TMI Blog1992 (1) TMI 170X X X X Extracts X X X X X X X X Extracts X X X X ..... me. The Assessing Officer disallowed depreciation holding that the assets have to be treated as " sold " as defined in section " 32(2) " which includes transfer by way of exchange also. He supported his decision with the rulings in the cases of Chittoor Motor Transport Co. (P) Ltd. v. ITO [1966] 59 ITR 238 (SC) and A.S. Krishna Setty Sons v. Addl. CIT [1975] 100 ITR 587 (Kar.). The learned CIT (Appeals) confirmed the decision of the Assessing Officer. 3. It has been argued by the learned counsel for the assessee that the provisions in the Income-tax Act dealing with depreciation and development rebate are distinct and different from each other. He submitted that he had claimed depreciation under provisions of section 32(1)(i) of the Act. He pointed out that as per the provisions of section 34(2)(ii) the allowance of depreciation under section 32(1)(i) etc. was prohibited if any depreciable assets was " Sold, Discarded, Demolished or Destroyed in that year ". He emphasised that none of these expressions included the term " Otherwise transferred " which was the basis of the rejection of assessee's claim by the authorities below. In contra-distinction to this provision, he drew ou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e assessee received in return for those assets. Thus where no consideration was receivable. the IT Act did not attack the assessee by making any disallowance. It was only when some consideration was received that a final reckoning of the actual cost suffered by the assessee by way of depreciation allowed in the past was done. If the depreciation which had been allowed in the past was less than what the assessee fetched on the sale of that asset, the assessee was allowed further deduction by way of balancing charge. On the other hand if the final consideration which the assessee received on such sale was more than the depreciation which had been allowed to the assessee, he would be charged to tax on that amount as profits of that year. It was in this background, according to the ld. Departmental Representative, that depreciation could not be allowed to the assessee in this year because the assessee had admittedly transferred the assets to a newly formed company for some consideration and that company had claimed depreciation on those assets and if assessee's contention is accepted then depreciation will be allowed on the same assets twice in one year. The learned Departmental Repres ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... In the first instance, we may mention that we are in full agreement with the learned counsel for the assessee that there are separate provisions in the IT Act dealing with development rebate and depreciation. We may also mention that although the arguments of the learned Departmental Representative may be based on theory, yet we have to be guided by the specific provisions of the IT Act rather than the purposes for which various provisions were intended to be introduced in the IT Act. It may be observed that under the IT Act in the first instance there are provisions in section 32(1)(ii) which provide that if the assets which are " sold, discarded, demolished or destroyed in the previous year ........ " the amount of money which is payable in respect of those assets together with the amount of their scrap value if any falls short of the WDV thereof, it shall be allowed as deduction. It is followed by an Explanation which specifically provides " for the purposes of this clause " and clause (2) of that Explanation defines that " sold " includes a transfer by way of exchange or compulsory acquisition etc. Similarly this word " sold " has again been defined in Explanation (ii) to secti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ere transferred to the limited company. As is obvious, that is not the case before us. In the case of Rogers Co. the main question to be decided was whether on the transfer of business conducted in partnership to a private limited company and transfer of assets of business to a company at original cost price, there was any sale and whether it gave rise to taxable income. It was decided that no profits had arisen on that transfer. It may be noticed that in the case before us the question involved is not regarding the profits having been made by the firm but it is whether in this year when the transfer has taken place, the transaction can be treated as sale and therefore, whether the depreciation in this year can be disallowed. 7. The only case which we find is squarely applicable to the facts and circumstances of the case before us is that of R.R. Ramakrishna Pillai's case where exactly similar question was before their Lordships of the Hon'ble Supreme Court and the circumstances were also similar. In that case also the partners of a erstwhile firm had transferred the assets to a newly formed company and the partners were allotted shares of that company as in the instant case. I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he shall examine the details of the agreement between the assessee-firm and the private limited company in the light of the decision of the Hon'ble Supreme Court in the case of R.R. Ramakrishna Pillai and may collect any such material as he considers necessary to decide the issue bearing in mind that the provisions dealing with the development rebate and depreciation are different and distinct. The assessee shall also be given a reasonable opportunity to adduce any evidence in support of its claim. The Assessing Officer shall also keep in mind that the definition of the word " Sold " as given in clause (2) to Explanation to clause (iii) of section 32(1) is to be applied only for the purpose of that clause and not for the purpose of section 34(2)(ii). In other words if after applying the tests laid down by the Hon'ble Supreme Court the Assessing Officer comes to the conclusion that a sale of the assets was effected in the transaction involved in this case, he shall be authorised to disallow depreciation. On the other hand if after applying these tests he finds that it was merely a case of transfer of assets, he shall not be entitled to disallow depreciation to the assessee-firm. 8 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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