TMI Blog1992 (7) TMI 114X X X X Extracts X X X X X X X X Extracts X X X X ..... lued figure that the company took over the assets. The dissolution deed bears testimony to these facts, apart from entries in the accounts. It should be stated in this context that the revaluation was done by an approved valuer. The value fixed by the approved valuer was at any rate less than the market value. These facts are not disputed before us. 2. The dispute is whether the appellant company is entitled to claim depreciation on the assets taken over from the partnership firm at the revalued figure or at the written down value as they stood in the books of the partnership firm. 3. The revenue's contention is that the appellant was admitted as a partner on 1-9-1984 and remained as a partner for hardly about 5 months, as the firm itself was dissolved on 25-2-1985. Thus, the admission of the appellant company as a partner in the partnership firm and the subsequent dissolution of the partnership and the revaluation of the assets on the eve of the dissolution, constituted a design or device or a ruse to reduce the tax liability, by setting up the claim for higher amount of depreciation on the enhanced value of assets and, therefore, the decision of the Supreme Court in the case ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d down in McDowell Co. Ltd.'s case was not attracted to the facts of the case and authorities erred in invoking the same. As for the Explanation 3 to section 43(1), it is only when the assets are taken over at a figure higher than the market value of such assets motive can be attributed to the company that it was done with a view to reduce the tax liability by way of higher claim of depreciation. In this case, the market value of the assets have been shown to be higher than the value placed on the assets on revaluation by an approved valuer. Therefore, the Explanation cited supra cannot also be applied. 6. Shri Nair submitted that it is not as if no consideration was paid to the previous owners of the assets. In fact, the amounts due to the erstwhile partners were also brought into the accounts of the company and the same was settled firstly by allotment of shares and secondly in a span of two years by account payee cheques or by cash through running accounts. Thus consideration was also paid for the revalued figure. In such circumstances, the assessing authority was not justified in adopting the written down value of the assets in preference to the revalued figures at which th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the goodwill, business, concern, undertaking, property, rights, assets and liabilities of any person, firm, association, society, company or corporation carrying on any business which this company is authorised to carry on or possessed of property suitable for the purpose of this Company and to pay for the same by shares or debentures of this Company, or by cash or otherwise, or partly in one way and partly in another or others, and to conduct, expand and develop or wind up and liquidate such business and to purchase and take steps for the acquisition of existing and new licences in connection with any such business. 2. To form, establish, promote, subsidise, aid, acquire, organise or be interested in any other company or companies, or partnerships for the purpose of acquiring all or any of the undertaking, property and liabilities of this company or shares therein by way of exchange for its shares or otherwise or for any purpose which may seem calculated directly or indirectly to benefit the company. 3. To enter into partnership with concerns or firms carrying on business similar to or allied to the objects for which this Company is formed and to enter into such arrangements ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , Bombay, in the month of August 1984 for a sum of Rs. 70,928 was referred to and then the value was fixed at Rs. 63,000. Thus, we find that the Approved Valuer had not gone about the assessment of the values of the machines, land and building, in an ad hoc manner. There was basis for his computation and the details of such basis have been furnished to the revenue authorities. Therefore, it cannot be said that the revaluation was done in an arbitrary manner or on an ad hoc basis. The assessing officer has not disputed the basis of valuation nor has he found that the revaluation was on an ad hoc basis. In other words, he has no grievance against the manner in which the revaluation of the asset was done by the Approved Valuer and adopted by the assessee. His only grievance is that this was done with a view to reduce the tax liability and this view was confirmed by the appellate authority substantially for the same reason adduced by the assessing officer. We do not uphold the view of the authorities. It is no doubt true that revaluation was resorted to on the eve of the dissolution of the partnership firm in which the appellant is a partner. It is settled law that in the event of diss ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... supra. 10. When a firm is dissolved several options are open in the settlement of accounts :-- (a) all the assets are sold, money realised, the liabilities are paid off and the balance shared among the partners in settlement of their mutual interest or right in the partnership ; (b) each one of the partners taking some asset or other at agreed values along with some liability or other also at their agreed value and thus the claim is settled ; (c) one of the partners taking over all the assets and liabilities at agreed value and paying off the other partners in respect of their share of interest in the partnership either by way of money or monies worth ; and (d) a combination of any one of these modes. In this case one of the partners had taken over the assets and liabilities at agreed value and the other partners had been given either cash or shares in the new company and the payment of the outstanding due to them was made subsequently. This is a method known to law and is a normal incident of dissolution of a partnership firm. Therefore, the method adopted by the assessee cannot be considered as repugnant to any of the provisions of the Partnership Act or the provisions ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ember 1984 and within a few months firm was dissolved with the appellant taking over the assets and liabilities and therefore this could be construed as a ruse or device. We have carefully considered this submission. No doubt, the interval between the entry of the appellant company as a partner and the dissolution of the firm is short. If the shareholders of the assessee-company were totally different persons, motives can be imputed in view of the brevity of the interval. In the case of the appellant company, all its shareholders were the partners of the erstwhile firm. In fact, the assessee company itself was formed to do similar business and the obvious intention in the transaction was to convert the partnership into a limited company. Conversion of partnership into a limited company with all the shareholders having been the partners of the erstwhile firm is a process known to law and has the statutory recognition in section 32A(7), which is as follows :-- " 32A(7). Where a firm is succeeded to by a company in the business carried on by it as a result of which the firm sells or otherwise transfers to the company any ship, aircraft, machinery or plant, the provisions of clauses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be held that the depreciation does not represent cash outlay. In fact, it is a recognition of consumption of a pre-paid expense. The Supreme Court in the case of P. K. Badiani v. CIT [1976] 105 ITR 642 approved as reasonable and plausible the view expressed by the Gujarat High Court in CIT v. Viramgam Mills Co. Ltd. [1961] 43 ITR 270 that-- " the normal depreciation reserve of a company could not form the accumulations of past profits as in the words of Wixon, it was 'the estimated expiration of asset value' or as observed by Paton in his Account's Hand Book, it is an out-of-pocket cost as any other costs. It further observed : There is still widespread misapprehension as to the precise significance of the depreciation charge. It is often deemed a more or less imaginary and hypothetical element, and is sharply contrasted with the regular 'out-of-pocket' cost as any other. The depreciation charge is merely the periodic operating aspect of fixed asset costs, and there is no doubt as to the reality of such costs. Far from being a non-out-of-pocket charge depreciation represents the extreme example of pre-payments. " Therefore we hold that the argument that the payments were made f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the case before us are different. The assessee has furnished the revaluation report of the approved valuer and had also given the basis for the valuation, copies of which have been furnished before us also in the paper book. Thus, there is a material difference in this case. There is also an important observation in the course of the judgment at page 623 to the effect that-- " What would be the normal market value of the assets as on the date of transfer is a different matter, but for the purpose of attracting the proviso to section 10(5)(a) [corresponding to section 43(1)] all that is required to be proved is that the market value of the assets transferred as on the date of their transfer was lower than the consideration for which the transfer had taken place and if the circumstances led to that adverse inference then the proviso to section 10(5)(a) (corresponding to section 43(1)] of the Act could be clearly attracted. " We have examined the transaction in the light of this test laid down by the Bombay High Court and hold that the assessee by its letter dated 25-10-1988 addressed to the Dy. Commissioner of Income-tax (Assessment), Special Range 2, Ernakulam, has clearly expla ..... X X X X Extracts X X X X X X X X Extracts X X X X
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