1969-VIL-213-DEL-DT

Equivalent Citation: [1970] 75 ITR 1

DELHI HIGH COURT

Date: 23.01.1969

RAJ NARAIN AGARWALA

Vs

COMMISSIONER OF INCOME-TAX, DELHI.

BENCH

Judge(s)  : JAGJIT SINGH., S. K. KAPUR.

JUDGMENT

KAPUR J.-The following two questions of law have been referred to this court under section 66(1) of the Indian Income-tax Act, 1922 :

" (1) Whether, on the facts and in the circumstances of the case, the assessment order for the assessment year 1955-56 finally concluded the position that the sum of Rs. 1,76,919 directed to be carried forward to the next year, represented loss and not unabsorbed depreciation left over in the preceding year ?

(2) Whether, on the facts and in the circumstances of the case, the written down value of the two factories in question for the purposes of computation of depreciation allowance was Rs. 6,20,000 ?"

The statement of case relates to the assessment year 1956-57 (previous year ending December 31, 1955). The assessee is a Hindu undivided family. A partnership firm was constituted in the name of Prem Narain Raj Narain by a written instrument dated January 1, 1944, between two brothers, Raj Narain and Prem Narain, each acting as a karta of his Hindu undivided family. The said partnership owned three factories, namely, (1) Prag Distilled Water Ice Factory, (2) Prag Cold Storage, and (3) Prem Raj Enamel Metal Factory. The firm carried on business up to January 1, 1955. Prag Distilled Water Ice Factory and Prag Cold Storage suffered losses of Rs. 2,12,027 and Rs. 1,02,481 respectively up to the end of the assessment year 1955-56 which were carried forward and the carried forward loss was Rs. 3,53,838 in the assessment of the said registered partnership for the assessment year 1955-56 comprising of Rs. 3,14,508 in the aforementioned two factories and Rs. 39,330 in Prem Raj Enamel Metal Factory. This loss was allocated equally between the two partners so that the carried forward loss in the hands of each partner was Rs. 1,76,919. The partnership firm was dissolved on January 1, 1955. On the same date, the three factories were valued by the partners with the help of experts and divided into two lots. The lot comprising Prag Distilled Water Ice factory as a going concern together with its assets and liabilities except goodwill and land and Prag Cold Storage also as a going concern together with its assets and liabilities except ing goodwill and land fell to the share of the assessee. The value of these assets was determined at Rs. 6,20,000. As the assets falling to the share of the assessee exceeded in value of the lot taken by Prem Narain, the assessee paid a sum of Rs. 4,35,000 for equalising the values of the divided assets. Regarding valuation and division of the assets, the Tribunal observed :

" We may, in the first instance, point out that the procedure followed by the partners in valuing the factories is such as to leave no doubt about the genuineness of the value fixed by them. The partners consulted experts on the point before fixing the values. Even after fixing the values, the asssets were divided into two lots by the assessee and the option was given to Prem Narain to elect either. of the two lots. In case were such a procedure is adopted, it is unlikely that any unrealistic values will be fixed for the assets.

Even apart from this, having regard to the written down value of these factories in the case of the firm coupled with the present times when the prices of plant and machinery have gone up many-fold, we have not in the least any doubt that Rs. 6 lakhs was the fair and reasonable value of the two factories on January 1, 1955."

It may be pointed out that the learned counsel for the parties agreed that the value of the assets claimed by the assessee was rupees six lakhs and Rs. 6,20,000 appearing in the second question referred is a mistake

The assessee earned an income of Rs. 1,27,287 from Prag Distilled Water Ice Factory and an income of Rs. 25,152 from Prag Cold Storage in the year under reference. The assessee claimed depreciation allowance on both the factories on the basis of rupees six lakhs as their written down value but the Income-tax Officer decided that the written down value of the factories must be the same as it was in the hands of the dissolved firm. The assessee also claimed that its one-half share of the total loss suffered in the aforesaid two factories amounting to Rs. 1,57,254 out of the carried forward loss of Rs. 1,76,919 from the firm should be off against its income of the current year. The Income-tax Officer rejected this claim also. The assessee's appeal before the Appellate Assistant Commissioner having failed, an appeal was taken to the Income-tax Appellate Tribunal. On the question of depreciation the Tribunal upheld the view of the Income-tax Officer. It principally relied on In the matter of M/s. Chouthmal Golapchand, and a decision of the Nagpur High Court in Commissioner of Income-tax v. Seth Mathuradas Mohta. In fact, the Tribunal was of the opinion that Mohta's case completely covered the present case. Regarding the carry forward of losses, the Tribunal decided that with respect to the losses other than unabsorbed depreciation, if any, included in the carried forward losses, both the conditions of section 24(2) stood satisfied inasmuch as

(1) the two businesses in which the losses were originally sustained continued to be carried on by the assessee in the previous year relevant to the assessment year in question ; and

(2) in the circumstances, the assessee, who was a partner in the erstwhile firm, must be held to have sustained the loss in business in the preceding year.

On the construction of section 24(2) of the said Act the Tribunal was of the view that a loss that could be carried forward to the following year under section 24(2) should not contain any element of unabsorbed depreciation which depreciation could be carried farward only in the manner set out in the proviso to section 10(2) (vi). It observed :

" In other words, such unabsorbed depreciation has not to be carried forward in the strict sense but has to be deemed to be part of the depreciation allowance for the following year and to be added thereto. The question of so adding the unabsorbed depreciation of the preceding year can only arise when the identical assessee has to be assessed for the following year. When, however, the identical assessee does not exist in the following year and when he is not assessed either itself or through any other agency in the following year, the question of so treating the unabsorbed depreciation as the depreciation of the following year and adding it thereto does not arise. In other words, the benefit of the set-off of the unabsorbed depreciation in the following year can be allowed only to that assessee alone and to none other. It follows that the unabsorbed depreciation accumulated in the case of the erstwhile partnership firm of Prem Narain Raj Narain cannot be deemed to be part of the depreciation of the following year and cannot be added to the depreciation of the following year in the case of the present assessee who is only an individual."

The Tribunal, however, answered the contention in favour of the assessee on the ground that the assessment order for the preceding year 1955-56, which had become final and conclusive between the parties, allowed the total sum of Rs. 1,76,919 as carried forward loss and not as carry forward of loss and unabsorbed depreciation. It is, therefore, necessary to refer to the order of the Income-tax Officer passed in the case of the assessee for the year 1955-56. The Income-tax Officer, after making allocation of income from the registered firm, observed in the concluding part :

" The loss to be carried forward to future years will be Rs. 1,96,919 minus Rs. 20,228=Rs. 1,76,691."

The Tribunal was of the view that this order of the Income-tax Officer finally decided that the total amount of Rs, 1,76,691 did not contain any unabsorbed depreciation and must, therefore, be treated as carried forward loss under section 24(2). It is in these circumstances that the first question has been referred to us at the instance of the revenue and the second at the instance of the assessee.

As I look at the order of the Income-tax Officer it merely says that the said figure of Rs. 1,76,691 is a carried forward loss. Even in the case of unabsorbed depreciation it could have legitimately been described by the Income-tax Officer as carried forward loss. Unabsorbed depreciation is one of the items to be deducted in computing the profits under section 10(2). Unabsorbed depreciation is under section 10(2)(vi), proviso (b), also to be carried forward and "added to the amount of the allowance for depreciation in 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 the succeeding year". Section 10(2) makes no distinction between the different allowances, mentioned therein. All these allowances are, as I have said, deductible in computing the profits and gains of business. It is true that section 24(2) deals with carry forward of losses other than losses on account of depreciation and that is so because the carry forward of depreciation has been provided in section 10(2)(vi), yet only the manner of carry forward in the two provisions is different and both types of deductions could appropriately be termed, as was done by the Income-tax Officer, as carry forward of losses. Whether or not the conditions prescribed by section 24(2) for the carry forward of the business losses other than unabsorbed depreciation and whether or not the unabsorbed depreciation could be carried forward by the assessee is not before us and we are, therefore, not called upon to pronounce on the correctness of the Tribunal's decision on these points. The combined effect of proviso (b) to section 10(2)(vi) read with section 24(1) is that the unabsorbed depreciation is carried forward and added to the depreciation in the following year. The total amount of depreciation thus arrived at is deemed to be the depreciation of the said following year. Similarly, if there is no such allowance for the following year, the unabsorbed depreciation will become the depreciation of that year. Once it becomes the depreciation of the following year it can, under section 24(1), be set off against income, profits and gains in that year under any head. In short, the position is this : If the profits of a business are insufficient to absorb the depreciation allowance, the allowance can be set off against the profits of any other business. If there are no such profits or the profits under the head "business" are insufficient to cover the depreciation allowance, the carried forward unabsorbed depreciation becomes the depreciation of the following year and may be set off against profits chargeable under any other head for that year. The unabsorbed carried forward depreciation is exactly on the same footing as the current depreciation for the assessment year so that the unabsorbed depreciation of the past years can be set off against income chargeable under any head. In the case of a registered firm any loss, which cannot be set off against any income, profits or gains of a firm, is to be apportioned between the partners of the firm and such partners alone are entitled to have the amount of loss set off under section 24. In the case of a registered firm if full effect cannot be given to any depreciation allowance in any past year then the carried forward unabsorbed depreciation becomes depreciation of the current year in the hands of the partners. If one of such partners is carrying on no other business such partner can necessarily set off the unabsorbed depreciation against income under other heads. In the language of section 10(2)(vi), proviso (b), is implicit the intention of the legislature that effect can be given to a depreciation allowance in the assessment of a partner. In such a case set off is permitted under section 24(1) and recourse to section 24(2) is unnecessary. In that view, even the condition prescribed in clause (ii) of sub-section (2) of section 24 that the business, profession or vocation, in which the loss was originally sustained, should continue to be carried on, may also not be necessary because carry forward of depreciation is not covered by section 24(2). To that extent, the Tribunal seems to have erred in coming to the conclusion regarding carry forward of unabsorbed depreciation. As I have already said, that matter is not before me and, therefore, I need not finally decide that question.

Mr. Bajaj, the learned counsel for the assessee, strongly impressed on us the necessity of upsetting the decision Tribunal on the question of carry forward of unabsorbed depreciation. This contention of Mr. Bajaj overlooks the fact that the assessee is not before us in appeal and we are only exercising advisory jurisdiction. No question having been referred to us on this aspect, I cannot concede to Mr. Bajaj's request. My view, therefore, is that, though the assessment order of 1955-56 was final and conclusive, yet it did not mean that the Tribunal was precluded from enquiring as to whether or not the carried forward loss contained some unabsorbed depreciation and what treatment had to be accorded thereto. I would, therefore, answer the first question in the negative.

That takes me to the second question. In answering this question one has to ascertain as to what is the actual cost to the assessee of the two factories taken by him. The Tribunal, as I have already said, was of the view that Mohta's case was on all fours with the case at hand. In Kalooram Govindram v. Commissioner of Income-tax, Mohta's case was overruled by their Lordships of the Supreme Court. In Kalooram's case a joint Hindu family was carrying on business. That family was a branch of a larger joint Hindu family composed of two branches, one being Govindram and the members of his family and the other Bachhulal and the members of his family. In the year 1942, there was a partition suit between the said two branches and under the decree made therein each item of the property was put tip for sale by competitive bidding. A sugar factory was knocked down in favour of Govindram for rupees 34 lakhs. After all the items of the assets were sold to one or the other, final adjustment was made by cash payment. Govindram's family continued to run the factory after partition. For the assessment year 1950-51 Govindram's family claimed depreciation for the said factory on the amount of Rs. 34,00,000. The majority of their Lordships held that Govindram was entitled to depreciation on the price at which he took over the assets. Subba Rao J. (as his Lordship then was) observed :

" Because of the uneven rise in prices of the different houses, instead of two houses he got only one house at the partition. The cost to him, therefore, would be the cost at which the property was valued at the partition or at which it was auctioned for the purpose of partition. Take another illustration : Instead of partitioning the properties by evaluation thereof, the houses were sold to a third party. So far as the third party was concerned the cost price would be the price at which he purchased them. If instead, the properties were sold by auction between the brothers and the difference in prices was adjusted by cash payment, it would be incongruous to say that in the former the cost of the houses would be the cost actually paid by the third party purchaser and in the latter the cost of the houses would not be the price for which they were auctioned but the nominal price they bore in a remote past. Other illustrations may be visualized. Barring the cases of fraud, collusion and inflation and deflation of values for ulterior purposes, 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."

and expressed dissent with the view taken by the Nagpur High Court in Mohta's case.

A partner is owner of the entire partnership assets. As held by the Tribunal, the valuation of the property was not notional but real and that was the basis for allocating properties to different partners. Adjustment was made by payment of Rs. 4,35,000 in cash by the assessee to the other partner with a view to equalising their shares. In the circumstances, the cost of the property to the assessee on the date of the partition would be the value given to it for the purposes of allotment. My answer to the second question, therefore, is in the affirmative and in favour of the assessee subject to the correction that the sum of Rs. 6,20,000 will be read as Rs. 6,00,000.

In the circumstances, I leave the parties to bear their own costs.

JAGJIT SINGH J.-I agree.

Reference answered accordingly.

 

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