Court allows further inquiry on carried forward loss, rules in favor of assessee on factory value

The court determined that the assessment order did not conclusively establish the nature of the carried forward loss, allowing for further inquiry. Regarding the written down value of the factories, the court ruled in favor of the assessee, setting the value at Rs. 6,00,000 instead of Rs. 6,20,000. Each party was instructed to bear their own costs.

---

---

Issues Involved:
1. Whether the assessment order for the assessment year 1955-56 conclusively determined that the sum of Rs. 1,76,919 represented a loss and not unabsorbed depreciation.
2. Whether the written down value of the two factories for the purpose of depreciation allowance was Rs. 6,20,000.

Detailed Analysis:

Issue 1: Assessment Order and Carried Forward Loss
The primary question was whether the assessment order for the assessment year 1955-56 conclusively determined that the sum of Rs. 1,76,919 represented a loss and not unabsorbed depreciation. The Tribunal had concluded that the sum of Rs. 1,76,919 was to be treated as a carried forward loss under section 24(2) of the Indian Income-tax Act, 1922, and not as unabsorbed depreciation. The Tribunal's reasoning was based on the final and conclusive nature of the assessment order for the year 1955-56, which did not explicitly differentiate between loss and unabsorbed depreciation.

However, it was argued that even if the Income-tax Officer described the amount as a carried forward loss, it could still include unabsorbed depreciation, which is also carried forward but treated differently under section 10(2)(vi). The Tribunal's decision was challenged on the grounds that it did not preclude an inquiry into whether the carried forward loss contained unabsorbed depreciation and how it should be treated.

The judgment clarified that unabsorbed depreciation is carried forward and added to the depreciation of the following year, as per section 10(2)(vi), and can be set off against income under any head. The Tribunal's view that unabsorbed depreciation could not be carried forward by the assessee was found to be erroneous. The court concluded that the assessment order of 1955-56 did not preclude the Tribunal from inquiring into the nature of the carried forward loss. Therefore, the first question was answered in the negative.

Issue 2: Written Down Value of Factories
The second issue was whether the written down value of the two factories for the purpose of depreciation allowance was Rs. 6,20,000. The Tribunal had upheld the view that the written down value should be the same as it was in the hands of the dissolved firm. However, the assessee argued that the value should be Rs. 6,00,000, as the value of Rs. 6,20,000 was a mistake.

The Tribunal had relied on the Nagpur High Court's decision in Commissioner of Income-tax v. Seth Mathuradas Mohta. However, this decision was overruled by the Supreme Court in Kalooram Govindram v. Commissioner of Income-tax, which held that the cost to the assessee at the time of partition should be the value at which the properties were auctioned for the purpose of partition.

The court noted that the valuation of the property was real and not notional, and the adjustment was made by payment of Rs. 4,35,000 in cash by the assessee to equalize the shares. Therefore, the cost of the property to the assessee on the date of partition would be the value given to it for the purposes of allotment. The court concluded that the written down value of the factories should be Rs. 6,00,000, not Rs. 6,20,000. Thus, the second question was answered in the affirmative and in favor of the assessee, subject to the correction of the amount to Rs. 6,00,000.

Conclusion:
The court answered the first question in the negative, indicating that the assessment order did not conclusively determine the nature of the carried forward loss. The second question was answered in the affirmative, affirming that the written down value of the factories for depreciation purposes was Rs. 6,00,000. The parties were directed to bear their own costs.

---