Colourable gift of business undertaking, section 50B taxation, and linked depreciation and write-off claims were disallowed.
A transfer described as a gift of a proprietary business undertaking to a company is treated as a colourable device where surrounding facts show no genuine gratuitous intent, and capital gains computation under section 50B is applied on that true character. Related claims for depreciation on the transferred undertaking fail where there is no real succession as claimed, and unabsorbed depreciation is not available for set-off against salary income under the post-amendment scheme of section 32(2) and section 71(2A). Write-off of sundry debtors and pre-operative or deferred revenue expenses is also disallowed where the write-off is part of the same sham arrangement and no independent year-wise crystallisation or bona fide basis is shown.
Issues: (i) Whether the transfer of the proprietary business undertaking by way of gift to a company was a genuine gift or a sham colourable device liable to capital gains tax, and whether section 50B of the Income-tax Act, 1961 applied; (ii) whether depreciation on the transferred business undertaking and set-off of unabsorbed depreciation against salary income were allowable; (iii) whether write-off of sundry debtors and pre-operative/deferred revenue expenses was allowable.
Issue (i): Whether the transfer of the proprietary business undertaking by way of gift to a company was a genuine gift or a sham colourable device liable to capital gains tax, and whether section 50B of the Income-tax Act, 1961 applied.
Analysis: The transfer was found to be a contemporaneous arrangement after reduction of shareholding in the donee company, with the assessee still retaining substantial control. The company was held to be an artificial person to which the concept of natural love and affection did not meaningfully apply. The deed and surrounding circumstances showed that the so-called gift was not a genuine gratuitous transfer but a colourable device to avoid capital gains tax. On computation, the authorities' approach of applying section 50B to determine net worth and capital gains was upheld.
Conclusion: The transaction was not accepted as a genuine exempt gift, and the capital gains computation under section 50B was sustained against the assessee.
Issue (ii): Whether depreciation on the transferred business undertaking and set-off of unabsorbed depreciation against salary income were allowable.
Analysis: Since the alleged gift was treated as a sham and there was no real succession of business in the manner claimed by the assessee, the claim for proportionate depreciation under the succession proviso failed. The unabsorbed depreciation was also held not available for set-off against salary income in view of the post-amendment scheme of section 32(2) and the restriction under section 71(2A).
Conclusion: The disallowance of depreciation and the denial of set-off of unabsorbed depreciation were upheld against the assessee.
Issue (iii): Whether write-off of sundry debtors and pre-operative/deferred revenue expenses was allowable.
Analysis: The debts and expenses were treated as part of the same colourable arrangement. The sundry debtors were written off on the same date on which the business assets and liabilities were transferred, and no bona fide basis for the write-off was shown. Likewise, the pre-operative and deferred revenue expenses were not shown to have crystallised during the year and were not independently proved to be allowable deductions.
Conclusion: The disallowances of the write-off of sundry debtors and of the pre-operative/deferred revenue expenses were confirmed against the assessee.
Final Conclusion: The appeal failed in entirety, and the Revenue's position on taxability and disallowance of the claimed deductions was sustained.
Ratio Decidendi: A transfer described as a gift will be taxed according to its true character where surrounding facts show a colourable device lacking genuine gratuitous intent, and related deductions or set-offs must also fail where they depend on that unreal transaction.