1. The only controversy raised by the assessee in this appeal for the assessment year 1976-77, for which the relevant 'previous year' ended on 31-12-1975, is about the issue whether the assessee is entitled to depreciation on building and machinery at the cost assigned to the said assets in the course of dissolution of the earlier firm which was constituted by four partners of the assessee-firm and other five partners who elected to dissolve the old firm, the value of the said assets having been adopted by the newly constituted firm which comprised of the first four partners of the old firm who joined hands with other seven partners in the assessee-firm without any relations being there between them or on the written down value coming from year after year up to the date of dissolution and also so adopted by the revenue up to immediately preceding assessment year which is 1975-76.
2. In order to appreciate the issue, a brief backdrop of facts would be of immense assistance. There was a firm duly constituted under a partnership deed dated 1-12-1969 under the name and style of Bharat Cold Storage situated at Shahbad and doing its business with effect from 2-9-1969. The said firm was constituted of the following partners : In the dissolution deed of this firm, first four partners were treated as partners of the first part whereas the next five partners were treated as partners of the second part. On 20-1-1972, the above said firm was dissolved and the said dissolution deed which is on the assessee's compilation contained Clauses 1 to 3 which are of importance to the issue and which read as under : 1. That this partnership firm is hereby dissolved today for all intents and purposes.
2. That the statement of profit and loss showing net profit at the rate of Rs. 2,08,545 and balance sheet prepared up to this date is verified by all the partners and the same is accepted as correct.
3. That in order to avoid any litigation, etc., between the partners, the valuation of the storage, land, building, machinery, etc., as it is where it is, has in internal bid by the partners been auctioned for Rs. 4 lakhs only (building Rs. 1,50,000, machinery Rs. 1,50,000, land Rs. 20,000 and wooden plate and racks Rs. 80,000) and the same has been taken over by partners of the 1st part with all rights of licences, etc. The other lock, stock and barrel assets and liabilities has also been taken over by the 1st party. The 1st party has agreed to pay the outstanding share capital of each partner of the 2nd part within one month up to 20-2-1972. In case of violation of this agreement and valuation, etc., shall be treated as cancelled.
As apparent from the above clauses of the dissolution deed, party, Nos.
(v) to (ix) went out on dissolution and the entire business was carried on by the first four partners. Subsequently on 12-2-1972, another partnership deed was drawn between the first four partners of the old firm and seven new partners who had no connection or relation with the old partners. The new partnership, which is the assessee-appellant before us, was constituted of the following persons : The last nine partners who joined the assessee-firm accepted the very same valuation assigned to building, machinery, wooden platforms-cum-racks and land, etc., which was adopted at the time of dissolution of the earlier firm and in respect of which the first four parties had paid out the outgoing partners, on dissolution, in respect of their capital investment including profit and appreciation of any cost of assets at the time of dissolution.Clause 9 of the newly constituted partnership, after dissolution, regarding the valuation of assets assigned in the course of dissolution and adopted by the new incoming partners read as under : 9. That the valuation of storage, building, machinery, wooden platforms- cum-racks and land beneath the store has been fixed at Rs. 4 lakhs in which all the partners to this deed shall have and enjoy their rights in title and ownership of these assets pro rata according to the share held by them.
Out of the total value of the assets amounting to Rs. 4 lakhs, the same were individually valued under : The appellant-firm, in the course of the assessment year 1973-74, claimed depreciation on the cost of assets acquired from the outgoing partners but the ITO allowed depreciation only on the written down value (WDV) of the assets as in the hands of the firm before the above said dissolution was effected. The issue was carried before the AAC where the assessee did not meet with success and even when the matter came up before the Tribunal, the assessee's appeal was dismissed for default of non-appearance. The assessee attempted restoration of the said appeal through its miscellaneous petition but that too was not allowed by the Tribunal.
3. For the next year, i.e., the assessment year 1974-75, again the assessee came forward with its claim but the ITO adopted the WDV as determined in the immediately preceding assessment year 1973-74 in respect of which the assessee came before the ITO with its rectification application under Section 154 of the Income-tax Act, 1961 ('the Act'). For the next year, i.e., the assessment year 1975-76, again the assessee put in its claim of depreciation in respect of Rs. 3,80,000, being the value of assets as assigned on the point of dissolution and adopted by the new firm when it came into being, but for this year as well, the assessee neither succeeded before the ITO nor before the AAC and when the matter was carried before the Tribunal, the Tribunal vide its order dated 19-7-1979 in IT Appeal No. 414 of 1979 set aside the order of the AAC and restored the appeal to his file who again dismissed the appeal vide his order dated 29-2-1980. The assessee thereafter went in revision before the Commissioner, which is said to be pending.
4. Again for the assessment year 1976-77, which is under consideration, the assessee put in its claim of depreciation to be allowed on actual cost after deduction of depreciation allowed in earlier years but this also did not find favour with the ITO and after the assessee's contentions were rejected by the ITO, when the issue was carried before the Commissioner (Appeals) he also confirmed the action of the ITO in allowing depreciation on WDV coming from year after year in respect of value of assets assigned from times of earlier firm.
5. It is this action of the Commissioner (Appeals), which is contested before us. The learned counsel for the assessee, Mr. D.K. Gupta, first of all took us thoroughly through the order of the Commissioner (Appeals) and admitting that in respect of the assessment year 1973-74 undoubtedly the issue went against the assessee but the order of the last fact-finding authority was for default of non-appearance and the Tribunal never had the occasion to adjudicate the issue on merit. He submitted that it is trite law now that res judicata is not applicable to income-tax proceedings. He relied on the case of Karnani Industrial Bank Ltd. v. CIT  25 ITR 558 (Cal.) and elaborated as to what is WDV under Section 10(5)(b) of the Act. He further relied on the cases of Maharana Mills (P.) Ltd. v. ITO  36 ITR 350 (SC) and CIT v.Hides & Leather Products (P.) Ltd.  101 ITR 61 (Guj.) and argued at length as to what 'actual cost' means. In respect of second issue raised by the Commissioner (Appeals) in his order, as mentioned in para 4, he submitted that the Commissioner (Appeals) himself has observed that the issue is res Integra and he drew our attention to the case of Karnani Industrial Bank Ltd. (supra). He submitted that the case of D.S. Bist & Sons v. CIT  85 ITR 254 (Delhi) stands overruled in the case of Bist & Sons v. CIT  116 ITR 131 (SC). In short, he summarised that the assessee's claim of depreciation should be admitted and the assessee should be allowed depreciation on actual cost minus depreciation allowed by the revenue in earlier years.
6. The learned departmental representative, Mr. M.P. Singh, on the other hand, beside relying on the order of the Commissioner (Appeals) submitted that there was no dissolution." But, according to him, as he argued at length, it was a change of constitution. He placed his reliance on the case of Nandlal Sohanlal v. CIT  110 ITR 170 (Punj. & Har.)(FB) and argued at length that the firm has continued its activities, the old and new firms are both separate entities and he said that the cases of Matrumal Dhanna Lal v. ITO  86 ITR 497 (All.) and Kalooram Govindram v. CIT  57 ITR 335 (SC) are on different facts and that they cannot carry the assessee's case any further. He also placed his reliance on Explanation 4 to Section 43(1) of the Act and on the basis of totality of circumstances he wanted us to confirm the order of the Commissioner (Appeals).
7. After taking into consideration the rival submissions, we are unable to confirm the order of the Commissioner (Appeals). Before dealing with the merit of the assessee's claim and coming to our finding on that, we come to the issue whether simply because WDV from the record of earlier firm has been taken into consideration for allowance of depreciation in the assessment year 1973-74 debars the assessee to put in its claim for the year under consideration. When we look to the Calcutta High Court decision in the case of Karnani Industrial Bank Ltd. (supra), we find that the headnote reads as under : The definition of 'written down value' in Section 10(5)(b) completely excludes the view that the language of Section 10(2)(vi) limits the Income-tax Officer to working down to the written down value for the year for which he is making the assessment from the written down value accepted for the previous year. The method enjoined by Section lO(5)(b) is that the Income-tax Officer should take into consideration the actual cost, determining it for himself, if necessary, take also into consideration the allowance granted in the past and then make his own computation as to the written down value for the assessment year. Neither the principle of res judicata or estoppel nor the terms of Section 10(2)(vi) prevent the Income-tax Officer from determining for himself what the actual cost of a machinery had been. (p. 558) From the above, it is clear that neither principle of res judicata or estoppel nor the terms of Section 10(2)(vi) prevent the ITO from determining for himself the actual cost of the assets. An adaptation of a different value in earlier years does not debar the ITO to reconsider the issue as the WDV coming from earlier years is not always binding.
When we look to the case of Maharana Mills (P.) Ltd. (supra) we find that even in respect of rectification proceedings, relevant para from the headnote can be placed below, which speaks of the extent to which the ITO can go back, does not stop at the WDV of the previous year : The limit to which the ITO can go back does not stop at the written down value of the previous year but extends up to the figure of the original cost and the method enjoined by Section 10(5)(b) of the Income-tax Act is not that the Income-tax Officer should merely scale down the written down value of the previous year, but that he should take into consideration the actual cost, determining, it for himself, if necessary, take also into consideration the allowances granted in the past and then make his own computation as to the written down value for the assessment year with which he is concerned. Thus it cannot be said that merely because under Section 35 some written down value and the depreciation amount have been determined they are a final determination binding for all times to come ; nor does the determination operate as estoppel or res judicata for the following years. (p. 351) Reliance of the learned departmental representative on the Full Bench decision of the Punjab and Haryana High Court in the case of Nandlal Sohanlal (supra) is misplaced. Their Lordships in that case while dissenting from the case of CIT v. Shiv Shanker Lal Ram Nath  106 ITR 342 (All.) observed that : ...a partnership firm has been invested with the status of a continuing entity and a unit of assessment. The framing of only one assessment against a person is the normal rule and two assessments can be framed against the person only under exceptional circumstances recognised by the Act.... (p. 171) With the above observation, we also find the following observation available from the headnote of the said case : ...The two concepts of a mere change in the constitution of the firm and its total annihilation which is technically called dissolution, are entirely distinct and separate from each other. The Partnership Act treats the two concepts separately and in sharply divided compartments.... (p. 172) The Legislature has advisedly used the phrase 'of a change in the constitution of a firm' in Section 187(1) of the Income-tax Act which bears a technical and legal connotation in the Partnership Act. It has, therefore, to be construed as such and not as something interchangeable with the dissolution of a firm which is a thing apart. (p. 172) Still further, their Lordships with dissolution of a firm, vis-a-vis change in the constitution of a firm in the said case have made the following observation : Both for the meaning of 'dissolution of a firm' and a 'change in the constitution of a firm', the true key is provided by the Partnership Act, while the Income-tax Act is totally silent thereon. It is with that clue that one has to first determine on the facts of the case whether a firm stands dissolved or whether it involves a mere change in the constitution thereof. It is only when that legal question is answered that the issue arises whether Section 187, 188 or 189 would be attracted thereto for the purpose of Income-tax assessment....
(p. 173) All these observations, according to us, supports the contention of the assessee and not of the revenue because in the instant case there is a clear case of dissolution as per duly executed deed of dissolution.
Then, as per clauses available in the dissolution deed, extracted and placed above assignment of new valuation to the existing assets is available, which stands accepted by both the continuing and outgoing partners on dissolution and the outgoing partners having been paid by the continuing one. Then from perusal of the partnership deed also, it is available that the same valuation assigned to the assets has been accepted by the new partners and it will not be out of place to mention that howsoever small it may be but there is a gap of time between the dissolution of the old firm and restart of the new. Some guidance as to the 'actual cost' is also available from the Gujarat High Court decision in the case of Hides & Leather Products (P.) Ltd. (supra) and their Lordships also abserved that neither resjudicata nor estoppel prevent the ITO from determining as to what the actual cost of the assets to the assessee has been, which is apparent from the very first few lines from the headnote : Neither the principle of res judicata nor estoppel prevent the Income-tax Officer from determining for himself the written down value of an asset for each assessment year. He can determine for himself what the actual cost to the assessee had been in the first instance and is not bound by the determination of that question in any of the previous assessment years. (p. 61) It is wrong to say that the Allahabad High Court decision in the case of Matrumal Dhanna Lal (supra) does not support the contention of the assessee. In that case, the assessee was a HUF which had been a partner in a firm. Disputes had arisen among the partners and the oil mill belonging to the firm was valued by the arbitrator at Rs. 9,50,000 which was allotted to the assessee-family. Depreciation in this case was allowed on the basis of this value from the assessment year 1947-48 but after six/seven years, i.e., for 1954-55 to 1957-58, the ITO held that WDV of the mill in the hands of the assessee should be fixed on the basis that its actual cost to the assessee was Rs. 1,53,348 that having been the WDV of the mill in 1946, as per income-tax records-and that the WDV in the assessment year 1954-55 was the difference between the said amount and the depreciation actually allowed to the assessee-family from the assessment years 1947-48 to 1953-54. The Tribunal confirmed this action but when the issue was carried before the High Court, their Lordships observed as under : Held, that the Tribunal was not right in holding that the actual cost of the oil mill in question to the assessee remained what it was in the case of the firm and that the cost of the mill to the assessee-family should be considered to be the price fixed by the arbitrators, viz., Rs. 9,50,000 which was not a notional but the real market value of the property. (p. 497) The instant case may not be the same on all fours but it is very much alike. In a way, the instant case is on a better footing because as a consequence of dissolution the assets were revalued and retained by the continuing partners and after sometime when new partners were taken in newly constituted assessee-firm, the very same value adopted at the time of valuation was assigned to the assets. In this case, it was the Supreme Court decision in the case of Kalooram Govindram (supra) which was followed and as per majority judgment in the said case even in case of partition of a HUF in respect of valuation of assets for the purpose of depreciation it was held as under : (ii) Barring the cases of fraud, collusion and inflation and deflation of values for ulterior purposes, the cost of an asset to a divided member must necessarily be its cost to him at the time of partition, whether mentioned in the partition deed or ascertained aliunde. If the valuation of the property for purposes of partition was not notional but was real and that was the basis for allocating properties to different members, the cost of a property allotted to a member cannot be that at which it was purchased by the joint family in the remote past, but would be the value given to it for the purpose of allotment or at which it was auctioned for the purpose of partition. (p. 336) In the instant case, it is not the case of the revenue that the assignment of valuation to assets is collusive or fraudulent.
Indirectly the contention of the assessee also gets support from the Supreme Court decision in the case of Bist & Sons (supra).
8. Explanation 4 to Section 43(7) also does not take the revenue's case any further because in the instant case the old assessee does not survive the moment the old firm undergoes dissolution. The remaining four partners as well cannot be called the same assessee and under no circumstances the present assessee can be called the same assessee especially when after lapse of some time from the date of dissolution, the new firm was constituted.
9. The Commissioner (Appeals) has expressed his fears that absurd result would follow in case the assessee's contention is accepted. The issues are got to be adjudicated as per law and what would follow should not come in the way of the appellate authority. The Commissioner (Appeals) also placed his reliance on the case of Bist & Sons (supra) but, as we have observed above, the said decision went before the Supreme Court and the same stands reversed in the case of Bist & Sons (supra).
10. Before we part with the issue, we may mention that the assessee right from the first year has not given up the issue. Undoubtedly at one stage it came before the Tribunal but it was never adjudicated on merit as the assessee's appeal was only dismissed for default. The assessee's contention is, therefore, accepted and the ITO is directed to recompute the assessee's claim of depreciation on the basis of actual cost of Rs. 3,80,000 as splitted above, building Rs. 1,50,000, machinery Rs. 1,50,000 and racks Rs. 80,000 and deducting the depreciation allowed to the assessee in all the previous years from 1973-74 to 1975-76 should be deducted out of the same and depreciation should be allowed on the balance. From Clause 3 of the dissolution deed, mention of internal bet amongst the continuing and outgoing partners regarding valuation of assets is also available and it has never been the case of the revenue that it was out of collusion or fraudulent assignment of valuation to the assets.