TMI Blog1965 (4) TMI 15X X X X Extracts X X X X X X X X Extracts X X X X ..... dding. One of the items of the said property, the sugar factory at Jaora, was knocked down in favour of Govindram for a sum of Rs. 34 lakhs. After all the items of the property were sold to one or other of the parties, final adjustments were made by cash payment. After the said partition Govindram and the members of his branch of the family continued to run the factory. For the assessment year 1950-51 the Income-tax Officer. Ratlam, assessed the appellant in respect of the income from the said factory. The appellant contended that it was entitled to depreciation as provided under section 10(2)(vi) of the Income-tax Act, 1922 (hereinafter called the Act), on the said amount of Rs. 34 lakhs, being the amount for which it purchased the factory in the auction that was held pursuant to the partition decree. The Income-tax Officer and, on appeal, the Appellate Assistant Commissioner rejected that contention and held that the value to be adopted for the purpose of depreciation would be the original cost of the said factory to the larger joint family. On a further appeal, the Income-tax Appellate Tribunal held that so far as the 10/16th share in the factory which belonged to the appellant ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... executive orders issued when the Indian Income-tax Act, 1886 (II of 1886), was in force. " It is not disputed that no previous depreciation was allowed under any Act repealed by the Indian Income-tax Act, 1922, or under any executive orders issued under the Indian Income-tax Act, 1886. Therefore, the appellant would be entitled to depreciation allowance on the original cost to it of the factory. What is the original cost of the 10/16th share in the factory to the appellant ? Two expressions in clause (vi) of sub-section (2) of section 10 give the clue to the answer, and they are, (i) "being the property of the assessee", and (ii) " the original cost thereof ". Therefore, depreciation is given in respect of property of an assessee on the original cost of the said property to him. The factory is the property of the assessee. What was the original cost of the property to the assessee ? Admittedly, Govindram purchased it in the auction for Rs. 34 lakhs. Ordinarily, that would be the cost of the factory to the assessee. It was conceded that it would be so if a third party had purchased it. But as the auction was only a step in the partitioning of the property of the larger family am ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... one of the two brothers would have got 2 houses each, and the partition would have been equitable and fair. But during these 30 years one village developed into a town and the value of the house therein had increased to Rs. 500. There was no appreciable rise in price in regard to the other 3 houses and they together would fetch only Rs. 500 in the market. In the result at the partition that was effected in 1960 the house in the town was given to one of the brothers and the other three houses together were given to the other brother. What would be the cost of the house in the town to the brother to whom it was allotted ? Clearly it would be Rs. 500, though the original cost of the house at the time it was built or purchased was only Rs. 100. Because of the uneven rise in prices of the different houses, instead of two houses he got only one house at the partition. The cost to him, therefore, would be the cost at which the property was valued at the partition or at which it was auctioned for the purpose of partition. Take another illustration : Instead of partitioning the properties by evaluation thereof, the houses were sold to a third party. So far as the third party was concerned t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... was purchased in the remote past. We cannot agree with the view expressed by the Nagpur High Court. In substance we do not see any difference in the matter of ascertaining the cost of an asset to an assessee whether he is a donee, purchaser, legatee, successor or a divided member of a joint Hindu family. It may be that in strict legal theory partition may not involve transfer, but the substance of the transaction is that an erstwhile member of a joint Hindu family, who has only an interest in the entire joint family property acquires an absolute title to a specific property. The cost of the property to the member at the date of partitio a would be the value given to it for the purpose of allotment, provided it was real, or the price at which he purchased it in auction or the value of it ascertained otherwise. It is nobody's case in the present appeal that the valuation given to the property was notional and not a real one ; indeed, the property was sold in open auction between the members of the larger joint family and the value fetched thereunder entered into the scheme of the partition. We, therefore, answer the question as follows : That depreciation allowance should ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... depreciation should be 10/16th share of the original cost to the larger Hindu undivided family plus Rs. 12,75,000 (paid by Govindram on behalf of the assessee to Bachhulal for the latter's 6/16th share in the sugar factory). At the instance of the appellant, the Tribunal referred the following question to the High Court of Madhya Pradesh under section 66(1) of the Income-tax Act : "Whether, on the facts and in the circumstances of this case, the assessee-Hindu undivided family is entitled to claim depreciation in respect of the assets of the old Hindu undivided family on the basis of the original cost to the family or on the basis of the valuation at which the assessee took over the assets ?" The High Court of Madhya Pradesh recorded the following answer : "...that the depreciation allowance should be computed on the basis of the original cost to the joint family and not on the basis of the valuation at which the assessee took over the assets. " In so answering the question, the High Court committed a clear error of law. The Commissioner had acquiesced in the order of the Tribunal and had not claimed that the original value to the larger Hindu undivided family was the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... utive orders issued when the Indian Income-tax Act, 1886 (II of 1886), was in force." The depreciation allowance under section 10(2)(vi) in respect of a factory has to be allowed in the manner prescribed on the actual value to the assessee limited to the buildings, machinery, plant and furniture. No previous depreciation has been allowed under any Act repealed by the Indian Income-tax Act, 1922, or under any executive order issued under the Indian Income-tax Act, 1886, and, therefore, the appellant is entitled to depreciation allowance under section 10(2)(vi) on the actual cost to the assessee of assets for which depreciation is admissible. The factory originally belonged to a larger Hindu undivided family. In the scheme of partition devised under the preliminary decree the factory was allotted to Govindram, his bid of Rs. 34 lakhs having been accepted by the court. The true effect of the scheme under which the properties were put up for competitive bidding under the order of the court was that the interest of the other member was to be conveyed at a value based on the offer made by the higher bidder. In other words, each party was given an option to purchase the share of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vidence to show that the valuation was unduly inflated, the value paid by the assessee is the actual cost to him, and not the value paid by his vendor for acquiring it. Again property which is owned jointly by more persons than one, by the acquisition of the interest of the other joint owners becomes the property of a single owner. In Francis Vallabarayar v. Commissioner of Income-tax a Division Bench of the Madras High Court held that an assessee is entitled in assessment of tax under section 10 of the Income-tax Act, to depreciation allowance in respect of machinery or plant, which he acquires by inheritance, on the market value of such property at the date of inheritance. The same principle would apply to cases of gift and succession. The legislature has by adding clause (c) in sub-section (5) of section 10 by section 8 of the Indian Income-tax (Amendment) Act, 1953 (25 of 1953), defined " written down value " in the case of assets acquired by the assessee by way of gift or inheritance as being the written down value as in the case of previous owner or the market value thereof whichever is less. In the case of purchase, as we have already observed, in the absence of fraudulen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f a Hindu family consisting of two members owning a ginning factory which was originally purchased for Rs. 23 lakhs decided to separate, and as the ginning factory could not be divided it was put to auction and purchased by A for Rs. 28 lakhs. A was debited in taking account with half the amount offered by him. Subsequently, A claimed depreciation allowance on the basis of Rs. 28 lakhs which he had paid alleging that that was the original cost to him. The income-tax authorities rejected the claim, and adopted the original value to the joint family as the actual value to A for computing depreciation allowance under section 10(2)(vi). In dealing with a reference made by the Tribunal on the question whether the Income-tax Officer had the power to ignore the valuation made by the parties in ascertaining the original cost of the machinery and building to the assessee, the High Court observed : "....the original cost is the cost of acquiring title. The cost of acquiring title is to be ascertained at the time when the property is acquired by the coparcenary. Thereafter, one is not concerned with cost strictly so called but one is concerned with a mode of partition. As a result of the p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fferent companies, commenced a business in shares by converting the shares into stock-in-trade of the business. The assessee subsequently sold those shares in the course of the business at a profit. A majority of this court held that the assessee's assessable profits on the sale of the shares was the difference between the sale price of the shares and the market price of the shares prevailing on the date when the shares were converted into stock-in-trade of the business, and not the difference between the sale price and the price at which the shares were originally purchased by the assessee. The court in that case distinguished an earlier case decided by this court, Sir Kikabhai Premchand v. Commissioner of Income-tax, in which it was held that the assessee was entitled to value at cost price, certain business assets which were, after withdrawal from the business, settled upon trust. But neither of these cases has a bearing on the computation of depreciation allowance which is qua building, machinery, plant (not being ships) or furniture to be a percentage of the written down value. A person who transfers his investments which are not part of his business into the stream of his bus ..... X X X X Extracts X X X X X X X X Extracts X X X X
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