Depreciation before firm reconstitution cannot be clubbed under section 41(2) for profit computation.

For computing profits under section 41(2) of the Income-tax Act, depreciation allowed to a firm before its reconstitution on a partner's death is not to be clubbed with depreciation allowed to the newly constituted firm. The relevant deductions are confined to those granted to the assessee-firm in its own hands. On that basis, the depreciation allowed to the erstwhile firm was excluded from the computation, and the question was answered against the Revenue.

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Issues: Whether, for computing profits under section 41(2) of the Income-tax Act, 1961, depreciation allowed to the firm before its reconstitution on the death of a partner was to be taken into account.

Analysis: On the death of a partner, a firm stands dissolved unless there is a contract to the contrary. The depreciation allowed to the erstwhile firm cannot be clubbed with the depreciation allowed to the newly constituted firm for the purpose of section 41(2). The amount eligible for consideration is confined to the deductions granted to the assessee-firm in its own hands.

Conclusion: The depreciation allowed to the firm prior to reconstitution was not to be taken into account while computing profits under section 41(2). The question was answered in the negative and against the Revenue.

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