Income Tax Appellate Tribunal - Jaipur
B.D. Dal And Oil Industries vs Income-Tax Officer on 5 February, 1986
Equivalent citations: [1986]16ITD122(JP)
ORDER
H.S. Ahluwalia, Judicial Member
1. The dispute in these appeals relates to the assessee's claim for depreciation. During both the relevant accounting years, the assessee-firm was dissolved and reconstituted because in the first year Shri Bhanwar La1 expired on 5-6-1975 and in the second year Shri Dhulilal died on 18-3-1976. Therefore, two assessments had to be made in case of the assessee for both the years in question under same directions of the Tribunal. Appeal effect was given to the order of the Tribunal by the ITO but single depreciation was only allowed for each of the two years in question. The assessee thereafter put in applications under Section 154 of the Income-tax Act, 1961 ('the Act') that the depreciation should be separately allowed at full rates for both the periods during each of the years in question. The same were rejected by the ITO. The appeals filed by the assessee before the Commissioner (Appeals) also failed. The assessee has come up in second appeal before us.
2. We have heard the representatives of the parties at length in both the appeals. The question whether one assessment or two assessments should be made in cases where there has been a change in the constitution of the firm by death of any partner or otherwise is by itself a highly complicated question over which there has been divergence of opinion between the various High Courts in the country. In fact under Section 187(2) of the Act even when there is a complete change in the constitution, one assessment has been contemplated if one or more of the partners of the old firm continued to remain as partner or partners after the change. Whether there is one assessment or two assessments it was probably not intended that the two firms would be entitled to separate depreciation for the entire years because for all practical purposes the business continued to be carried on by the firm of the same name and in the same manner as before. The change was only qua the partners to whom the share of incomes were to be respectively allocated. There is no decided case on the subject from which we conclude that probably no assessee has claimed depreciation in the manner in which it has been done by the present assessee now. As has been rightly observed by the Commissioner (Appeals) by referring to the case of CIT v. National Taj Traders [1980] 121 ITR 535 (SC), the interpretation of the provisions of any Act has to be with reference to the scheme and it would be an unrealistic interpretation if depreciation for four years is permitted to be allowed to a practically same assessee in a short period of two years. With these remarks, we dismiss both the appeals.
A. Kalyanasundharam, Accountant Member
1. I have had the benefit of going through the order passed by my learned colleague and senior Member though purely from the point of view of logic what he says appeals but on the review with the provisions contained in the Act I find myself unable to agree with his finding. The fact remains that one firm was dissolved and another firm succeeded the same. On these facts, the provisions contained in Section 188 of the Act would be applicable. Under no circumstances, provisions of Section 187(2) could be said to be applicable even in a case where the firm is dissolved. This is so as dissolution means coming to an end and it cannot be treated to be a change in the constitution. The Legislatures have considered this item as to whether on the death of a partner the firm comes to an end or not even in circumstances where the remaining partners continue the business with either an addition of a partner or not. They have provided by means of proviso to Section 187(2), which is effective from 1-4-1975 and the amendment was brought in by Taxation Laws (Amendment) Act, 1975. The amendment that is brought in rules is that 'provided that anything contained in clause (a) shall apply to a case where the firm is dissolved on the death of any of.its partners'. Clause 2(a) says that if one or more partners ceased to be partners or one or more new partners are admitted and if one or more partners continue before the change or continue after the change then it is a case of change in constitution.
2. Apart from this, once it is held that the earlier firm is dissolved then the sequence is that there is settlement amongst partners of their mutual rights and liabilities. On settlement, the partners or any one of the partners may receive the various assets of the firm. Such receipts by the partner having been clearly held to be not a transfer then the meaning of Section 47(ii) of the Act which talks of distribution of capital assets on dissolution of the firm (sic). Therefore, the first firm till the date of death of a partner is entitled to depreciation as is allowable under the Act. As regards the second firm is concerned, it is an absolutely a distinct and separate from the earlier dissolved firm and has come into being by means of succession. Therefore, whatever are the assets as on the starting day of the firm the second firm is entitled to depreciation under the Act, which must be allowed. I found that the Madras Bench of the Tribunal in the case of ITO v. Erode Service [1983] 3 ITD 755 had considered the identical issue and giving similar reasons have held that on the dissolution of a firm there is no element of sale or discarding action by the earlier firm and, therefore, the first firm cannot be denied depreciation. Since the second firm has come into being and is separate and distinct entity from the earlier one, depreciation is allowable. In another case before Chandigarh Bench in Sita Ram Saluja v. ITO [1982] 1 ITD 754 a firm was dissolved on the death of a partner and the only remaining partner continued the business as a sole proprietor the question was that since the firm was allowed depreciation fully till the date of death of a partner the assessee-proprietor was not entitled for further depreciation. It was held by the Tribunal that allowing of depreciation in the hands of the proprietor does not mean that the depreciation has been allowed twice on the same assets for the same assessment year as there are two separate assessees involved. I am, therefore, unable to accept the reasoning given by my learned brother that depreciation is being allowed twice for the same assessment year. I am, therefore, of the view that the claim of the assessee is fully justified and I allow the appeals of the assessee.
ORDER UNDER SECTION 255(4) OF THE INCOME-TAX ACT, 1961 As there has been a difference of opinion between us the following point of difference is referred for opinion of the Third Member under Section 255(4) of the Act :
Whether, on the facts and in the circumstances of the case, the assessee is entitled to separate depreciations twice over in each of the accounting years in question. ORDER G. Krishnamurthy, Senior Vice President
1. The following difference of opinion between the learned Members of the Jaipur Bench in the above case was referred to me by the President as Third Member for my opinion under Section 255(4) :
Whether, on the facts and in the circumstances of the case, the assessee is entitled to separate depreciations twice over in each of the accounting years in question.
2. The assessee is a firm carrying on business at Kota. During the assessment year 1976-77 one of the partners of the assessee-firm Bhanwar Lal expired on 5-6-1975. A question arose whether on the death of the partner one assessment has to be made treating the death of the partner as only a change in the constitution of the firm within the meaning of Section 187 or two assessments should be made treating the death of the partner as a total dissolution of the partnership resulting in succession whereunder two assessments were to be made. When this matter reached the Tribunal, the Tribunal held that consequent on the death of the partner the firm dissolved and, therefore, two assessments have to be made, one for the period from the commencement of the year till the date of the death and the other on the reconstituted firm from the date it was reconstituted to the end of its accounting year. The ITO giving effect to the order of the Tribunal made two assessments but he has allowed depreciation only for the full year but apportioned it for the two periods on proportionate basis. In other words, he did not allow depreciation for the first period when the old firm was in existence and again on the new firm after it was constituted after dissolution. The assessee made an application under Section 154 to the ITO to allow depreciation for each of the periods independently and not proportionately as was done by him submitting that that was not the purport of the order of the Tribunal when it directed that two separate assessments should be made. The ITO rejected this claim. On appeal, the Commissioner (Appeals) agreed with him. He held that it would be unrealistic interpretation if depreciation is to be allowed for each of the periods separately as if each period is a full year. There was then an appeal to the Tribunal.
3. The learned Judicial Member took the view that the question whether one assessment should be made or two assessments should be made in cases where there had been a change in the constitution of the firm by death of any partner or otherwise was a highly complicated question, that under Section 187(2) even when there was a complete change in the constitution only one assessment was completed and whether it was one assessment or two assessments, it was probably not intended that the two firms would be entitled to separate depreciation for the entire year because for all practical purposes the business continued to be carried on by the firm in the same name and in the same manner. He held that the change was only qua the partners to whom the shares of income were to be respectively allocated. He, therefore, agreed with the view expressed by the Commissioner (Appeals) and dismissed the assessee's appeals. But the learned Accountant Member held that once there was a dissolution of a firm, the earlier firm and the new firm became two separate and distinct firms. There was settlement of accounts amongst the partners of their mutual rights and liabilities, and taking over assets for a price. Therefore, each firm must be entitled to depreciation under the Act if it satisfied the conditions of Section 32 of the Act and the relevant rules made thereunder. He fortified his conclusion by relying upon a decision of the Madras Bench of the Tribunal in the case of Erode Service (supra) and another decision of the Chandigarh Bench of the Tribunal in the case of Sita Ram Saluja {supra). Thus, the difference of opinion arose and was referred to me by the President.
4. I have heard the learned departmental representative and considered the written arguments submitted on behalf of the assessee. I am unable to agree with the view expressed by the learned Judicial Member because once it is held that a firm got dissolved on the death of a partner, that firm becomes extinct in law and a firm separate from another reconstituted firm (sic). Each firm is, therefore, a separate entity under the Income-tax law and each is entitled to the claim of depreciation provided the requirements of Section 32 are satisfied. What is to be seen is, therefore, not what Section 187 or 188 provided in this manner because on the manner and mode of assessment no guidance is available in those sections except that Section 188 says that in case of succession separate assessments shall be made on the predecessor firm and the successor firm in accordance with the provisions of Section 170 of the Act. Section 188, thus, recognises the existence of two firms-a predecessor firm and a successor firm. They are not to be treated as one and the same. Each has got its own rights and liabilities and the income of each has to be determined by applying the provisions of the Act relating to computation of income. In Section 188 there is reference to Section 170 and Section 170 provides that where a person carrying on any business or profession referred to as predecessor has been succeeded by any other person referred to as the successor, who continues to carry on that business or profession, the predecessor shall be assessed in respect of the income of the. previous year in which the succession took place up to the date of succession. The successor shall be assessed in respect of the income of the previous year after the date of succession. This provision will make it clear that the predecessor has to be assessed separately as well as the successor. Allowance of depreciation for both predecessor and successor would have to be allowed separately treating them as separate and distinct and not as one. If as held by the revenue that only one depreciation has to be allowed for the entire year, that would mean that both the predecessor and successor were treated as one and the same. This is against the provisions of Section 188 and Section 170. Section 32 provides that depreciation shall be allowed in respect of buildings, machinery, plant or furniture owned by the assessee and used for the purpose of the business or profession subject to the conditions laid down therein. If the assessee is owner of a machinery and if such machinery was used for the purpose of the business or profession, depreciation has to be allowed if the other conditions relating thereto were satisfied. The predecessor firm in this case is the owner of the machinery up to the date of dissolution. Thereafter it ceased to be its owner. The successor firm became its owner subsequent to dissolution. Therefore, the successor firm is entitled to claim depreciation during the period it used the assets and the predecessor firm is entitled to claim depreciation during the period it owned the assets and used for the purpose of the business. It is not in dispute that the predecessor firm was not the owner of the assets up to the date of dissolution nor used it for the purpose of the business, though that was the contention raised before me by the learned departmental representative with which I am unable to agree. Similarly it was not in dispute that the successor firm was the owner of the assets or used it in the business. Therefore, the conditions in Section 32 are satisfied and both the assessees are entitled to claim depreciation separately. The question of the same assets getting depreciation twice and that was not the intention of the Legislature do not get the support from the sections of the Act. It is not the question of probabilising the intention of the Legislature. The question is what did the Legislature provide for. This is also the view taken by the Madras Bench of the Tribunal as well as by the Chandigarh Bench and I am in respectful agreement with those views.
5. For these reasons I hold that the view taken by the learned Accountant Member is justified and correct. The matter will now go before the regular Bench for the disposal of the appeals in accordance with the opinion of the majority.