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Sita Ram Saluja Vs. Income-tax Officer - Court Judgment

LegalCrystal Citation
CourtIncome Tax Appellate Tribunal ITAT Chandigarh
Decided On
Judge
Reported in(1982)1ITD754(Chd.)
AppellantSita Ram Saluja
Respondentincome-tax Officer
Excerpt:
.....of 80 : 20 in its profits and losses.this firm continued its business in the name and style of saluja hosiery factory which was manufacturing hosiery for sale in the open market up to 31-10-1975. there was a dissolution on 31-10-1975 and the running business in the name and style of saluja hosiery factory was taken over by sita ram saluja. in the business of hosiery manufacture under the above name and style, the firm had certain machinery which was owned by it and used in the business. with effect from 1-11-1975, sita ram saluja carried on the business as an individual and as owner of the factory, saluja hosiery factory. he closed his books of account for the assessment year under appeal on 31-3-1976. the ito completed the assessment of saluja hosiery factory up to 31-10-1975 and.....
Judgment:
1. This appeal by the revenue is directed against the order of the AAC dated 8-12-1980 relating to the assessment year 1976-77. The issue that has been brought before us by the assessee is whether, on the facts and in the circumstances of the case, the AAC erred in upholding the disallowance of depreciation to the assessee in relation to the assets received by the assessee on dissolution of the firm in which he was a partner. We have to determine this issue on the following set of facts.

2. Sita Ram Saluja and Mala Singh were carrying on business in partnership, having the ratio of 80 : 20 in its profits and losses.

This firm continued its business in the name and style of Saluja Hosiery Factory which was manufacturing hosiery for sale in the open market up to 31-10-1975. There was a dissolution on 31-10-1975 and the running business in the name and style of Saluja Hosiery Factory was taken over by Sita Ram Saluja. In the business of hosiery manufacture under the above name and style, the firm had certain machinery which was owned by it and used in the business. With effect from 1-11-1975, Sita Ram Saluja carried on the business as an individual and as owner of the factory, Saluja Hosiery Factory. He closed his books of account for the assessment year under appeal on 31-3-1976. The ITO completed the assessment of Saluja Hosiery Factory up to 31-10-1975 and allowed depreciation on the machinery used in the business by the firm.

However, when the assessment of Sita Ram Saluja as proprietor of Saluja Hosiery Factory was taken up, the ITO found that in the return filed by the assesses on 23-7-1976, declaring income of Rs. 63,733, the assessee had claimed depreciation to the extent of Rs. 30,916. While computing the total income of the assessee-individual from the business of hosiery run under the above name and style, the ITO refused to admit the claim of depreciation with the following observations : No depreciation is allowable in the assessee's case as the same has been allowed in the firm's case, for full period of twelve months, Saluja Hosiery Factory, Ludhiana, in which assessee had 80 per cent share.

This assessment was completed on 30-3-1977 and was challenged in appeal before the AAC, inter alia, on this issue.

3. The AAC confirmed the order of the ITO by sustaining the disallowance of depreciation in the hands of the assessee but only in relation to the assets received on dissolution of the firm. For the additions made after 31-10-1975, the ITO was, however, directed to allow depreciation as per rules. Hence, the present appeal by the assessee.

4. We have heard both the sides. The learned counsel for the assessee submitted that the learned AAC did not appreciate the claim made by the assessee who was the owner of the assets, though received on dissolution of the firm on 31-10-1975, thereafter, because he was running the business as a proprietor. It was contended that though on the dissolution of a firm, the assets received by a partner may not be involving transfer in the connotation of the terms used in the Act, yet after the dissolution, the assets are owned by the individual partner and if he carries on the business, he owns the assets and if the assets are used in the business, depreciation cannot be disallowed. These submissions were, however, strongly opposed by the learned departmental representative, who contended that we have to keep in mind that the firm is nothing but a compendious name for its partners and, therefore, when dissolution takes place, whatever partners get, they get because they were already the owner thereof. In such a view of the matter, it was contended that the partner, who was having 80 per cent share in the firm earlier, continued to be the partner of the assets which he received. Since for that assessment year, i.e., 1976-77, he as a partner had got depreciation when the firm was allowed depreciation, further claim for the period from 1-11-1975 to 31-3-1976 is untenable because depreciation cannot be allowed twice on the same assets for one assessment year. Reliance was placed on the ratio of the judgment of the Karnataka High Court in the case of Meghdoot Electrical Corporation v. Addl. CIT [1979] 116 ITR 400 for the above proposition.

5. We have given careful considerations to the rival submissions and we are of the opinion that the depreciation has been wrongly disallowed on the assets which were received by the assessee on dissolution of the firm. Though a firm, for the purpose of general law, is nothing but a compendious name for its partners yet under the Income-tax Act, income of a firm is arrived at and is subjected to tax in the hands of the firm in accordance with the provisions of the Act. As such a firm is treated as a separate and independent entity independent of the partners constituting the firm. Though this is a well settled position of law, however, for the sake of its reiteration one may refer to the judgment of the Andhra Pradesh High Court in the case of CIT v. T.Veerarghavulu Chetty & Sons Co. [1975] 100 ITR 723. The facts of the case before us show that on the dissolution of the firm, the business was taken over and carried on by Sita Ram Saluja. From 1-11-1975 he is clearly the sole proprietor of the business and owns the plant and machinery used in the manufacture of hosiery in the business carried on under the name and style of Saluja Hosiery Factory, Ludhiana, which had earlier been carried on by the firm. The proposition propounded by the authorities below that since there was no transfer at the time of dissolution with regard to the assets which the present assessee received and used in the continuing business the depreciation cannot be allowed to him, is erroneous for the following reasons.

6. The partner is the owner of the assets that he received at the time of dissolution of the firm. It is not a question whether there was transfer at the time of dissolution but whether he is the owner of the assets which he is using in the business carried on by him during the accounting period relevant to the assessment year. Incidentally, therefore, if the previous year of the business that he independently carried on after the dissolution of the firm ends within the financial year in which dissolution took place, he cannot be robbed of the right of various benefits available to him under the statute, which include right to get depreciation under the rules prescribed, if the property is owned by him and used for the purpose of the business.

7. Rule 5 of the Income-tax Rules, 1962, provides the mode and manner of allowance of depreciation. The depreciation is to be calculated at the percentages specified in the second column of the Table in Part I of Appendix to the said Rules on the actual cost or, as the case may be, the written down value of the assets used for the purpose of the business or profession at any time during the previous year. We would like to emphasise that Rule 5 provides that depreciation will be allowed if the assets are owned by the assessee and used in his business or profession at any time during the previous year. The assessee before us has used the assets which are owned by him in the business carried on by him from 1-11-1975 to 31-3-1976. Therefore, we do not see any reason why depreciation should not be allowed to the assessee. The argument of the authorities below that it tantamounts to allowing depreciation twice on the same assets during the same assessment year cannot be considered as a reason for denying the assessee what the law clearly provides him. The appeal of the assessee is, therefore, allowed with the directions that the ITO would consider the claim of the assessee with regard to depreciation for all the assets owned and used by the assessee in the business carried on, including the assets received at the time of dissolution of the firm.


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