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TMI Blog1965 (4) TMI 15X X X X Extracts X X X X X X X X Extracts X X X X ..... ed 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 was concerned the cost to the appellant was the original cost to the larger branch ; and so far as the 6/16th share of Bachhulal's branch in the said factory was concerned the original cost was the amount for which the appellant's branch purchased the 6/16th share of the other branch, i.e., Rs. 12,75,000. The following question was referred by the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 among the branches composing it, Govindram did not purchase it but only got it in the partition. It was then contended that partition did not involve any conveyance or transfer, but it was only a process in and by which joint enjoyment was transformed into an enjoyment in severalty and that, therefore, the appellant did not get any new title to the factory or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 the cost price would be the price at which he purchased them. If instead, the properties were sold by auction between the brothers and the difference in prices was adjusted by cash payment, it would be incongruous to say that in the former the cost of the houses would be the cost actually paid by the third party purchaser and in the latter the cost of the hous ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t 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 be computed on the basis of the valuation at which the assessee took over the assets. In the result, the appeal is allowed with costs here and in the High Court. SHAH J.--A sugar factory in the former Indian State of Jaora belonged to a Hindu undivided family of Govindram and his nephew, Bachhulal. In a suit filed by Bachhulal in 1942 in the Civil Court at Ja ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ncome-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 only amount on which depreciation allowance was to be computed. The income-tax authorities had held that, for the purpose of computing the depreciation allowance, the original cost to the joint family had to be the basis, but the Tribunal did not accept that view and held that the depreciation allowance in respect of the sugar factory was to be computed on the basis of 1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ncome-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 other, but the option was exercisable only by the person who offered the higher bid for the asset. By the preliminary decree, the share of Govindram was defined at 10/16th and he became entitled to that share in every item of property and Bachhulal became entitled to the remaining 6/16th share in each such item. But some of the properties were found incapable of physical divisio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e-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 fraudulent overvaluation with a view to obtain an unfair advantage, the price paid by the purchaser would be regarded for the purpose of depreciation allowance as the actual cost to him, and not the original cost to the vendor: Commissioner of Income-tax v. Buckingham and Carnatic Co. Ltd. Jogta Coal Co. Ltd. v. Commissioner of Income-tax. Cases in which full title to an asset, in respect of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s 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 partition each (fraud, overreaching and the like being put on one side) is to be regarded as having got half by the mode of division adopted whether that mode be through court, arbitration, private auction or drawing lots or any other mode agreed upon. The original cost of the property is not increased though one side might in the result get what a third person would regard as less than ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ling 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 business may value the investments at the prevailing market rate on the date on which they are brought into the business. In Shirinbai's case the court was called upon to ascertain commercial profits earned by sale of stock-in-trade and in so doing regarded the owner as investor and as businessman as two different entities. S. K. Das J., speaking for the majority, observed that normally the ..... X X X X Extracts X X X X X X X X Extracts X X X X
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