Full Judgment Text
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PETITIONER:
SETH BANARSI DASS GUPTA & ANR. ETC.
Vs.
RESPONDENT:
COMMISSIONER OF INCOME-TAX, DELHI.
DATE OF JUDGMENT29/04/1987
BENCH:
MISRA RANGNATH
BENCH:
MISRA RANGNATH
OZA, G.L. (J)
CITATION:
1987 AIR 1664 1987 SCR (3) 101
1987 SCC (3) 441 JT 1987 (2) 584
1987 SCALE (1)949
ACT:
Income-tax Act, 1922: s. 10(2)(vi), s. 24---Deprecia-
tion--Benefit of--Admissible only where assessee full owner
of property--Assessee alone entitled to maintain
claim--Carried forward loss--Claim for set off--When admis-
sible--Assessee surrendering lease of partnership share for
annuity--Nature of receipts--Whether profit for the interest
held in business.
HEADNOTE:
’A’, a partner in a firm running a sugar factory, insti-
tuted a suit for its dissolution in 1948 and a Receiver was
appointed by the Court. The arrangement arrived at for the
factory was that it would be leased out for a term of five
years to the highest bidder from amongst the six partners.
In July, 1948, ’A’ transferred his 1/6th share to the appel-
lant for Rs.4,50,000. The appellant had taken a loan against
shares of that value held by him in another sugar mill for
purchase of the share. In May, 1950, another partner ’B’
leased out his 1/6th share to the appellant on an annual
payment of Rs.50,000. In July, 1950 yet another partner ’C’
leased out his 1/6th share to the appellant for a similar
sum. In 1951 ’C’ sued for cancellation of the lease. In
April, 1954 the dispute was compromised and the lease termi-
nated. ’C’ undertook to pay the appellant at the rate of Rs.
16,000 for the first three years and at the rate of Rs.
I0,000 for the subsequent two years. ’B’s 1/6th share was
also returned on mutual arrangement and he agreed to pay the
appellant a sum of Rs.39,000 and odd annually.
During the assessment proceedings for the year 1953-54
the nature of these receipts came to be considered. The
assessee-appellant maintained that these were in the nature
of capital receipts in lieu of the lease-hold interest. The
assessee also claimed depreciation on the 1/6th share in the
sugar mill that he had acquired from ’A’. Similar questions
also arose for the assessment years 1954-55 and 1955-56. The
assessee had suffered a loss in the sugar business in the
assessment year 1953-54, a part of which remained unab-
sorbed, and claimed set off of that unabsorbed loss against
the share of the rent received by him from the Receiver in
the assessment year 1954-55. Since the sugar mill was being
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assessed as an association of persons, for the assessment
year 1960-61
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the Receiver claimed that for the purpose of computing
depreciation allowance, the written down value of the busi-
ness assets be enhanced so as to reflect the sum of
Rs.4,50,000 in place of 16th share representing the share of
’A’. The Revenue negatived the assessee’s contentions, which
view was upheld by the High Court.
Dismissing the appeals by certificate, the Court,
HELD: 1. The amounts the assessee received under the
compromise or by amicable arrangement from other partners
were in the nature of profits to be received by the assessee
for the interest held in the business and, therefore, con-
stituted taxable income. [106B]
2. The benefit of s. 10(2)(vi) of the Income-tax Act,
1922 would be admissible only where the assessee is the
owner of the property. It too is not admissible in respect
of a fractional claim. [106A]
In the instant case, all that is claimed for the asses-
see is 1/6th share in the machinery. Such a fractional share
does not suffice for granting an allowance for depreciation
under s. 10(2)(vi) of the Act. [105F]
3. Two conditions had to be fulfilled under s. 24 of the
Incometax Act, 1922 before the claim for set off of carried
forward loss could be admitted, firstly, the income against
which the loss has to be set off should be income from
business and secondly, the business should be same in which
the loss was suffered. [107C]
In the instant case, the letting out of the sugar mill
was not the business of the assessee. The Receiver was
appointed for dissolution of the firm and the main reason
for allowing the sugar factory to work was to dispose it of
as a running mill so that proper price could be fetched.
[107DE]
4. Under the scheme of 1922 Act, it is the assessee who
alone is entitled to maintain claim of depreciation. Within
the framework of that scheme it is difficult to maintain
separate value of a part of the asset to work out deprecia-
tion. The book-value, as shown must in the instant case,
therefore, be applicable to the entire assets of the firm
including the 1/6th share which ’A’ had given to the appel-
lant. The claim of the Receiver for depreciation cannot,
therefore, be sustained. [108B]
103
JUDGMENT:
CIVIL APPELLATE JURISDICTION: Civil Appeal Nos. 850 of
1973 etc.
From the Judgment and Order dated 3.9. 1970 of the
Allahabad High Court in Civil Miscellaneous (ITR) No. 461 of
1961.
With
CIVIL APPEAL No. 941 of 1975.
From the Judgment and Order dated 5.5. 1972 of the
Allahabad High Court in I.T. Reference No. 236 of 1969.
Raja Ram Agarwal and Mrs. Rani Chhabra for the Appellants.
B.B. Ahuja and Ms. A Subhashini for the Respondents.
The Judgment of the Court was delivered by
RANGANATH MISRA, J. CA. No. 850 of 1973 This appeal is
by certificate and is directed against the judgment of the
High Court of Allahabad. Assessee and five of his brothers
constituted a Hindu Joint Family. The relevant assessment
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year is 1953-54 corresponding to the accounting period
ending on 30th June, 1952. The Joint Family which owned
inter alia a sugar factory at Bijnore. In 1930 there was
partition in the family and the members of the erstwhile
Joint Family constituted themselves into a partnership firm
which took over the sugar factory and operated the same. In
the year ,1944, Sheo Prasad, one of the brothers who was a
partner of the firm instituted a suit in the Lahore High
Court for dissolution of the firm. Partition of the country
followed and after the parties shifted over to India a fresh
suit was instituted at Bijnore for purposes of partition.
The properties were put in charge of a receiver appointed by
the Court. So far as the sugar factory is concerned, the
arrangement was that at five yearly rest an auction was to
be held confined to the partners and the highest bidder
would be given lease to operate the factory for that period
under the receiver. On 16th July, 1948, Sheo Prasad trans-
ferred his 1/6th share to Banarsi Dass at a stated valuation
of Rs.4,50,000. On 3rd May, 1950, another brother, Devi
Chand, leased out his 1/6th share to Banarsi Dass on an
annual payment of Rs.50,000. On 13th July, 1950, yet another
brother, Kanshi Ram, similarly leased out his 1/6th share to
Banarsi Dass for a similar sum. In 1951, Kanshi Ram sued for
cancellation of the lease. On 6th April, 1954, the dispute
was compromised and the lease was
104
terminated. Kanshi Ram undertook to pay to Banarsi Dass at
the rate of Rs. 16,000 for the first three years and at the
rate of Rs. 10,000 for the subsequent two years. Devi
Chand’s 1/6th share was also returned on mutual arrangement
and he agreed to pay a sum of Rs.39,000 and odd annually to
Banarsi Dass for the lease period. During the assessment
proceedings, the nature of these receipts came to be debat-
ed-the assessee maintained that these were in the nature of
capital receipt lieu of the lease hold interest and the
Income-tax Officer maintained that those were revenue re-
ceipts. In due course, the Tribunal ultimately upheld the
view of the Revenue.
One more question that arose was the admissibility of a
claim of expenditure being payment of interest on a loan
taken for purchase of shares in the sugar factory. The
Income-tax Officer had allowed the claim of Rs.75,211. The
Appellate Assistant Commissioner gave notice to the assessee
and disallowed the same. The Appellate Tribunal reversed the
finding of the Appellate Assistant Commissioner in regard to
the admissibility of the claim. Thus the assessee as also
the Revenue applied to the Tribunal to refer the case to the
High Court. As far as relevant, the following questions were
referred for the opinion of the High Court under section
66(1) of the Act at the instance of the assessee.
1. Whether on the facts and in the circum-
stances of the case, the sums of Rs. 16,000
and Rs.39,262 received from Kanshi Ram and
Devi Chand respectively were assessable as
income of the assessee?
2. Whether on the facts and in the circum-
stances of the case, depreciation is allowable
on the 1/6th share in S.B. Sugar Mills, Bij-
nore which the assessee had acquired from Seth
Sheo Prasad?
So far as the first question is concerned, the High Court
referred to the arrangement entered into by the parties as
also the terms of compromise and referred to certain deci-
sions and came to the conclusion that the sum of Rs. 16,000
received as a part of the total sum of Rs.68,000 constituted
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an assessable receipt. On the same reasoning, the High Court
held that the amount of Rs.39,262 received from Devi Chand
was also liable to tax.
So far as the other question is concerned, the
High Court held:-
"The question, however, remains whether the
assessee is
105
entitled to claim depreciation on the ground
that it has acquired 1/6th share in the S.B.
Sugar Mills. It is to be noted that the asses-
see does not claim to be full owner of the
property. All that the assessee claims is
1/6th share in S.B. Sugar Mills."
"The assessee claims allowance under clause
(vi) of subsection (2) of section 10 of the
Indian Income-tax Act of 1922. Clause (vi) is:
’In respect of depreciation of such buildings,
machinery, plant or furniture being the
property of the assessee .........."
"In order to qualify for an allowance under
clause (vi), the assessee has to make out that
the building, machinery, plant or furniture is
the property of the assessee. Mr. Shanti
Bhushan appearing for the assessee urged that
clause (vi) is attracted even where an asses-
see owns a fractional share in the machinery.
On the other hand, Mr. Brij Lal Gupta appear-
ing for the Department urged that ownership of
a fractional share in machinery does not
attract clause (vi). The point is not free
from difficulty."
The High Court ultimately came to hold:
"In order to qualify for an allowance under
clause (vi), the claimant must make out that
the machinery is the property of the assessee.
That test is not satisfied by the present
assessee. The assessee does not claim to be
the full owner of the machinery in question.
All that is claimed for the assessee is 1/6th
share in the machinery. Such a fractional
share will not suffice for granting an allow-
ance for depreciation under section 10(2)(vi)
of the Act."
We have heard learned counsel for the assessee-appellant
at length. He has referred to several authorities in support
of the assessee’s stand of admissibility of the claim’ on
both scores. According to him, the proper test to be adopted
should have been to find out whether the arrangement consti-
tuted an apparatus to earn profit. whether the arrangement
was one in course of business activity, and whether what was
received constituted a part of the circulating capital or
was a part of the fixed asset. We have considered the sub-
missions of
106
the learned counsel for the appellant but are not in a
position to accept the same. There is hardly scope to doubt
that the benefit of section 10(2)(vi) of the Act would be
admissible only where the assessee is the owner of the
property. It too is not admissible in respect of a fraction-
al claim. Similarly, we are of the view, in agreement with
the High Court. that the amounts which the assessee received
under the compromise or by amicable arrangement was in the
nature of profits to be received by the assessee for the
interest held in the business and, therefore, constituted
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taxable income. No other point was canvassed before us. This
appeal has to fail and is hereby dismissed. Parties are
directed to bear their own costs throughout.
c.A. No. 233 of 1976
This appeal between the parties is also by certificate
granted by the Allahabad High Court and relates to the
assessment year 1955-56 for the accounting period ending on
30th June, 1954. Leave has been confined to two
questions--as would appear from the order granting the
certificate, namely, as to whether one of the instalments
received by the assessee out of the said amount of
Rs.68,000, as referred to above, in respect of an earlier
assessment year constituted a taxable receipt. The second
question relates to acquisition of the 1,6th share under a
deed of exchange from Devi Chand under the exchange deed
dated 16th July, 1948, which indicated that the valuation of
that interest was shown to be Rs.4,50,000 and depreciation
was claimed in regard to it. Both the questions raised here
are covered by our aforesaid judgment. The appeal of the
assessee has therefore to fail. The appeal is accordingly
dismissed. Parties are directed to bear their own costs.
C.A. No. 1101 of 1975.
The relevant assessment year in this case is 1954-55
corresponding to the accounting period ending June 30, 1953.
Three questions survive for consideration: One relating to
the receipt of Rs. 16,000 and Rs.42,957 in the same manner
as already indicated, and the other depreciation in regard
to the 1/6th share, said to have been valued at Rs.4,50,000.
Both the questions have to be answered against the assessee
for the reasons already indicated. In this case, there is a
third question which is relevant, namely, whether in the
facts and circumstances of the case. the unabsorbed carried
forward loss of Rs.78,084 was liable to be set off against
the share of the rent received by the assessee from the
Receiver. Dealing with this question, the High Court ob-
served:.
107
"During the previous year relevant to the
assessment year 1953-54, the assessee had
suffered a loss in sugar business. After
setting off the loss against other heads of
income there remained an unabsorbed loss of
Rs.78,084. In the assessment year in dispute
the assessee claimed that the unabsorbed loss
of the preceding year should be brought for-
ward and set off against its share in lease
money received from the Receiver in respect of
S.B. Sugar Mills. This claim of the assessee
has been disallowed and the question arises as
to whether the assessee was entitled to carry
forward and set off the loss as claimed by
it."
The High Court referred to section 24 of the Income-tax Act
of 1922 and indicated that two conditions had to be ful-
filled before the claim of set off of carried forward loss
could be admitted, firstly, the income against which the
loss has to be set off should be income from business and
secondly, the business should be same in which the loss was
suffered. The High Court referred to certain decisions
including the one of this Court in 26 ITR 765 and ultimately
negatived the claim of the assessee by saying that the
question would not arise because the letting out of the
sugar mill was not the business of the assessee. In fact the
receiver was appointed for dissolution of the firm and the
main reason. as found by the High Court. for allowing the
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sugar factory to work was to dispose it of as a running mill
so that proper price would be fetched. Having heard learned
counsel for the parties, we are satisfied that there is no
merit in the assessee’s stand and the same has got to be
dismissed. The appeal is accordingly dismissed. Parties are
directed to bear their own costs throughout.
C.A. No. 941 of 1975
This appeal is by certificate from the judgment of the
Allahabad High Court. The assessee is the sugar mill which
during the relevant assessment year 1960-61 corresponding to
the accounting period ending 30th June, 1959, was in the
hands of a Court Receiver. The sugar mill was being assessed
as an Association of Persons. Banarsi Dass. a partner, had
1/6th share therein. He had acquired under a deed of ex-
change dated 16th July, 1948 1/6th share of Sheo Prasad in
exchange of shares held by Banarsi Dass in Lord Krishna
Sugar Mills valued at Rs.4,50.000. In this assessment year,
the receiver claimed that for the purposes of computing the
depreciation allowance, the written down value of the busi-
ness assets be enhanced so as to reflect the sum of
Rs.4,50,000 in place of 1/6th share representing the share
of
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Sheo Prasad. Similar claim had been raised by Banarsi Dass
in his own assessment. The Income-tax Officer rejected the
claim and such rejection has been upheld throughout. We have
already turned down the claim of Banarsi Dass. This claim
has, therefore, to be rejected. We may additionally point
out that under the scheme of the Act, it is the assessee who
alone is entitled to maintain such claim of depreciation and
it would indeed be difficult, within the framework of the
scheme contained in the statute, to maintain a separate
value of the part of the asset to work out depreciation. The
book-value as shown must be applicable to the entire assets
of the firm including the 1/6th share which Sheo Prasad had
given to Banarsi Dass. The claim has rightly been rejected
in the forums below including the High Court. The appeal has
no merit and is dismissed. Parties will bear their own
costs.
P.S.S. Appeals dis-
missed.
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