1978 (11) TMI 3 - SC - Income Tax

Supreme Court exempts Rs. 24,252 from tax under Income Tax Act

The Supreme Court held that the sum of Rs. 24,252 was not taxable in the appellant's hands for the assessment year 1957-58 under the second proviso to s. ... There was a total disruption of the family and on the same day the separated members of the family constituted a partnership firm - ITO held that the entire sum of Rs. 24,252, representing the sale proceeds of the three trucks, should be deemed to be profits of the previous year by virtue of the second prov. to s. 10(2)(vii) - depreciation allowed to the family cannot be regarded as depreciation allowed to the appellant so second prov. to s. 10(2)(vii) not attracted Issues:1. Taxability of the sum of Rs. 24,252 under s. 10(2)(vii) of the Indian I.T. Act, 1922.2. Interpretation of the second proviso to s. 10(2)(vii) in relation to the sale proceeds of three trucks.3. Consideration of depreciation allowance and written down value in determining tax liability.4. Distinction between a partnership firm and a Hindu Undivided Family (HUF) for tax purposes.5. Potential classification of the sum as capital gains under s.12B of the Act.Analysis:The case involves the taxability of a sum of Rs. 24,252 under s. 10(2)(vii) of the Indian I.T. Act, 1922. The appellant, a partnership firm, sold three trucks during the previous year ending March 31, 1958. The Income Tax Officer (ITO) included the entire sale proceeds in the appellant's income, invoking the second proviso to s. 10(2)(vii) to recover depreciation benefits. The High Court upheld this decision, considering the business takeover as a mere change in style and nature from a Hindu Undivided Family (HUF) to the appellant. However, the Supreme Court disagreed, emphasizing that the written down value of the trucks was nil when acquired by the appellant, precluding any depreciation allowance and balancing charge under s. 10(2)(vii).The Supreme Court clarified that the cost of assets to the appellant, including the three trucks, should be deemed nil due to the exhausted written down value from the HUF period. Despite the business takeover as a running concern, the Court held that the actual cost to the appellant remained nil, thereby rejecting the revenue's argument to consider depreciation allowed to the HUF. The Court emphasized the distinct assessable entity status of a firm under the I.T. Act, disregarding past depreciation benefits allowed to the HUF in determining the appellant's tax liability.Consequently, the Court ruled that the sum of Rs. 24,252 was not taxable in the appellant's hands for the assessment year 1957-58 under the second proviso to s. 10(2)(vii). The judgment highlighted the inapplicability of the balancing charge provision in cases where no depreciation was allowed to the current assessable entity. Additionally, the Court declined to address the capital gains aspect under s.12B, leaving it open for the Tribunal to consider in further proceedings. The appellant's appeal was allowed, and costs were awarded in their favor.