TMI Blog1939 (4) TMI 23X X X X Extracts X X X X X X X X Extracts X X X X ..... , the assessment shall be made on such person succeeding, as if he had been carrying on the business, profession or vocation throughout the previous year, and as if he had received the whole of the profits for that year. The reference arises under the following circumstances :- An order for the winding-up of the Union Indian Sugar Mills Company Limited, Cawnpore, (hereinafter referred to as the Mills), which carried on an extensive business, was made on a creditors petition on May 28, 1926. Within a few months of this order, viz., on the 15th of September, 1926, certain persons including one L. Kamlapat entered into a partnership with a view to take over and run the Mills which had gone into liquidation. This partnership was styled as the firm of Kamlapat Moti Lal (hereinafter referred to as the assessee). On the 22nd of November 1926, the assessee filed an application in this court embodying alternative proposals to take a mortgage of the Mills or to purchase the same. The proposals embodied in the petition were as follows :- That the applicant is willing to advance a sum of ₹ 10 lakhs to the above Company in liquidation on the terms annexed herewith and is als ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... me of the Union Sugar Mills Company Limited. On January 7, 1927, the assessee agreed to increase its offer by a sum of ₹ 62,000 and this Court then on February 25, 1927, approved the proposed scheme for the mortgage of the Mills for ₹ 10,62,000 and directed that a mortgage-deed be executed in favour of the assessee and then the assessee paid the additional amount of ₹ 62,000 to the official liquidators. Disputes however arose between the liquidators and the assessee as to the terms of the mortgage-deed with the result that litigation ensued between them which culminated in an appeal to His Majesty in Council. The appeal was decided by their Lordships of the Privy Council on July 5, 1929, and their Lordships decision is reported as Kamlapat Moti Lal v. Union Indian Sugar Mills Company, Limited, (1929 A.L.J., p. 1289). Their Lordships held that as the shareholders of the Mills had not assented to the scheme as approved, the orders of the Court, dated February 25, and certain subsequent orders of the Court, dated February 25, and certain subsequent orders must be set aside . Their Lordships further directed that a meeting of shareholders should be summoned to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of ₹ 50,000 and the ownership of the Mills passed to the assessee in May 1932. As there was no profit till the end of 1931 no income-tax was assessed and no allowance on account of depreciation on buildings, machinery etc. was allowed. It is common ground that by the year 1932 the Mills were entitled to an allowance of ₹ 5,62,151 on account of depreciation in accordance with the provisions of Section 10(2) (vi) of the Act. For the first time in the year 1932 there was a profit of ₹ 1,34,318 in the business and the assessee was, subject to allowance on account of depreciation, liable to pay income-tax on this amount with respect to the assessment year 1933-34. In the return submitted by it the assessee, while showing the above amount as profit, claimed ₹ 5,62,151 as allowance on account of unabsorbed or accumulated depreciation from 1926 to 1932. The assessee further maintained that it had spent a sum of about ₹ 27,000 in making additions to the buildings and machinery during the above period and that this amount should also be taken into account in calculating the depreciation. In short the assessee maintained that it was not liable to pay any t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... inst the depreciation allowance... and no income will be taken into account. He held that the depreciation for the period subsequent to the purchase of the Mills by the assessee will be allowed on the cost at which the assessee had purchased the Mills. In this connection he overruled the contention of the assessee that in calculating the cost price of the Mills to the assessee a number of liabilities to which the Mills were subject should be taken into account and that the cost price of the Mills to the assessee should be deemed to be ₹ 21,35,375 and not only ₹ 11,12,000. In the result he made assessment on ₹ 94,980. It would be noted that in making this assessment the Assistant Commissioner did not make allowance on account of depreciation even on the costs price to the assessee. The assessee then filed an application to the Commissioner of Income-tax praying that either the order of the Assistant Commissioner be reviewed under Section 33 or the case be stated to the High Court in accordance with Section 66 (2) of the Act. The Commissioner rejected the application for review but made the present reference to this Court. The questions referred are :- (1) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Carnatic Company Ltd. Before this case was decided by their Lordships there was difference of opinion in India as to the true interpretation of the words on the original cost thereof to the assessee in Section 10 (2) (vi) of the Act. It was held by the Madras High Court in Commissioner of Income-tax, Madras v. Messrs. Massey Co. Ltd., Madras, that the words quoted above meant the original cost to the vendor and not to the actual assessee, whereas the Bombay High Court in Commissioner of Income-tax, Bombay Presidency v. The Saraspur Mills Co., Ahmedabad, and the Patna High Court in Motiram Roshan Lal Coal Company Limited v. Commissioner of Income-tax, had held that those words meant the original cost to the actual assessee, viz., the purchaser. Their Lordships approved of the decisions of the Bombay and the Patna High Courts and held that the cost which is to be considered for the purpose of the allowance for depreciation must be the original cost to the person by whom the income-tax is payable. It is however to be noted that neither in the case decided by their Lordships nor in the other cases referred to above did the question arise in relation to an assessment made under Se ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... one lakh. On the eve of assessment with respect to 1939-40 on the profits for the previous year even though he did not receive any portion of those profits. If the contention advanced on behalf of the Department is well founded, in the computation of the profits for the previous year B will not be entitled to any of the allowances specified in sub-section (2) of Section 10 and he would not be entitled even to claim depreciation on the price paid by him for the transfer of the business in his favour for the simple reason that the ownership of the buildings, machinery etc., had not passed to him in the previous year . In other words, he would be subject to the double penalty of paying income-tax on a supposed profit which he never received and further, in the computation of the taxable profit, the allowances to which A would have been entitled would be denied to him. One can appreciate the reason for the legislature making the successor liable to pay tax on the profits of the previous year, but why should the fact of transfer entitle the Department to give a clear go by to the mandatory provisions of sub-section (2) of Section 10 in computing the profits for the previous year ..... X X X X Extracts X X X X X X X X Extracts X X X X
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