1982 (7) TMI 177 - AT - Income Tax

Summary

Issues:
- Claim of depreciation on buses transferred to retiring partners
- Interpretation of section 34(2)(ii) of the Income-tax Act, 1961
- Application of section 38 regarding asset usage for business purposes

Analysis:
The appeal involved a dispute regarding the allowance of depreciation on buses transferred to retiring partners of a firm. The Revenue contended that since the buses were no longer owned by the firm, depreciation should be disallowed under section 34(2)(ii) of the Income-tax Act, 1961. However, the Commissioner (Appeals) allowed the claim of the assessee, stating that the transfer did not fall within the scope of section 34(2)(iii) which denies depreciation for sold, discarded, or destroyed assets.

Upon review, the Tribunal found that the distribution of assets to retiring partners upon dissolution of a firm does not constitute a transfer, as partners have mutual rights over partnership assets. Referring to legal precedents, the Tribunal emphasized that such distributions do not amount to sales or transfers, as partners only receive their share of the capital they already owned. The Supreme Court rulings in Addanki Narayanappa v. Bhaskara Krishtappa and Malabar Fisheries Co. v. CIT were cited to support this interpretation.

Additionally, the Tribunal addressed the argument that the buses should be considered as discarded assets. However, it found that the mutual agreement among partners to cease using the buses did not align with the concept of discarding assets as useless. The Tribunal agreed with the Commissioner that the buses given to retiring partners were neither sold nor discarded, thus not falling under the disallowance provisions of section 34(2)(ii).

Furthermore, the Tribunal considered the application of section 38 of the Act, which restricts depreciation deduction for assets not exclusively used for business purposes. It noted that since the buses were not used exclusively for business throughout the year, the claim for depreciation was appropriately restricted to the period they were used for business purposes. Consequently, the Tribunal upheld the order of the Commissioner (Appeals) granting the depreciation claim and dismissed the appeal by the Revenue.