1972 (6) TMI 2 - HC - Income Tax

Partnership entitled to claim depreciation for business assets despite working partners' lack of individual rights

The High Court of Madras ruled that a partnership was entitled to claim depreciation under the Income-tax Act for assets used in the business, despite ... Depreciation under section 10(2)(vi) of the Income-tax Act, 1922, and section 32(1) of the Income-tax Act, 1961- Partnership between the assessee (who became the absolute owner of the capital, deposits, outstandings and other properties in three Burmah Shell agencies) and working partners to carry on business - working partners have only a right to share the profits or loss of the partnership business and they have no right or claim against the partnership assets – held that, it is the firm which is entitled to depreciation on these assets, not the assessee Issues:1. Entitlement to claim depreciation under section 10(2)(vi) of the Income-tax Act for partnership assets.2. Interpretation of partnership deed regarding ownership of assets and entitlement to depreciation.Analysis:The High Court of Madras addressed two questions referred by the Income-tax Appellate Tribunal. The first question was whether Smt. Rajeswari Vedachalam could claim depreciation for assets used in the partnership business for the assessment year 1960-61. The second question was whether the assessee-firm was entitled to claim depreciation for the assessment years 1960-63 to 1961-64 on partnership assets. The partnership deed indicated that Smt. Rajeswari Vedachalam owned all assets and capital, while working partners had no right to claim partnership assets. The Tribunal held that since the assets were not owned by the partnership, it couldn't claim depreciation. However, the High Court disagreed, stating that the partnership deed clearly made all assets partnership assets, even though working partners had no claim over them. Therefore, the partnership was entitled to depreciation under the Income-tax Act.The Court analyzed the partnership deed clauses and concluded that the assets were intended to be partnership assets, as specified in clause (4) of the deed. Despite working partners having no claim over the assets, the deed clearly indicated that all existing assets were to be considered partnership assets. The Court rejected the Tribunal's interpretation that the assets remained the property of an individual partner due to the working partners' lack of rights. The Court held that if the assets were considered partnership properties and were used for business purposes, depreciation under the Income-tax Act would apply. Consequently, the Court answered the second question in favor of the assessee, allowing the partnership to claim depreciation for the assets used in the business. As a result, the first question was answered in favor of the revenue, requiring the depreciation allowed to Smt. Rajeswari Vedachalam to be added back and brought to assessment. The Court made no order as to costs in this matter.