Ownership of transferred business assets supported depreciation, and the revenue challenge to the related expenditure disallowance failed.

Depreciation was discussed in the context of assets taken over from a proprietary concern, with the ownership question turning on the transfer of the running business, the affidavit of the transferor, and later execution of the sale deed. The tribunal treated the assessee as the owner of both movable and immovable assets and applied the principle that, where two views on ownership are possible, the one favourable to the assessee prevails; depreciation was therefore allowable. On the expenditure issue under section 37(2B), the disallowance was examined against the nature of the spending and the relevant legal position for the period, and the deletion of the disallowance was upheld.

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Issues: (i) Whether the assessee was entitled to depreciation on the movable and immovable assets taken over from the proprietary concern in the years under appeal. (ii) Whether the disallowance made under section 37(2B) was justified.

Issue (i): Whether the assessee was entitled to depreciation on the movable and immovable assets taken over from the proprietary concern in the years under appeal.

Analysis: The assessee had taken over the running concern together with its assets and liabilities, and the record showed that the business was being carried on by the company from 1-4-1972. The affidavit of the transferor stated that the assessee was the owner of the assets and that he was acting as trustee for the assessee until the sale deed was executed. The Court held that the assessee was the owner of the assets, both movable and immovable, taken over from the concern. It further held that where two views on ownership were possible, the view favourable to the assessee had to prevail. On the movable assets, the Court found that ownership had passed when they were acquired and used by the company.

Conclusion: The assessee was entitled to depreciation on both the movable and immovable assets, and the denial of depreciation was unjustified.

Issue (ii): Whether the disallowance made under section 37(2B) was justified.

Analysis: The amount disallowed was examined in the light of the nature of the expenditure and the governing legal position applicable to the relevant period. The Court found no substance in the revenue's challenge to the deletion made by the appellate authority.

Conclusion: The deletion of the disallowance under section 37(2B) was upheld.

Final Conclusion: The assessee succeeded on the depreciation issue and also on the small disallowance issue, while the revenue's appeals failed.

Ratio Decidendi: Depreciation cannot be denied where the assessee is found to be the owner of the assets taken over and used in business, even if the formal conveyance is completed later; if two views are reasonably possible, the view favourable to the assessee must be adopted.

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