Madras High Court
Commissioner Of Income-Tax vs Sekar Offset Press on 6 September, 1994
Equivalent citations: [1995]214ITR516(MAD)
JUDGMENT Gupta, J.
1. These two references, at the instance of the Revenue, refer the following questions of law of the opinion of this court:
Tax Case No. 242 of 1981:
"Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was justified in holding that the market value of the assets taken over by the assessee-firm, viz., Rs. 5,59,730, should be taken into consideration for the purpose of allowing depreciation as against the written down value taken by the Income-tax Officer in the assessment order passed for the assessment year 1976-77?"
Tax Case No. 322 of 1981:
"Whether on the facts and in the circumstances of the case, the Appellate Tribunal was correct in law in holding that the market value of the assets, viz., Rs. 5,59,730, should be taken into account to allow depreciation instead of the book value, viz., Rs. 2,79,871, adopted by the Income-tax Officer?"
2. The questions relate to the assessment years 1975-76 and 1976-77 and for that purpose, two references have been made.
3. The facts necessary for the decision of the questions are that the assessee was a registered partnership-firm consisting of four partners. One M.K.A. Muthusami Nadar was a partner along with his sons in the firm. On the death of the said Muthusami Nadar, the firm underwent changes in the constitution and was dissolved on May 31, 1973. The dispute between the partners being intense, could not be amicably settled, but it was done with the help of three leading persons of Sivakasi. In consequence of the understanding between the parties, the firm's assets were revalued at Rs. 11,50,609, though the written down value was only Rs. 5,42,564. After so revaluing, the assets were divided among the partners. Some of the assets were given to the present assessee and their market value was Rs. 5,59,730. The assessee-firm had shown this market value of assets in their books and has claimed deduction on that basis. The Income-tax Officer, however, disallowed this claim and granted depreciation on the basis of the written down value, i.e., Rs. 2,79,871, relying upon Explanation 3 to section 43(1) of the Income-tax Act, 1961 (hereinafter referred to as "the Act"). The assessee preferred an appeal against the order of the Income-tax Officer. The assessee preferred an appeal against the order of the Income-tax Officer. He came to the conclusion that Explanation 3 to section 43(1) of the Act was not attracted in view of the facts and circumstances of the case and the market value of the assets alone should be taken for allowing depreciation. The Department preferred an appeal against the said order. The Appellate Tribunal was of the view that the facts and circumstances of the case clearly indicate that there was a quarrel among the brothers after the death of their father, which necessitated the dissolution of the partnership an distribution of the assets. The Tribunal was, therefore, of the view that the transfer of assets was not for the purpose of reducing the liability to income-tax. In this view of the manner, the decision of the Appellate Assistant Commissioner was affirmed. The Department thereafter asked for a reference, which has been granted and the matter is before this court.
4. Explanation 3 to section 43(1) of the Act would be attracted only in cases where, before the date of acquisition by the assessee, the assets were at any time used by any other person for the purpose of his business and the Income-tax Officer is satisfied that the main purpose of the transfer of such assets, directly or indirectly to the assessee, was for the reduction of the liability to income-tax. There is no other circumstance, under which this Explanation can be invoked. The first requirement that the assets would be used by any other person is satisfied in the instant case, inasmuch as the assets were of a dissolved firm, which was paying income-tax. The second and the main requirement that the transfer should be mainly for reducing the liability is not at all established in the instant case. The facts of the case, however, indicate that after the death of the father, the sons could not carry on business together and happily. There were serious differences among them which needed the help of three other important persons of locality for an amicable settlement. It is the admitted case that at the intervention of three persons of the locality, the firm was dissolved and the assets distributed. It is true that while distributing the assets, they were revalued, based on their existing market value. But that by itself would not lead to the conclusion that it was so done for reducing the tax liability. Indeed, the question of liability to pay income-tax at the time of transfer would not have been in the mind of any one at all. Be that as it may, the Income-tax Officer is obliged to record his satisfaction that the transfer of the assets was for reducing the liability to pay income-tax. But, in this case, the Income-tax Officer has not recorded any such satisfaction. Under the circumstances, it was open to the appellate authorities to consider the matter to ascertain whether Explanation 3 to section 43(1) was attracted. Considering the facts and circumstances of the case, the Department could not hope to satisfy the appellate authorities that the transfer was for reducing the tax liability. The facts, as they are, could not lead to the said conclusion. Under the circumstances, Explanation 3 to section 43(1) was clearly not attracted. There is, therefore, no illegality in the finding of the Tribunal.
5. In view of the discussion aforesaid, the questions are answered in the affirmative and against the Department. No costs. Counsel's fee Rs. 1,000 (one set).