Income Tax Appellate Tribunal - Bangalore
Arenetch Medical Enterprises (P.) Ltd. vs Income-Tax Officer on 14 November, 1991
Equivalent citations: [1993]47ITD89(BANG)
ORDER
A.V. Balasubramanyam, Judicial Member 1 The ground that requires a decision in this appeal is about a claim for depreciation. The essential facts are in the way following.
2. There was a firm consisting of seven partners. One of them was a private limited company, by name 'Arenetch Medical Enterprises (P.) Ltd.', the assessee in appeal. The other six partners were qualified doctors in different branches of medicine. The firm owned an extensive land of over 17,110 sq. ft. with a building of 1650 sq. ft. thereon. The firm was running a nursing home.
3. The firm was dissolved on 13-12-1982. All the assets of the firm including the land and building mentioned above were taken over by the assessee, one of the partners. The land and building, in the books of the firm, were of the value of Rs. 5,22,818. They were revalued at Rs. l0 lakhs at the time of dissolution. Accordingly, the other six partners were paid. We were told that shares were issued to the other six partners and their nominees by the assessee in respect of the amounts payable to them.
4. In the assessment for 1984-85, the assessee claimed depreciation on the revalued cost. The ITO did not grant and he held that in view of Explanation 3 to Section 43(1) the assessee could not have substituted the revalued cost in place of the original, cost. This view was affirmed by the CIT (Appeals) in appeal.
5. Shri S. Venkatesan, arguing for the assessee before us, contended that Explanation 3 to Section 43(1) has no application inasmuch as there was no transfer of the asset in favour of the assessee. His point was that when the asset of the firm is allotted to the share of a partner at the time of dissolution there is no transfer of the asset in favour of the partner taking over the assets, strongly relying upon the decision of the Supreme Court in the case of Malabar Fisheries Co. v. CIT [1979] 120 ITR 49. The rejoinder of the learned departmental representative, Shri Satish Goyal, was that when the asset of the firm is taken over by the partner there is a change of ownership from one to another and this is sufficient to attract the application of Explanation 3 to Section 43(1). He sought to support this argument by the decision of the Andhra Pradesh High Court in the case of Kungundi Industrial Works (P.) Ltd. v. CIT [1965] 57 ITR 540.
6. The assets were revaluated for the purpose of dissolution and on the basis of the revaluated cost, adjustment of the shares had been made. It is on the re-adjusted figures the assessee acquired the impugned property to itself. There was no serious dispute in regard to revaluation. Even so, it cannot be denied that the assets of the firm could have been revalued at the time of dissolution and the revaluated cost was the basis for adjustment of the rights between the partners. The other partners have been paid according to revaluated cost. The Supreme Court has recognised the right of the partners to revalue at the time of dissolution in CIT v. Bankey Lal Vaidya [1971] 79 ITR 594. The Delhi High Court has in the case of Raj Narain Agarwala v. CIT [1970] 75 ITR 1 pointed out that the actual cost for the company (assessee) is the revaluated figure for the purposes of Section 43(1).
7. Explanation 3 provides that the Assessing Officer, if satisfied that the main purpose of transfer of such asset, directly or indirectly, to the assessee was to reduce the liability to income-tax, then the actual cost may be determined having regard to all circumstances of the case. Shri Venkatesan urged that this Explanation could be applied only in cases where the assessee acquired the property as a consequence of transfer. The question is whether there was a transfer in favour of the assessee which has taken over the asset to its share at the time of dissolution of the firm.
8. CIT v. Dewas Cine Corporation [1968] 68 ITR 240 (SC) is an illustrative case. Two persons owned cinema theatre each and they formed a partnership to carry on the business as exhibitors of cinematograph films. Theatres were brought into the books of the partnership as its assets. There was a dissolution of the firm and the two partners agreed that the theatres should be returned to them as they are the original owners. The Supreme Court held:
. . . that on the dissolution of the partnership, each theatre had to be deemed to be returned to the original owner in satisfaction partially or wholly of his claim to a share in the residue of the assets after discharging the debts and other obligations. But thereby the theatres were not in law sold by the partnership to the individual partners in consideration of their respective shares in the residue, and, therefore, the amount of Rs. 44,380 could not be included in the total income of the partnership under the second proviso to Section 10(2)(vii).
The expressions 'sale' and 'sold' are not defined in the Income-tax Act; those expressions are used in Section 10(2)(vii) in their ordinary meaning. 'Sale', according to its ordinary meaning, is a transfer of property for a price and adjustment of the rights of the partners in a dissolved firm by allotment of its assets is not a transfer, nor is it for a price.
The above ruling was given in the context of depreciation allowance to be debited in the computation of profits and gains under Section 10(2)(vii) of Income-tax Act, 1922 which corresponds to Section 41(2) of 1961 Act.
9. In Bankey Lal Vaidya's case (supra) this question was again considered by the Supreme Court. A firm of two partners was dissolved. The assets were valued and one partner received from the other partner value of his share in the assets. It was held that it was an arrangement between the partners of the firm amounting to distribution of assets of the firm on dissolution. The Court pointed out that there was no sale or exchange or transfer of one partner's share in the capital assets.
10. In Malabar Fisheries Co.'s case (supra), the Supreme Court affirmed the view taken earlier in the case of Dewas Cine Corpn. (supra) and Bankey Lal Vaidya's case (supra). In the case of Malabar Fisheries Co. (supra), a firm was dissolved and the distribution of the assets between the partners was made. The firm's business was taken over by one of the partners and the remaining were paid a certain sum in lieu of his share in the assets of the firm. The Supreme Court held:
... Dissolution of a firm must, in point of time, be anterior to the actual distribution, division or allotment of the assets that takes place after making accounts and discharging the debts and liabilities due by the firm. Upon dissolution the firm ceases to exist; then follows the making up of accounts, then the discharge of debts and liabilities and thereupon distribution, division or allotment of assets takes place inter se between the erstwhile partners by way of mutual adjustment of rights between them. The distribution, division or allotment of assets to the erstwhile partners, is not done by the dissolved firm. In this sense there is no transfer of assets by the assessee (dissolved firm) to any person. . . .
The above observations were in the context of withdrawal of development rebate under Section 34(3)(b) and their Lordships explained the connotation of the word "transfer" found in that provision in the background of the definition in Section 2(47) and the ratio equally applies to the word "transfer" found in Explanation 3 to Section 43(1).
11. The case of Kungundi Industrial Works (P.) Ltd. (supra) is demonstrably distinguishable on facts. A firm of partners had been converted into private limited company and the shareholders of the company were, old partners and their nominees and shares in the company were allotted in the same proportion as shares held by the partners in the firm. The Andhra Pradesh High Court held that there was change over or transfer of the assets for the purpose of proviso to Section 10(5)(a), Income-tax Act, 1922. In this case, the property belonging to the partners of the firm became the property of the private limited company. The company was not a partner of the firm. It was a new company which was started and the assets of the firm were made over to that company. In this context, the High Court held, there was a transfer. Furthermore, the dispute in the case was not whether there was a transfer or no transfer, but whether the main purpose of the change over was to achieve reduction of liability to income-tax by claiming depreciation with reference to enhanced cost. In other words, it was not in dispute that there was a transfer and the controversy was in regard to the other aspect which is mentioned above.
12. The authorities of the Supreme Court to which we have made a detailed reference clearly hold the field to conclude that when the assets of the firm are taken over by one of the partners at the time of dissolution, there is no transfer. Consequently, Explanation 3 to Section 43(1) is inapplicable. The assessee is entitled to claim depreciation on the revaluated figure. We accordingly hold on the ground in favour of the assessee.
13. The appeal is allowed.