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of <h1>Conversion to Partnership Firm Not Treated as Sale for Depreciation</h1> <h3>Commissioner of Income Tax Versus Ramlubhaiya R. Malhotra.</h3> Commissioner of Income Tax Versus Ramlubhaiya R. Malhotra. - [2002] 254 ITR 165, 169 CTR 435, 119 TAXMANN 962 Issues:1. Claim of depreciation under section 34(2)(ii) after conversion of proprietary business into a partnership firm.Analysis:The judgment pertains to a reference made by the Income-tax Appellate Tribunal regarding the claim of depreciation under section 34(2)(ii) of the Income-tax Act, 1961. The primary issue was whether the Tribunal was correct in upholding the claim of the assessee for depreciation after the proprietary business was converted into a partnership firm during the relevant accounting period. The assessee had initially run a proprietary business named Standard Rolling Mills, which was later taken over by a new firm as a partnership with the same business name. The assessee claimed depreciation and investment allowance for the assets of the proprietary business. The Assessing Officer rejected the claim, but the Commissioner of Income-tax (Appeals) allowed it. The Tribunal partially allowed the Revenue's appeal, disallowing the investment allowance claim but affirming the depreciation claim.The crux of the matter was the interpretation of section 34(2)(ii) of the Income-tax Act, which deals with the denial of depreciation claims in specific circumstances like sale, discard, demolition, or destruction of assets. The Revenue contended that the conversion of the proprietary business into a partnership firm constituted a sale, thus disqualifying the assessee from claiming depreciation. However, the court disagreed, emphasizing that under partnership law, bringing assets as capital contribution does not amount to a sale, as the proprietor retains interest in the assets. The court also analyzed the definitions of 'sold' and 'transfer' under the Act, concluding that they did not apply to the case at hand.Furthermore, the court referenced the Madras High Court's decision in A. M. Ponnurangam Mudaliar v. CIT, which supported the view that conversion into a partnership firm does not constitute a transfer for the purposes of capital gains computation. Ultimately, the court upheld the Tribunal's decision, ruling in favor of the assessee's claim for depreciation under section 34(2)(ii) in the scenario of converting a proprietary business into a partnership firm during the relevant accounting period. The judgment resolved the reference in favor of the assessee, with no costs awarded.In conclusion, the judgment provides a detailed analysis of the legal provisions related to depreciation claims in the context of converting a proprietary business into a partnership firm. It clarifies the distinction between sale and capital contribution in a partnership, ultimately supporting the assessee's entitlement to depreciation benefits in the given circumstances.
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