Succession and depreciation under income tax law: successor cannot inherit predecessor's unabsorbed depreciation, and year-of-succession depreciation is split.

On succession to a business under Section 26(2) of the Indian Income-tax Act, 1922, depreciation for the year of succession was held to be computable separately for the pre-succession and post-succession periods, because the notional assessment under that provision does not preserve the predecessor's depreciation basis for the successor throughout the whole previous year. Depreciation under Section 10(2)(vi) is computed on the original cost to the assessee claiming it, so the successor had to compute depreciation on the cost applicable after transfer. The successor was also not entitled to carry forward the predecessor's unabsorbed depreciation, as the allowance is personal to the assessee and is not transferred merely because the business changes hands.

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Issues: (i) Whether, on succession to a business under Section 26(2) of the Indian Income-tax Act, 1922, depreciation for the year of succession could be computed as if the business had been carried on by the successor throughout the previous year. (ii) Whether the successor could carry forward and claim the predecessor's unabsorbed depreciation allowance.

Issue (i): Whether, on succession to a business under Section 26(2) of the Indian Income-tax Act, 1922, depreciation for the year of succession could be computed as if the business had been carried on by the successor throughout the previous year.

Analysis: The assessment under Section 26(2) is a notional one only to the extent necessary to fasten liability on the successor for the profits of the previous year. The depreciation allowance under Section 10(2)(vi) is computed on the original cost of the assets to the assessee, and the section contains no indication that, after succession, the predecessor's basis of depreciation continues for the successor for the whole year. For the period after the transfer, depreciation has to be worked out on the cost to the successor.

Conclusion: The successor was not entitled to have depreciation for the whole previous year computed on the original cost to the predecessor; the Revenue's computation for the pre-succession and post-succession periods was correct.

Issue (ii): Whether the successor could carry forward and claim the predecessor's unabsorbed depreciation allowance.

Analysis: Proviso (b) to Section 10(2)(vi) permits only the carrying forward of depreciation allowance that falls within Section 10(2)(vi), namely, allowance computed on the original cost of the assets to the assessee claiming it. The allowance is a statutory privilege personal to the assessee carrying on the business, and it does not become transferable to a successor merely because the business or assets are transferred by agreement. Section 26(2) deals with assessment on succession, not with transfer of the predecessor's depreciation balance.

Conclusion: The successor could not claim the predecessor's unabsorbed depreciation allowance; the claim failed.

Final Conclusion: The reference was answered against the assessee and in favour of the Revenue on both substantive questions, and the assessment made by the tax authority was upheld.

Ratio Decidendi: Depreciation under Section 10(2)(vi) of the Indian Income-tax Act, 1922 is an allowance personal to the assessee based on the original cost of the assets to that assessee, and neither Section 26(2) nor proviso (b) authorises a successor to inherit or carry forward the predecessor's unabsorbed depreciation.

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