Citation Codes

Equivalent Citations

citation codes

Case Number

Income-tax Reference No. 59 of 1964

Judges

Kantawala, C.J
Tulzapurkar, J.

Acts

section 66(1) of the Indian Income-tax Act, 1922 (hereinafter referred to as the Act),
provisions of sections 14, 15, 29, 32, 37, 38 and 48 of the Partnership Act, 1932,
provisions of clause (b) of the proviso to sub-section (2) of section 24,
clause (a) and sub-clauses (i), (ii) and (iii) of clause (b) of section 48.
clause (vi) of sub-section (2) of section 10
Indian Income-tax Act, 1886 (II of 1886),

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Smart Summary

Structured Summary of the Opinion (Kantawala, C.J.)

Factual and Procedural Background

This reference was made under section 66(1) of the Indian Income-tax Act, 1922 at the instance of the assessee. Two questions were posed concerning whether the assessee could set off losses and unabsorbed allowances determined under section 10 for assessment years 1957–58 and 1958–59 against his share of income from the same business after it was converted into partnership firms for assessment years 1959–60 and 1960–61.

Material facts relevant to Question No. 1 (the only question pressed) as recited in the opinion:

The assessee originally carried on two businesses as sole proprietor: Messrs. Kumandas Kishandas and Messrs. Kala Silk Factory, up to 23 October 1957. With effect from 24 October 1957 both businesses were converted into partnerships consisting of the assessee and his sons.
For assessment year 1957–58 the assessee (in his individual capacity) was assessed to a loss of Rs. 84,304 comprising: Rs. 634 business loss, Rs. 28,150 unabsorbed depreciation, and Rs. 55,520 unabsorbed development rebate. For assessment year 1958–59 the loss was Rs. 18,917 comprising Rs. 8,953 unabsorbed depreciation and Rs. 9,964 unabsorbed development rebate.
For assessment years 1959–60 and 1960–61 the assessee was assessed only as a partner and his assessed incomes included Rs. 64,714 (share for 1959–60) and Rs. 1,03,541 (share for 1960–61) as his share of profits from those firms.
The assessee sought to set off the earlier losses and unabsorbed allowances (1957–58 and 1958–59) against his share of profits for 1959–60 and 1960–61. The Income-tax Officer rejected the claim; the Appellate Assistant Commissioner dismissed the appeal; the Income-tax Appellate Tribunal allowed the carry forward only of the business loss of Rs. 634 and disallowed the unabsorbed depreciation and development rebate.
The Tribunal held a question of law arose, leaving Question No. 1 (entitlement to set off unabsorbed depreciation of Rs. 37,103) for determination by this Court. Question No. 2 (relating to unabsorbed development rebate) was not pressed by the assessee and therefore not answered.

Legal Issues Presented

Whether, on the facts and in the circumstances of the case, the assessee was entitled to a set-off in respect of the loss determined under section 10 of the Act including unabsorbed depreciation of Rs. 37,103 relating to the assessment years 1957–58 and 1958–59 and pertaining to the business carried on by him as sole proprietor against his share of income for assessment years 1959–60 and 1960–61 from the same business converted into partnership firms consisting of himself and his sons?
Whether, on the facts and in the circumstances of the case, the assessee was entitled to a set-off in respect of the loss determined under section 10 of the Act including therein unabsorbed development rebate of Rs. 65,484 relating to the assessment years 1957–58 and 1958–59 and pertaining to the business carried on by him as sole proprietor against his share of income for assessment years 1959–60 and 1960–61 from the same business converted into partnership firms consisting of himself and his sons?

Note: The opinion records that Question No. 2 was not pressed by the assessee and therefore the Court did not answer it.

Arguments of the Parties

Appellant's (Assessee's) Arguments

The assessee (represented by Mr. Mehta) contended that he could claim the unabsorbed depreciation in his individual assessment even though for the relevant assessment years he was a partner in the firms rather than the sole owner of the business.
It was not the assessee's case that he claimed the carry forward as a partner in a registered firm; rather he sought to make the claim in his assessment as an individual.
As an alternative or illustrative contention, Mr. Mehta suggested that under proviso (c) to clause (vi) it is conceivable that some unabsorbed depreciation could be carried forward and claimed even if in a subsequent year the assessee is not entitled to claim depreciation in the ordinary course (for example, where 99% of original cost has already been allowed and 1% remains unabsorbed). He argued by analogy that a carry-forward might arise despite the assessee not being able to claim depreciation in the partnership year.

Respondent's (Revenue's) Arguments

The opinion does not contain a detailed account of the respondent's legal arguments.

Table of Precedents Cited

Precedent	Rule or Principle Cited For	Application by the Court
Narayanappa v. Bhaskara Krishnappa, A.I.R. 1966 S.C. 1300	Interpreting provisions of the Partnership Act (sections 14, 15, 29, 32, 37, 38 and 48): property brought into or acquired by the partnership becomes partnership property; partners have an interest in the partnership property but no exclusive right to deal with specific partnership assets during the subsistence of the partnership; partner's entitlement is to his share of profits and, upon dissolution, a share in the value of assets after liabilities.	The Court applied the principle to conclude that once the sole-proprietor's plant and machinery were brought into the partnership, they ceased to be the assessee's personal property during the relevant accounting periods, and therefore the assessee could not claim depreciation (which requires that the asset be the property of the assessee) nor carry forward unabsorbed depreciation in his individual assessment for those partnership years.

Court's Reasoning and Analysis

The Court's analysis proceeds in a stepwise manner from statutory text to application of partnership law and the facts:

Interpretation of section 10(2)(vi): The Court emphasised that depreciation allowance under clause (vi) is available only where the asset (buildings, machinery, plant, furniture) is the property of the assessee and that the allowance is calculated by reference to the original cost to the assessee or, in prescribed cases, the written down value. Thus ownership by the assessee is a condition precedent to claiming depreciation under the main provision.
Role of provisos (b) and (c): Proviso (b) permits carrying forward and adding unabsorbed depreciation to the allowance for the following year when full effect cannot be given in a year due to insufficient profits. Proviso (c) limits aggregate depreciation allowances so they cannot exceed the original cost to the assessee. The Court read proviso (b) as implicit that unabsorbed depreciation must be added to the allowance for depreciation in a following year for the same assessee entitled to claim depreciation in that following year.
Effect of partnership conversion and precedent: Citing Narayanappa, the Court explained that when partnership is formed property brought into or acquired for the partnership becomes partnership property; the bringing-in partner ceases to have exclusive ownership and can only claim a share of profits. Consequently, during the relevant accounting periods (1959–60 and 1960–61) the plant and machinery were partnership assets and not the assessee's personal property.
Application of ownership requirement to the facts: Because the plant and machinery were no longer the assessee's property in the partnership years, the assessee could not claim depreciation under the main paragraph of clause (vi) for those years. Further, depreciation allowance is computed by reference to the original cost to the assessee; once the assets ceased to be his personal property, he no longer bore an original cost in relation to those partnership assets for the purposes of claiming depreciation during the partnership years.
Consequences for proviso (b): The Court reasoned that the benefit of carrying forward unabsorbed depreciation under proviso (b) is available only to assessees who, under the main paragraph, would be entitled to claim depreciation in the relevant following year. Since the assessee, as a partner, was not entitled to claim depreciation in his individual assessment for the partnership years, he cannot invoke proviso (b) to set off unabsorbed depreciation against his share of profits.
Addressing the illustrative submission on proviso (c): The Court acknowledged a hypothetical scenario under proviso (c) where some unabsorbed depreciation might be carried forward even if the assessee ordinarily could not claim depreciation in that subsequent year (for example, due to the aggregate allowance limit). However, the Court distinguished such hypothetical cases from the present case where the fundamental condition—ownership of the asset—ceased because of the conversion into partnership. Therefore, proviso (c)'s hypothetical does not assist the assessee here.
Conclusion of analysis: Both the language of the main paragraph of clause (vi) and proviso (b) led the Court to conclude the assessee was not entitled to set-off or allowance for unabsorbed depreciation of Rs. 37,103 for assessment years 1957–58 and 1958–59 against his share of income for assessment years 1959–60 and 1960–61.

Holding and Implications

Holding: The court answered Question No. 1 in the negative: the assessee is not entitled to set off the unabsorbed depreciation of Rs. 37,103 (relating to assessment years 1957–58 and 1958–59 when he was sole proprietor) against his share of income for assessment years 1959–60 and 1960–61 arising from the business after conversion into partnership.

Direct implications for the parties: The assessee's claim to set off the specified unabsorbed depreciation was rejected; the assessee was ordered to pay the costs of the revenue.

No broader novel precedent or new departure from existing law is stated in the opinion; the decision rests on applying the statutory provisions of section 10(2)(vi) (and its provisos) and the established principle from Narayanappa regarding the nature of partnership property and a partner's rights.

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Kishandas Dilberdas v. Commissioner Of Income-Tax, Bombay City Ii

Kantawala, C.J:— By this reference under section 66(1) of the Indian Income-tax Act, 1922 (hereinafter referred to as “the Act”), the following two questions are referred for our determination at the instance of the assessee:

“1. Whether, on the facts and in the circumstances of the case, the assessee was entitled to a set-off in respect of the loss determined under section 10 of the Act including unabsorbed depreciation of Rs. 37,103 relating to the assessment years 1957–58 and 1958–59 and pertaining to the business carried on by him as sole proprietor against his share of income for assessment years 1959–60 and 1960–61 from the same business converted into partnership firms, consisting of himself and his sons?

2. Whether, on the facts and in the circumstances of the case, the assessee was entitled to a set-off in respect of the loss determined under section 10 of the Act including therein unabsorbed development rebate of Rs. 65,484 relating to the assessment years 1957–58 and 1958–59 and pertaining to the business carried on by him as sole proprietor against his share of income for assessment years 1959–60 and 1960–61 from the same business converted into partnership firms, consisting of himself and his sons?”

2. So far as question No. 2 is concerned, it has not been pressed by the assessee and accordingly it is unnecessary for us to answer the same. We will briefly state the facts which are necessary for consideration of question No. 1 only. The assessee originally carried on business in the name and style of Messrs. Kumandas Kishandas and Messrs. Kala Silk Factory as the sole proprietor thereof. Such sole proprietary business was continued by him in that capacity up to October 23, 1957. Both these businesses were converted into partnerships with effect from October 24, 1957. For the assessment years 1957–58 and 1958–59 the assessee was, however, assessed in respect of these two businesses as the sole proprietor. For the assessment year 1957–58, the assessee suffered loss in the business and such loss was determined at Rs. 84,304 in his individual case as comprising of three items, (1) Rs. 634 as business loss, (2) Rs. 28,150 as unabsorbed depreciation, and (3) Rs. 55,520 as unabsorbed development rebate. For the assessment year 1958–59, he also suffered loss and such loss was determined at Rs. 18,917 as comprising of the following two items:

1. Rs. 8,953 being unabsorbed depreciation, and

2. Rs. 9,964 being unabsorbed development rebate.

3. For the assessment years 1959–60 and 1960–61 to which this reference relates, the assessee was only a partner in the two businesses and his total income for these two years as finally determined included the amount of Rs. 64,714 being his share of the profit from those firms for the assessment year 1959–60 and the amount of Rs. 1,03,541 being the share of his profit from those firms for the assessment year 1960–61.

4. For both these assessment years 1959–60 and 1960–61 the assessee claimed by way of set-off the total loss of Rs. 84,304 for the assessment year 1957–58 and the total loss of Rs. 18,917 for the assessment year 1958–59. The Income-tax Officer rejected the claim of the assessee. On an appeal by the assessee the Appellate Assistant Commissioner rejected the appeal. On a further appeal by the assessee before the Income-tax Appellate Tribunal, the Tribunal slightly modified the order and held that the assessee was entitled to carry forward and set off the business loss of Rs. 634, but he was not entitled to set off either the amount of unabsorbed depreciation or unabsorbed development rebate for the assessment years 1957–58 and 1958–59. As in the opinion of the Tribunal a question of law arose for decision, question No. 1 alone survives for our determination, which relates to the right to set off unabsorbed depreciation of Rs. 37,103 relating to the assessment years 1957–58 and 1958–59 and pertaining to the business carried on by him as sole proprietor against his share of income for assessment years 1959–60 and 1960–61 from the same business converted into partnership firms, consisting of himself and his sons.

5. Under section 10 of the Act tax is payable by an assessee under the head “profits or gains of business, profession or vocation” in respect of the profits or gains of business, profession or vocation carried on by him. What allowances are to be taken into account for computing such profits or gains are enumerated in sub-section (2) thereof. We are concerned with the relevant provision relating to depreciation and the appropriate part thereof relevant for the present purpose is as under:—

“10. (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…… to such percentage on the original cost thereof to the assessee as may in any case or class of cases be prescribed and in any other case, to such percentage on the written down value thereof as may in any case or class of cases be prescribed;….”

6. There are three provisos to this clause (vi) and we are concerned with the provisions of provisos (b) and (c) which are as under:

“Provided that—……

(b) where, in the assessment of the assessee or if the assessee is a registered firm, in the assessment of its partners, full effect cannot be given to any such allowance in any year not being a year which ended prior to the 1st day of April, 1939, 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, then, subject to the provisions of clause (b) of the proviso to sub-section (2) of section 24, 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 allowances in respect of depreciation made under this clause and clause (via) or under any Act repealed hereby, or, under the Indian Income-tax Act, 1886 (II of 1886), shall, in no case, exceed the original cost to the assessee of the buildings, machinery, plant or furniture, as the case may be;……”

7. A mere reading of this clause makes it clear that a right to claim depreciation is permitted if the conditions in the main paragraph of clause (vi) are fulfilled. While unabsorbed depreciation for the earlier years can be carried forward in subsequent years provided the condition laid down in proviso (b) are fulfilled, the provisions of proviso (c) make it clear that the aggregate amount of all allowances in respect of depreciation can in no event exceed the original cost to the assessee of the buildings, machinery, plant or furniture, as the case may be.

8. The main part of clause (vi) makes it amply clear that a claim for depreciation can only be made by an assessee in respect of machinery and plant used for the purpose of the business provided it is the property of the assessee. Even the percentage of depreciation which can be claimed depends upon the original cost of such machinery and plant to the assessee. If during the relevant year the plant and machinery cease to be the property of the assessee then no claim for depreciation can ever be made by such an assessee under the first part of clause (vi).

9. The claim for set-off is in respect of unabsorbed depreciation for the assessment years 1957–58 and 1958–59, when the assessee was the sole proprietor of both the businesses. With effect from October 24, 1957, a partnership was formed of the assessee and his sons and for the two assessment years in question, namely, 1959–60 and 1960–61, it is this firm which is assessed and so far as the assessee is concerned his share in the profits of these two businesses carried on as partnership has been determined as subject to tax. The question to be considered is whether at any time during the assessment year 1959–60 and/or 1960–61 the assessee could be regarded as the owner of the plant and machinery or whether such plant or machinery could be regarded as his property. Answer to this question is concluded by a decision of the Supreme Court in Narayanappa v. Bhaskara Krishnappa A.I.R 1966 S.C 1300.. In this case, the Supreme Court has, inter alia, taken the view that the provisions of sections 14, 15, 29, 32, 37, 38 and 48 of the Partnership Act, 1932, make it clear that whatever may be the character of the property which is brought in by the partners when the partnership is formed or which may be acquired in the course of the business of the partnership it becomes the property of the firm and what a partner is entitled to is his share of profits, if any, according to the partnership from the realisation of this property, and upon dissolution of the partnership to a share in the money representing the value of the property. No doubt, since a firm has no legal existence, the partnership property will vest in all the partners and in that sense every partner has an interest in the property of the partnership. During the subsistence of the partnership, however, no partner can deal with any portion of the property as his own. Nor can he assign his interest in a specific item of the partnership property to anyone. His right is to obtain such profits, if any, as fall to his share from time to time and upon the dissolution of the firm to a share in the assets of the firm which remain after satisfying the liabilities set out in clause (a) and sub-clauses (i), (ii) and (iii) of clause (b) of section 48. The whole concept of partnership is to embark upon a joint venture and for that purpose to bring in as capital money or even property including immovable property. Once that is done whatever is brought in would cease to be the exclusive property of the person who brought it in. It would be the trading asset of the partnership in which all the partners would have interest in proportion to their share in the joint venture of the business of partnership. The person who brought it in would, therefore, not be able to claim or exercise any exclusive right over any property which he has brought in, much less over any other partnership property. He would not be able to exercise his right even to the extent of his share in the business of the partnership.

10. This being the nature of the interest of a partner in the partnership assets, the assessee, even though he was at one time the sole proprietor of the plant and machinery used for the business, ceased to be such owner of the said plant and machinery after the partnership was formed and the plant and machinery became the property of the partnership. There is no controversy whatsoever that during the relevant accounting periods for the assessment years 1959–60 and 1960–61 all the plant and machinery formed part of the assets of the partnership and belonged to the partnership as such. Thus, during the relevant accounting periods for both the assessment years the plant and machinery was not the property of the assessee. Simply on that ground the allowance for depreciation permitted under the main paragraph of clause (vi) of sub-section (2) of section 10 will not be available to the assessee in respect of any of the two assessment years. Further, it should not be overlooked that the depreciation allowance permitted is a sum equivalent to a percentage on the original cost of the plant and machinery to the assessee himself. Once the plant and machinery cease to be the property of the assessee and became the assets of the partnership in which all partners have interest, it cannot be said that in respect of such plant and machinery the assessee bore any original cost as they ceased to be his personal property as owner. Thus, it will not be permissible to the assessee to claim any depreciation for any of the two assessment years in question for the plant and machinery which were used in the partnership business during the relevant accounting periods.

11. The question, however, arises whether notwithstanding the fact that during the relevant accounting periods for the two assessment years in question, the plant and machinery ceased to be the personal property of the assessee and became the property of the partnership in which he was interested as a partner, is he entitled to claim set-off in respect of unabsorbed depreciation of the plant and machinery during the period that he was the sole proprietor of the business? Such a claim can only be made if it is covered by the conditions laid down in proviso (b) to clause (vi) above referred to. In this proviso two types of persons are referred to who are entitled to claim a set-eff or allowance in respect of unabsorbed depreciation. Either it can be claimed in the assessment of the assessee or if the assessee is a registered firm it can be claimed in the assessment of its partners. It is not the contention of Mr. Mehta on behalf of the assessee that the assessee is making any claim as a partner of any registered firm. His submission is that such a claim in respect of unabsorbed depreciation can be made by the assessee in his assessment as such. Omitting unnecessary words from this proviso, it lays down:

“Where, in the assessment of the assessee full effect cannot be given to any such allowance in any year not being a year which ended prior to the 1st day of April, 1939, 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, then, subject to the provisions of clause (b) of the proviso to sub-section (2) of section 24, 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.”

12. The proviso also contains provisions for further carrying over of such unabsorbed depreciation. It is implicit in the language of this proviso that the unabsorbed depreciation has to be added to the amount of the allowance for depreciation for the following year. This condition, there fore, lays down that for the following year the assessee is entitled to claim depreciation. If he is not entitled to claim depreciation for the following year the question of adding unabsorbed depreciation of the earlier years does not arise at all. Undoubtedly, as a partner of the partnership during the two assessment years, the assessee has been subjected to tax in respect of his share of profits in the business of the partnership, but it is the partnership and partnership alone that will be entitled to claim depreciation during both the relevant assessment years and there is no question of the assessee being entitled to claim any depreciation allowance. The benefit of proviso (b) of carrying forward of unabsorbed depreciation is available to only those assessees who under the main paragraph of clause (vi) above referred to will be entitled to claim depreciation. Clearly, the assessee is not one of those types of persons and, therefore, he is not entitled to set off the unabsorbed depreciation for the two earlier years against his share of profits in the partnership business for the assessment years 1959–60 and 1960–61. A contention was, however, urged by Mr. Mehta that a claim to carry forward unabsorbed depreciation in respect of the earlier years can possibly arise even though during the year in question the assessee may not be entitled to claim any depreciation in respect of the plant and machinery used in the business. Such a contingency is hypothetically possible. The language of proviso (c) to this clause makes it clear that the aggregate of all allowances in respect of depreciation, shall, in no case, exceed the original cost to the assessee of the plant and machinery. It was suggested by way of illustration that if 99% of the original cost of plant and machinery was set off against the profits of the earlier year, but 1% of the original cost though permitted to be allowed as depreciation allowance could not be set off because there were insufficient profits; in such a case, even though in the subsequent year the assessee is not entitled to claim any depreciation as such, still he will be entitled to make a claim for allowance in respect of unabsorbed depreciation of the earlier years. Such a case, in our opinion, cannot be equated to a case where the plant and machinery in respect of which the depreciation is claimable has ceased to be the property of the assessee, during the assessment years in question. Under proviso (c) it is possible to imagine cases where even though for the assessment year in question the assessee may not have been entitled to any claim for depreciation, still he may claim allowance for unabsorbed depreciation of the earlier year, but such a situation arises not because ordinarily he is not entitled to make a claim for depreciation, but the right to claim depreciation gets exhausted once the aggregate of all allowances in respect of depreciation amounts to the original cost of plant and machinery. Such a situation which can possibly arise under proviso (c) cannot be of any assistance to the assessee in the present case. In our opinion, both having regard to the language of the main paragraph of clause (vi) as well as proviso (b) thereto, the assessee is not entitled to claim set-off or allowance for unabsorbed depreciation relating to the assessment years 1957–58 and 1958–59 against his share of income for the assessment years 1959–60 and 1960–61 from the business converted into the partnership firms.

13. Accordingly, our answer to question No. 1 referred to us is in the negative. The assessee shall pay the costs of the revenue.

Kishandas Dilberdas v. Commissioner Of Income-Tax, Bombay City Ii

Structured Summary of the Opinion (Kantawala, C.J.)

Factual and Procedural Background

Legal Issues Presented

Arguments of the Parties

Appellant's (Assessee's) Arguments

Respondent's (Revenue's) Arguments

Table of Precedents Cited

Court's Reasoning and Analysis

Holding and Implications

Kishandas Dilberdas v. Commissioner Of Income-Tax, Bombay City Ii

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