Mad. 175. It is necessary therefor 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 Sec. 10(2) (vi). The High Court of Madras considered that the original cost to the assessee referred to in that sub-sections the original cost to the vendor and not the actual assessee, where as this High Court and High Court of Patina had held that the original cost was the original cost to the actual assessee, viz., the purchaser : see Commission of Income-tax, Bombay v. The Sarsapur Mills Co., Ahmedabad I.L.R. (1931) Bom. 129, and Motiram Roshan Lal Coal Co. v. Commissioner of Income Tax I.L.R. (1932) Pat 12. In the Buskingham and Carnatic Co.s 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 but the assessee to Mazagaon Dock, and not not the original cost to the Mazagaon Dock. But in none of the cases referred to did the question arise in relation to an assessment under Sec. 26(2) in respect of the year previous to the purchase. It would appear from a statement made but oh Commissioner of Income-tax in Motiram Roshan Lal Co., Ltd. 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 Sec. 26, but the Income Tax Commissioner expressed the view that in the year after succession the depreciation was always calculated not the cost to the predecessor and the accordingly refused to raise a question on Sec. 26.

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 the 4th December 1920. Four questions had been raised in that case but the Income Tax Commissioner, the first being whether the Buckingham and Carnatic Co., Ltd., which succeeded to the business of the five companies therein mentioned, is entitled under Sec. 10(2) (vi) of the Act to depreciation allowance on the assets taken over from the five predecessor companies calculated not the original cost of those assets to such predecessor companies or not the value at which those assets were taken over they 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 not the value at which the assets were taken over but purchasing company. The second question raised was in these terms : whether Buckingham and Carnatic Co., Ltd., is entitled to have depreciation allowance from the years 1921-22 to 1930-31 recalculated on the basis of that decision, and to claim that the excess depreciation not allowed in those years would 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 onto at question, or on the other question raised, for thus equations 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 therefor clear that the Privacy Conical 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, 1922 and the Income Tax Act of 1918 contained no section corresponding to Sec. 26 of the later Act. It is moreover plain that an assessment ten years old could not have been reopened. It is no doubt true that the ratio disdained in the Buckingham and Carnatic Company Case, as in the decisions of the High Courts which it proved, was that assess in Sec. 10(2) (vi) means the succession 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 not the profits of the assessee such as they were dealing with, and that they had not considered the question in relation to hypothetical assessment not the profits of the previous year under Sec. 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 working 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 Sec. 26(2) assessee in Sect. 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 negative.

PER BLACKWELL, J. - This is a reference but the Commissioner of Income Tax under Sec. 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 the 31st March 1936.

The company has been, as form the 1st April 1936, carrying on business as shipbuilder 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 but the Company from the 1st April 1935, the Income-tax Officer assessed the company under Sec. 26(2) of the Act for the financial year 1935-36 on the profits earned but the firm in the year which ended on the 31st March 1935, which was the 'previous year' of the firm as defined in Sec. 2(11) of the Act. In arriving at the tax payable by an assessee in accordance with Sec. 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 Sec. 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 :

Provide 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.'

The company claimed that Sec. 26(2) of the act required that the allowance should be competed 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 (2) to Sec. 10(2) (vi) of the Act would also the 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 Carnatic Co., Ltd. I.L.R. (1935) Mad. 179 declined to accede to the intention of the company and computed the total depreciation allowable at Rs. 51,939, 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. 2,26,986 under an assessment order dated the 2nd October 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.

The company appealed to the assistant Commissioner of Income-tax by a petition dated the 29th November 1936, Exhibit B. The Assistant Commissioner heard the appeal and confirmed the assessment by his order dated the 4th January 1937, Exhibit C.

Thereupon the Company applied to the Commissioner requesting him to refer the matter to the Court under Sec. 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 Sec. 10(2) (vi) of the act on the original cost to the assessee company itself, notwithstanding the fact that it was being assessed under Sec. 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. Buckingham and Carnatic Co., Ltd., 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 befores, 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 Sec. 26(2) which is in the following terms :-

'Where at the time of making an assessment under Sec. 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 vacation 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-secs. (i), (ii) and (iii) of Sec. 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 not with standing that the depreciation allowed by the sub-sec. (vi) of Sec. 10(2) of the Act is a depreciation of buildings, machines, plant or furniture which are the property of the assessee 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 Sec. 26(2) as it now stands only came into existence by virtue of the Indian Income-tax (Amendment) Act, (III of 1928), that no reference was made to this section in the Privy Council case, and the Privy Council decision in that case has no bearing upon the question now before this Court.

I do not agree with Mr. Coltmans 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 Sec. 26 which was introduced into the Act of 1922, or to Sec. 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 machines calculated on the original cost thereof to the five companies, but this claim was disallowed, and depreciation calculated not 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 :-

'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 if 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 Sec. 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 there is not a word in their Lordships judgment which suggests that their Lordships though that claims was in that year wrongly disallowed, or that a different meaning should be given to the words used in Sec. 10(2) (iv) if the question from the meaning which should be given to them if the question arises either in the next year after that or ten years later.

In the present case the language of Sec. 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 in 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 Sec. 3 of the act income-tax is to be charged for the year at thereat applicable to the total income of the assessee for that year in respect of the profit of the previous year. The return of income which the company was required by Sec. 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 the deemed by Sec. 26(2) have existed and to have been acquiring not the business. Consequently the Company must be treated as having made a return of its own profits during the previous year, and as have been the owner of the buildings, machinery and plant during the previous year. Apart form 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 Sec. 10(2) (vi), which in may opinion are too plain to be got rid of, it seems to me impossible to hold that the word 'assessee' in Sec. 10(2) (vi) can be taken to refer to the firm.

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 Sec. 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 Legislator intended that Sec. 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 Sec. 26 was intruded it would have been perfectly simple to employ appropriate language in reference to Sec. 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 artificial meaning in the first year after a succession, while giving to it, as I am bound to do by the ordinary cannons of construction and upon authority, its plain and natural meaning in the years following.

It is said that difficulties will arise in giving effect to Sec. 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 Sec. 10(2) cannot in my opinion out with the plain meaning of the words used in Sec. 10(2) (vi).

In the Privy Council case their Lordships emphasized there points :- (1) There is no ambiguity in the provisions of Sec. 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 not 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 Sec. 2(2) of the Act, namely, the person by whom income-tax is payable.

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 Sect. 26(2) of the act makes no difference in my opinion to its applicability. Applying that reasoning, and construing the words used in Sec. 10(2) (vi) read with the definition of 'assessee' in Sec. 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.

PER RANGNEKAR, J. - This is a Reference made but the Commissioner of Income-tax, Bombay, under Sec. 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 shipbuilders and repairers up to 31st March 1935. On the 1st of April 1935, the firm was converted into a limited company and its business was taken over but limited company, known as the Mazagaon Dock, Limited. Under Sec. 26(2) of the Act, the Company was assessed but the Income-tax Officer, Companies Circle, for the tax year beginning on the 1st of April 1935, on the profits earned by the firm for the year ended 31st March 1935, which was the previous year of the firm as defined in Sec. 2(11) of the Act.

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 Sec. 10(2) (vi) of the Act. The company claimed that the allowance should be computed on the original count 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 Sec. 10(2) (vi) of the Act should be allowed. The Income Tax Officer relying not he Privy Council decision in The Commissioner of Income-tax, Madras v. Buckingham and Carnatic Co., Ltd. I.L.R. (1935) Mad. 175, 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.

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.

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

The Commissioner is of opinion that the question should be answered against the Company. The question thus raised turns upon a true construction of Sec. 3(2) read with Sec. 10 and Sec. 26 (2). Section 26(2) was re-cast but 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 Sec. 23, it is found that the person carrying on any business, profession or vocation has been succeed 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 sections a hypothetical assessment, and the successor to a business is to be assessed, and he becomes liable to any 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 Sec. 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 building, 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 being less than 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 there is no such allowance, for that year, be deemed to be the allowance of the at year, and so on for succeeding years; and

(c) the aggregate of all such allowances made under the 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.'

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 Sec. 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 collecting the allowance regard must be had to the actual price paid by the Company to the firm when the former acquired the business sin question from the latter. The Advocate-General says the words 'original cost' of the buildings, etc., 'to the assessee' in Sec. 10(2) (vi) must refer to the company as it is the 'assessee' in question as defined by Sec. 2(2). On the other hand, the argument on behalf of the Company is that in the circumstances of this case the word 'assessee' can only refer to the firm and the allowance must be calculate don 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.

Sec. 2(2) no doubt define 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 repugnant in the subject or context,' and that, in my opinion, is the case here. It is only after a persons income is ascertained or assessed under Sec. 23 that that person becomes an 'assessee'. The liability to tax can only be determined after a persons 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 Sec. 10 would give rise to considerable difficulty.

As stated above, Sec. 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 whole profits or gains are being assessed under Sec. 23. If a questions to the method of calculating all the allowances other than the depreciation always 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.

The first allowance under Sec. 10 relates to -

'any rent paid for the premises in which such business sis carried on, provide 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 Sec. 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 soul due 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 are used but 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, when 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 dealing house, a proportional part only of such amount shall be allowed.'

If any such allowance is claimed for repairs, it can any be granted on the basis of the cost of the repairs to the predecessor of the Company is the previous year, the Company not being in existence in that year. The their allowance is for capital, and that can only refer to the capital borrowed by the predecessor for the purpose 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 allowance made in respect of depreciation under clause (vi). If 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 me consideration would apply. Clause (viii) refer to the allowance in respect of and 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

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 worked 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 income 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 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 favorable to the subject.

The difficulties that I have pointed out are not denied by the Advocate-General. But he says that under Sec. 26(2), the assesses 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 the Commissioner of Income Tax, Madras v. The Buckingham and Carnatic Co. Ltd. He submits that the point which is now raised is covered by the decision of their Lordships in treat 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 Sec. 26(2). Sec. 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 this predecessor. No difficulty such as I have pointed out above on the language of Sec. 10 can arise in such a case. That is the view we took in the case of the Commissioner of Income-tax, Bombay Presidency v. The Sarsapur Mills Co., Ahmedabad, I.L.R. 1931 Bom. 129. But here, the position is quite different. That 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.

I would answer the question submitted in the negative.

Question answered in the negative.


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