1972 (11) TMI 6 - HC - Income Tax

HUF partition depreciation: Initial depreciation cannot reduce written down value under section 10(5)(b) Income-tax Act 1922

Commissioner of Income-Tax, Ernakulam Versus PN. Krishna Iyer.

The HC ruled in favor of the assessee on both questions regarding depreciation treatment under the Income-tax Act, 1922. The court held that initial ... Eligibility of deduction of Initial Depreciation in Computing Written Down Value - value of assets taken over on partition of the HUF - application of the provisions contained in section 10(5)(b) instead of section 10(5)(c) - meaning of the word 'inheritance' - HELD THAT:- In the case of a partition there can be no gift involved. Every member of a joint Hindu family will have an interest in the joint family property before partition. This court held that there is no transfer involved in the case of a partition. So the only question is whether a member of a Hindu undivided family or a smaller group in a Hindu undivided family taking property on partition of the family can be said to inherit the property from the original family. Even so, it is not possible to understand property taken on partition of a joint Hindu undivided family as property inherited by the member or group taking the property on partition. Clause (c) of sub-section (5) of the section cannot have, therefore, any application. The Tribunal has applied clause (b) of sub-section (5) of section 10. If that clause 'is applied, the result arrived at by the Tribunal must follow. Clause (b) of sub-section (5) of section 10 only permits the deduction from the original cost, of the depreciation allowed to the assessee. The assessee in this case, as we said earlier, is the smaller group which came into existence as a different group on partition in October, 1951. The sum of Rs. 1,01,814 was not depreciation allowed to the assessee. Therefore, that sum was not deductible from the actual cost under clause (b) of sub-section (5) of section 10 of the Act. Thus, we answer both the questions in the affirmative, that is, in favour of the assessee and against the department. The assessee will have his costs from the department which we fix at Rs. 250 1. ISSUES PRESENTED and CONSIDEREDThe Court considered two core legal questions referred by the Income-tax Appellate Tribunal, Cochin Bench, at the instance of the Commissioner of Income-tax, Kerala:(a) Whether the Tribunal was legally justified in holding that the initial depreciation of Rs. 1,01,814 allowed to the original Hindu undivided family (HUF) should not be deducted in computing the written down value (WDV) of assets for the purpose of calculating profits under section 10(2)(vii) of the Income-tax Act, 1922Rs.(b) Whether the Tribunal was legally justified in applying the provisions of section 10(5)(b) of the Income-tax Act, 1922, instead of section 10(5)(c) in determining the written down value of assets taken over on partition of the HUFRs.2. ISSUE-WISE DETAILED ANALYSISIssue 1: Deductibility of Initial Depreciation of Rs. 1,01,814 in Computing Written Down ValueRelevant Legal Framework and Precedents: The assessment year was 1953-54, and the relevant statutory provisions were sections 10(2)(vii) and 10(5) of the Income-tax Act, 1922. Section 10(2)(vii) deals with computation of profits including the treatment of depreciation and written down value of assets. Section 10(5) defines 'written down value' for the purposes of subsection (2), particularly clauses (b) and (c) which specify how to compute WDV for assets acquired before the previous year and assets acquired by gift or inheritance respectively.Court's Interpretation and Reasoning: The Court noted that the original Hindu undivided family had been partitioned on October 23, 1951, creating a smaller HUF (the assessee). The assets used in the business were allotted to the smaller HUF. The assessee contended that the original cost of assets taken over should be the written down value as per the accounts of the original HUF plus the initial depreciation of Rs. 1,01,814 allowed to the original HUF. The Tribunal had rejected the department's contention that the initial depreciation should be deducted from the written down value.The Court examined the definition of written down value under section 10(5)(b), which allows deduction of depreciation 'actually allowed to him' (the assessee) from the actual cost. The Court emphasized that the initial depreciation of Rs. 1,01,814 was allowed to the original HUF, not to the smaller HUF (assessee) which came into existence only after partition. Therefore, this initial depreciation was not 'allowed to the assessee' and could not be deducted from the actual cost for computing WDV under section 10(5)(b).Key Evidence and Findings: The initial depreciation was allowed to the original HUF before partition. The smaller HUF did not have this depreciation allowance. The sale of some assets during the accounting year resulted in a sale consideration exceeding the WDV by Rs. 87,194, which was added as profit under the proviso to section 10(2)(vii).Application of Law to Facts: Since the initial depreciation was not allowed to the assessee but to the original HUF, it could not be deducted from the actual cost in computing WDV for the assessee. The Tribunal's approach in refusing to deduct this initial depreciation was thus legally justified.Treatment of Competing Arguments: The department argued that the initial depreciation should be deducted to arrive at the correct WDV. The Court rejected this, holding that the depreciation allowed to the original HUF cannot be imputed to the smaller HUF post-partition. The assessee's contention that the initial depreciation should not be deducted was accepted.Conclusion: The Court affirmed the Tribunal's decision that the initial depreciation of Rs. 1,01,814 was not deductible in computing the WDV for the assessee under section 10(2)(vii).Issue 2: Applicability of Section 10(5)(b) vs. Section 10(5)(c) for Computing Written Down Value on PartitionRelevant Legal Framework and Precedents: Section 10(5)(b) applies to assets acquired before the previous year, defining WDV as actual cost less depreciation allowed to the assessee. Section 10(5)(c) applies to assets acquired by way of gift or inheritance, defining WDV as the WDV of the previous owner or market value, whichever is less.Court's Interpretation and Reasoning: The Court analyzed whether assets taken on partition of a Hindu undivided family could be considered as acquired by inheritance under section 10(5)(c). The Court noted that partition does not involve a transfer akin to inheritance or gift. It referred to established legal principle that partition does not amount to a transfer and that every member of a joint HUF has an interest in the joint family property before partition.The Court examined the meaning of 'inheritance' through authoritative sources such as Black's Law Dictionary and the Shorter Oxford English Dictionary, concluding that inheritance generally implies acquisition by succession on death or by birthright, which is not the case in partition.Key Evidence and Findings: The assets were allotted on partition, not by gift or inheritance. The Court found that the popular and legal meaning of inheritance does not extend to property taken on partition.Application of Law to Facts: Since the assets were not acquired by gift or inheritance, section 10(5)(c) was inapplicable. The Tribunal correctly applied section 10(5)(b) to compute WDV.Treatment of Competing Arguments: The department argued for applying section 10(5)(c), presumably to reduce the WDV by considering the previous owner's WDV or market value. The Court rejected this, holding that partition does not amount to inheritance and accordingly section 10(5)(c) cannot be applied.Conclusion: The Court held that section 10(5)(b) applies to assets acquired on partition of a Hindu undivided family and that section 10(5)(c) is inapplicable.3. SIGNIFICANT HOLDINGSThe Court answered both questions in the affirmative in favor of the assessee and against the department. The key legal reasoning includes the following verbatim excerpts:'Clause (b) of sub-section (5) of section 10 only permits the deduction from the original cost, of the depreciation allowed to the assessee. The assessee in this case... is the smaller group which came into existence as a different group on partition in October, 1951. The sum of Rs. 1,01,814 was not depreciation allowed to the assessee. Therefore, that sum was not deductible from the actual cost under clause (b) of sub-section (5) of section 10 of the Act.''In the case of a partition there can be no gift involved. Every member of a joint Hindu family will have an interest in the joint family property before partition... it is not possible to understand property taken on partition of a joint Hindu undivided family as property inherited by the member or group taking the property on partition. Clause (c) of sub-section (5) of the section cannot have, therefore, any application.'The core principles established are:Initial depreciation allowed to the original Hindu undivided family cannot be deducted from the actual cost of assets taken over by a smaller Hindu undivided family formed on partition, for the purpose of computing written down value under section 10(2)(vii) of the Income-tax Act, 1922.Assets taken over on partition of a Hindu undivided family are not acquired by inheritance or gift; hence, section 10(5)(c) of the Income-tax Act, 1922, is not applicable. Instead, section 10(5)(b) applies for computing written down value.Final determinations on each issue:(1) The Tribunal was justified in law in holding that the initial depreciation of Rs. 1,01,814 was not to be deducted in computing the written down value for profits under section 10(2)(vii).(2) The Tribunal was justified in applying section 10(5)(b) instead of section 10(5)(c) in computing the written down value of assets taken over on partition.