TMI Blog2003 (2) TMI 159X X X X Extracts X X X X X X X X Extracts X X X X ..... . Both the merged firms, namely, M/s. Anand Co. and M/s. MDC had same partners on and from 1-10-1991 having same profit sharing ratio. The brought forward unabsorbed depreciation pertaining to the erstwhile firm M/s. MDC was thus allowed to be set off in the hands of the present partnership firm which came into existence on merger of two firms as stated above. On examination of the record, the CIT had arrived at a conclusion that the acceptance of the claim for set off of brought forward unabsorbed depreciation pertaining to the firm M/s. MDC in the assessment of the present partnership firm by the Assessing Officer was erroneous and prejudicial to the interest of revenue. He, therefore, issued a show-cause notice under section 263 of the Act to the assessee as to why the assessment made by the Assessing Officer should not be rectified by disallowing set off of brought forward unabsorbed depreciation fixing the hearing op 23-3-1998. Having received the show-cause notice under section 263 of the Act the assessee submitted a reply in writing vide its letter dated 23-3-1998 saying that the adjustment of unabsorbed depreciation has been rightly done by the Assessing Officer inasmuch ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ended that the order of the CIT passed under section 263 was fully justified being in accordance with the provisions of law contained in section 263 of the Act as the order passed by the Assessing Officer to allow set off of brought-forward unabsorbed depreciation pertaining to M/s. MDC was erroneous and prejudicial to the interest of revenue. He further contended that M/s. Anand Co. and M/s. MDC were two separate and distinct partnership up to 31-3-1992, which has merged together on and from 1-4-1992 creating a separate and new partnership firm w.e.f. 1-4-1992. It was further argued that since the present firm M/s. Anand Co. came into existence w.e.f. 1-4-1992 is a separate and independent assessable entity it is not entitled to claim the setoff of unabsorbed depreciation brought-forward from the earlier years in the hands of M/s. MDC which is no more in existence having been merged into a new firm. 6. We have carefully considered the rival contentions of both the parties and have gone through the order of the CIT passed under section 263 of the Act. We have also gone through the papers filed by the assessee before us. 7. In order to appreciate the controversy raised in th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ch reads as under: - "(23) "firm", "partner" and "partnership" have the meanings respectively assigned to them in the Indian Partnership Act, 1932 (9 of 1932); but the expression "partner" shall also include any person who, being a minor, has been admitted to the benefits of partnership;" The firm has also been included in the definition of 'person' in section 2(31) of the Act. It is also well settled that Income tax is chargeable under section 4 in accordance with and subject to the provisions of the Act, in respect of total income of a previous year of the firm. For the purpose of Income tax, a firm is a distinct and separate entity from the persons who compose it. In law, there is no prohibition for the creation or existence of two or more separate firms or partnerships by the same partners. The very question as to whether there was really one partnership or two different assessable entities being two separate distinct partnerships unconnected with each other, has to be determined by the I.T. Authorities for the purpose of completing the assessment under Income-tax Act but not under the general law governed by the provisions of the Partnership Act. It is settled law that a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1-10-1991 as evident from the two and separate deed of partnership executed on 1st day of October, 1991. In other words, there were two different and separate agreements or relationship between the partners to constitute two distinct and separate partnerships. On perusal of the deed of partnership executed on 1-4-1992 executed by the partners it is clear that the erstwhile two partnership firms M/s. Anand Co. and M/s. MDC have been amalgamated to carry on the business previously being carried on by two distinct and separate firms, namely M/s. Anand Co. and M/s. MDC. In this connection the relevant portion of the deed of partnership dated 1st day of April, 1992 may be reproduced below: - " And whereas it has been mutually decided, by the common partners of both the firms viz. M/s. Anand Company and M/s. Mineral Development Corporation that for the sake of convenience and commercial expediency the business of both the firms shall be clubbed together in order to amalgamate the two partnership businesses in one and identical firm to be functioning under the name style of M/s. Anand Company at its place of business at 34-A, Brabourne Road, Calcutta-1 on and from the 1st day ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eciation was contained in section 10(2)(vi), proviso (b) and section 24(2), proviso (b) of the 1922 Act, which correspond to sections 32(2), 12(2) and 73(2) of the 1961 Act. Section 32(2) makes provision for carry forward and setoff of the unabsorbed depreciation of a particular year. According to that section, where in the assessment of the assessee, (up to 31-3-1993) or if the assessee is a registered firm or an unregistered firm as registered firm in the assessment of its partners, full effect cannot be given to the depreciation allowance in any previous year owing to there being no profits or gains chargeable for that previous year, or the profit or gains chargeable being less than the allowance, then, subject to the provisions of sections 72(2) and 73(3), the allowance or part of the allowance to which effect has not been given, as the case may be, shall be added to the amount of the allowance for depreciation for the following previous year and deemed to be part of that allowance, or if there is no such allowance for that previous year, be deemed to be the allowance for that previous year, and so on for the succeeding previous year. The effect of this provision contained in s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1988-89 was thus first required to be set off in the assessment of the partners in those assessment years and then was to be treated as a depreciation allowance for the succeeding previous years in the hands of same assessee-firm. On plain reading of section 32(2) of the Act it is, therefore, clear that the unabsorbed depreciation determined in the hands of M/s. MDC which was separately assessed as a registered firm can only be set off either in the hands of its partners or in that firm's hands and not to any other person. In this connection we may refer to the following decisions: 1. Indian Iron Steel Co. Ltd., In re [1941] 9 ITR 539 (Cal.) 2. Indian Iron Steel Co. Ltd. v. CIT [1943] 11 ITR 328 (PC) 3. Bangal Flour Mills Co. Ltd., In re [1941] 9 ITR 568 (Cal.) 4. Kamlapat Motilal v. CIT [1950] 18 ITR 812 (All.) 5. United Steel Co. Ltd. v. Cullington [1941] 9 ITR (Suppl.) 20 (HL) In all these cases it was held that the depreciation allowance is a statutory privilege personal to the assessee and it is not a right which passes to the successor nor is it a right which the assessee can transfer by agreement. In this view of the matter we are, therefore, of the consider ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o invoke section 263 of the Act. In this connection the Ld. counsel for the assessee has placed reliance on a decision of Hon'ble Supreme Court in the case of Malabar Industries Co. Ltd. 17. In the case of Malabar Industries Co. Ltd it was held as follows :- "A bare reading of section 263 of the Income-tax Act, 1961, makes it clear that the prerequisite for the exercise of jurisdiction by the Commissioner suo motu under it, is that the order of the Income-tax Officer is erroneous in so far as it is prejudicial to the interests of the Revenue. The Commissioner has to be satisfied of twin conditions, namely, (i) the order of the Assessing Officer sought to be revised is erroneous; and (ii) it is prejudicial to the interests of the revenue. If one of them is absent - if the order of the Income-tax Officer is erroneous but is not prejudicial to the revenue or if it is not erroneous but is prejudicial to the revenue - recourse cannot be had to section 263(1) of the Act. The provision cannot be invoked to correct each and every type of mistake or error committed by the Assessing Officer, it is only when an order is erroneous that the section will be attracted. An incorrect assumption ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ncorrect assumption of facts as well as on incorrect application of law. The Ld. counsel for the assessee has not been able to point out any basis or justification to hold that the order of the Assessing Officer was in any way permissible or sustainable in law. On perusal of Assessing Officer's order, we find that the Assessing Officer has even failed to state the reason, of allowing the adjustment of unabsorbed depreciation, relating to assessment years 1985-86, 1986-87 and 1988-89 determined in the hands of erstwhile partnership, namely, M/s. MDC and thus making the order of the Assessing Officer as erroneous and prejudicial to the interests of revenue. 19. The contention of the Ld. Counsel for the assessee that no sufficient opportunity of being heard was given by the CIT before passing the order under section 263 is also not sustainable inasmuch as we find that the explanation put forward by the assessee before the CIT has been duly considered in the order passed under section 263. 20. In this view of the matter and considering the totality of the facts and circumstances of the case and in the light of our discussion made above we are of the considered opinion that the orde ..... X X X X Extracts X X X X X X X X Extracts X X X X
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