Depreciation on predecessor's original cost applies where a statutory fiction treats the successor as carrying on the business.

Under a statutory fiction deeming the successor to have carried on the business throughout the previous year, depreciation for assessment purposes was held to be computed by reference to the predecessor firm's original cost of the depreciable assets. The court reasoned that section 10 allowances attach to the profits of the business whose income is being assessed, so the word "assessee" in section 10(2)(vi) referred to the person on whose profits the assessment rested, namely the predecessor. The majority distinguished ordinary successor assessments and concluded that the successor company could claim depreciation on the predecessor's original cost; the dissent would have used the successor's own cost.

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Issues: (i) Whether, in an assessment under section 26(2), depreciation under section 10(2)(vi) is to be computed on the original cost to the successor company or on the original cost to the predecessor firm.

Analysis: Section 26(2) creates a hypothetical assessment by deeming the successor to have carried on the business throughout the previous year and to have received its profits. Reading section 10 as a whole, the allowances for business income are intended to be applied to the profits of the business whose income is being ascertained. In that context, the word "assessee" in section 10(2)(vi) was construed to refer to the person on whose profits the assessment is based, namely the predecessor whose business generated the income for the relevant previous year. The majority held that the Privy Council decision on ordinary successor assessments did not govern this distinct situation of a statutory fictional assessment under section 26(2).

Conclusion: Depreciation under section 10(2)(vi) in an assessment under section 26(2) is to be computed on the original cost to the predecessor firm, not on the cost to the successor company.

Dissenting Opinion: Blackwell J. held that section 26(2) required the successor to be treated as having carried on the business and owning the assets during the previous year, and that the wording of section 10(2)(vi), read with the definition of "assessee", compelled computation on the successor's own cost. On that view, the reference question was answered in the affirmative.

Final Conclusion: The reference was answered against the Revenue and the successor company obtained the depreciation basis claimed on the predecessor's original cost.

Ratio Decidendi: Where a statute deems a successor to have carried on the business throughout the previous year for assessment purposes, the computation of business allowances must be made by reference to the predecessor's profits and the predecessor's ownership and cost of the depreciable assets.

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