Full Judgment Text
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PETITIONER:
D. S. BIST & SONS, NAINITAL
Vs.
RESPONDENT:
COMMISSIONER OF INCOME TAX, DELHI CENTRAL, NEWDELHI
DATE OF JUDGMENT03/11/1978
BENCH:
PATHAK, R.S.
BENCH:
PATHAK, R.S.
BHAGWATI, P.N.
TULZAPURKAR, V.D.
CITATION:
1979 AIR 379 1979 SCR (2) 224
1979 SCC (3) 613
ACT:
Income Tax Act 1922. 3, 10(2)(vii)-Firm whether a
separate taxable entity-Whether same as partners-Balancing
charge-Whether depreciation allowed to a disrupted HUF, to
be taken into consideration in determining the balancing
charge of a firm which takes over the HUF business as a
going concern.
HEADNOTE:
A Hindu Undivided Family consisting of Thakur Dan Singh
and his son, Thakur Mohan Singh was carrying on business as
forest contractors. There was a total disruption of the
family in March, 1956. On that day, the written down value
of three trucks owned by the Hindu Undivided Family was nil
on account of depreciation allowance granted under the
Income Tax Act, 1922. On the same day when the joint family
was disrupted, Thakur Dan Singh and his son Thakur Mohan
Singh constituted a partnership firm. The business of Hindu
Undivided Family was taken over as a running concern by the
firm. The firm sold the three trucks for Rs. 24,252/-. The
Income Tax officer held that the entire sale proceeds should
be deemed to be profits of the firm by virtue of the second
proviso to s. 10(2)(vii) of the Income Tax Act, 1922 and 1:
he included that amount in the total income of the
appellant. The decision of the Income Tax officer was
confirmed by the Appellate Assistant Commissioner, the
Income Tax Appellate Tribunal and the High Court. The High
Court took the view that inasmuch as the partners of the
appellants were the same individuals who were the members of
the Hindu Undivided Family and as the business was taken
over as a running concern by the appellants from the family,
there was merely a change in the style and nature of the
Hindu Undivided Family. According to the High Court, the
original cost of the trucks to the appellant would be the
same as it was to the Hindu Undivided Family.
Allowing the appeal by the assessee,
^
HELD: The second proviso to section 10(2)(vii) seeks to
recover back from the assessee the benefit allowed to him by
way of depreciation allowance earlier. It does so by
imposing a balancing charge on the excess of the sale price
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over the written down value to the extent of the total
depreciation allowance granted to the assessee in the past.
In the present case, the appellant could not have been
allowed any depreciation allowance for the reason that from
the outset when the three trucks became his property the
written down value was nil. No question of imposing a
balancing charge, therefore, can arise in this case. It is
immaterial that the business was taken over as a running
concern. It is also immaterial that the partners of the firm
are the same as the members of the Hindu Undivided Family.
Under s.2 of the Income Tax Act, a firm is a distinct
assessable entity. [226G-H, 227A, B-C]
225
Commissioner of Income Tax, Bengal v. A. W. Figgics &
Co. and Ors., [1953] 24 ITR 405 S.C.I. Raja Bejoy Singh
Dudhuria v. Commissioner of Income Tax, Bengal, [1933] 1 ITR
135 (P.C.); relied upon.
When depreciation allowance was allowed to the Hindu
Undivided Family in its assessment proceedings, it was a
step taken in determining the taxable Income of the family.
The depreciation allowance allowed to the family cannot be
regarded as depreciation allowed to the appellant firm.
[227GH, 228A]
JUDGMENT:
CIVIL APPELLATE JURISDICTION: Civil Appeal No. 1727 of
1972.
(Appeal from the Judgment and order dt. 8.12.71 of the
Delhi High Court in Income Tax Reference No. 30/67).
T. A. Ramachandran for the appellant.
B. B. Ahuja and Miss A. Subhashini for the respondent.
The Judgment of the Court was delivered by
PATHAK, J.-This appeal by special leave is directed
against the judgment of the High Court of Delhi disposing of
a reference made to its by the Income Tax Appellate Tribunal
on the following question:-
"Whether on the facts and in the circumstances of
the case the sum of Rs. 24,252/- is an item taxable in
the previous year under the Provisions of section 10(2)
(vii),
The appellant is a partnership firm carrying on business as
forest contractors. The partners are Thakur Dan Singh and
his son, Thakur Mohan Singh. The appeal relates to the
assessment year 1958-59, for which the previous year is the
financial year ending March 31, 1958. The business was
originally carried on by a Hindu undivided family consisting
of the aforesaid father and son. There was a total
disruption of the family on March 22, 1956 and on the same
day the separated members of the family constituted a
partnership firm under the name and style of Messrs. D. S.
Bist & Sons. The business was taken over as a running
concern by the firm. At the time when the business was owned
by the family, it included three trucks. On account of
depreciation allowed in earlier years the written down value
of two trucks came to nil in the assessment year 1952-53. As
regards the third truck, according to what is stated in the
judgment of the High Court the written down value stood
reduced to nil by the date of disruption of the Hindu
undivided family. During the previous year ending March 31,
1958, relevant to the assessment year 1958-59, two trucks
were sold for a total of Rs. 12,000/- while the third truck
was sold for Rs. 12,252/-.
During the assessment proceeding for the assessment
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year 1958-59, the Income Tax Officer held that the entire
sum of Rs. 24,252/-, representing the sale proceeds of the
three trucks, should be deemed to be
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Profits of the previous year ending March 31, 1958 by virtue
of the second proviso to section 10(2) (vii) of the Indian
Income Tax Act, 1922, and he included that amount in the
total income of the appellant. Before the Appellate
Assistant Commissioner the appellant contended’ that as no
depreciation was allowed to the appellant in respect of the
three trucks no question arose of computing any profit in
its hands, but the contention was rejected. The appellant
was unsuccessful before the Income Tax Appellate Tribunal
also. At the instance of the appellant, a reference was made
to the High Court of Delhi. The High Court took the view
that inasmuch as the partners of the appellant were the same
individuals who were members of the Hindu undivided family
and as the business was taken over as a running concern by
the appellant from the family "there was merely a change in
the style and nature of the Hindu undivided family on March
22, 1956". In the opinion of the High Court the original
cost of the trucks to the appellant would be the same as it
was to the Hindu undivided family and it rejected the
contention that the original cost of the three trucks in the
hands of the appellant must be taken as nil. In the result,
the High Court affirmed’ that the sum of Rs. 24,252/- was
taxable in the hands of the appellant by virtue of the
second proviso to section 10(2) (vii).
It appears from the judgment of the High Court that the
written down value of the three trucks exhausted while they
were still the assets of the Hindu undivided family
business, the written down value of two trucks having been
exhausted in the assessment year 1952-53 and that of the
third truck having been exhausted in the assessment year
1956-57. Accordingly, when the business was taken over by
the appellant the written down value of the three trucks was
nil. In defining the expression "written down value" section
10(5) (b) declares that in the case of assets acquired
before the previous year the written down value means ‘ the
actual cost of the assessee less all depreciation actually
allowed to him under the Act." It is urged on behalf of the
appellant that the actual cost to the appellant of the three
trucks was nil inasmuch as the written down value had
already been exhausted when the business was taken over by
the appellant. It is urged that as no depreciation could
possibly have been allowed to the appellant, no question
arises of applying the second proviso to section 10(2)
(vii). Now, in enacting the second proviso to section 10(2)
(vii) the Legislature sought to recover back from the
assessee the benefit allowed to him by way of depreciation
allowance earlier, and it did so by imposing a balancing
charge on the excess of the sale price over the written down
value to the extent of the total depreciation allowance
granted to the assessee in the past. In the present case,
the appellant could not have been allowed any depre
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ciation allowance for the reason that from the outset when
the three trucks became its property, the written down value
was nil. No question can arise of imposing balancing charge
under the second proviso to section 10(2)(vii).
It is contended by the Revenue that the business was
taken over as a running concern by the appellant and"
therefore, account should be taken of the depreciation
allowed in the hands of the Hindu undivided family. In our
opinion, it is immaterial that the business was taken over
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as a running concern. Where a business is taken over as a
running concern by an assessee, the cost to it of the assets
must ordinarily turn on the value of the assets as on the
date of acquisition. There is no material before us
evidencing an intention to the contrary. It cannot be
disputed that the actual cost to the appellant of the three
trucks must be regarded as nil, and that being so no
depreciation can be said to have been ever actually allowed
to the appellant.
It is pointed out by the Revenue that the partners of
the appellant are the same two individuals who constituted
the Hindu undivided family, and reliance has been placed on
the observation of the High Court that in the constitution
of the firm "there was merely a change in the style and
nature of the Hindu undivided family". Now we must remember
that we are dealing with a case under the Income Tax Act. We
are concerned with provisions for the computation of income
of an assessee for the purpose of determining its income
tax liability. It may be, as is quite often said, that a
firm is merely a compendious description of the individuals
who carry on the partnership business. But under the Income
Tax Act, a firm is a distinct assessable entity. Section 3
of the Indian Income Tax Act, 1922 treats it as such, and
the entire process of computation of the income of a firm
proceeds on the basis that it is a distinct assessable
entity. In that respect it is distinct even from its
partners. Commissioner of Income Tax, West Bengal v. A. W.
Figgies and Company and others(1) As an assessable entity it
is also distinct from a Hindu undivided family, which in
itself is regarded as a separate unit of assessment under
Section 3. Raja Bejoy Singh Dudhuria v. Commissioner of
Income Tax, Bengal(D). For the purposes of the question
before us it recks little that the very individuals who
constituted the Hindu undivided family now constitute the
appellant firm. When depreciation allowance was allowed to
the Hindu undivided family in its assessment proceedings, it
was a step taken in determining the taxable income of the
family. The depreciation allowed to the family
(1) (1953) 24 I.T.R. 405 (S.C.)
(2) (1933) 1 I.T.R. 135 (P.C.)
228
cannot be regarded as depreciation allowed to the appellant.
We must ignore entirely the circumstance that depreciation
has been allowed to the Hindu undivided family in the past.
On these considerations it is not possible to say that
the second proviso to section 10(2) (vii) is attracted.
Accordingly, we hold that the sum of Rs. 24,252/- is
not taxable in the hands of the appellant for the assessment
year 1957-58 by virtue of the second proviso to section
10(2) (vii) of the Indian Income Tax Act, 1922" and we
answer the question referred in favour of the appellant and
against the Revenue.
It was strenuously contended on behalf; of the Revenue
that the sum of Rs. 24252/- should be considered as capital
gains under section 12B of the Act, and that it could be
brought to tax under that head. There was some debate before
us whether that point can be regarded as an aspect of the
question specifically referred by the Tribunal for the
opinion of the High Court. We consider it unnecessary to
enter into the matter, because it is open to the Tribunal to
consider whether the assessment should be confirmed on any
other ground, now that the case will be before it again for
disposal conformably to this judgment. The appellant is
entitled to its costs of this appeal.
P.H.P. Appeal allowed. & Case remitted.
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