2007 (1) TMI 492 - AT - Income Tax

Summary

Issues Involved:
1. Deduction of sales commission of Rs. 78,300.
2. Set off of carry forward business loss of Rs. 1,00,000.
3. Set off of unabsorbed depreciation of Rs. 6,16,055.
4. Interest under sections 234B and 234C.

Issue-wise Detailed Analysis:

1. Deduction of Sales Commission of Rs. 78,300:
The assessee, a private limited company formed from the conversion of a partnership firm, claimed a deduction of Rs. 78,300 towards sales commission. The Tribunal held that despite the company assuming all assets and liabilities of the erstwhile partnership firm, it does not automatically qualify for deduction. The liability for the sales commission arose when the predecessor firm executed the sales, and thus, should have been accounted for by the predecessor firm. The deduction was not allowed in the hands of the successor company as it did not meet the requirements under section 145. The Tribunal upheld the order of the Commissioner of Income-tax (Appeals), denying the deduction.

2. Set Off of Carry Forward Business Loss of Rs. 1,00,000:
The assessee claimed a set-off for the carry forward of unabsorbed business loss of Rs. 1,00,000 from the erstwhile partnership firm. The Tribunal referred to section 78(2) of the Income-tax Act, which precludes the carry forward of losses except in cases of inheritance. The Tribunal clarified that the conversion of a partnership firm into a company does not qualify as inheritance, as inheritance is a natural phenomenon and cannot be defined or specified by the predecessor. Since the conversion does not meet the criteria of inheritance, the claim for carry forward of the business loss was disallowed. The Tribunal upheld the Revenue's decision.

3. Set Off of Unabsorbed Depreciation of Rs. 6,16,055:
The assessee also claimed the carry forward of unabsorbed depreciation of Rs. 6,16,055. The Tribunal analyzed section 32(2) of the Income-tax Act, which governs the carry forward of unabsorbed depreciation. The Tribunal noted that the allowance of depreciation should be allocated between the predecessor and successor based on the number of days the assets were used by each during the relevant year. The Assessing Officer had allowed full depreciation in the hands of the partnership firm and denied it to the successor company. The Tribunal remitted the matter back to the Assessing Officer to determine the correct amount of depreciation allowable to both the predecessor firm and the successor company, ensuring a fair assessment as per the law. The Tribunal agreed that carry forward of depreciation under section 32(2) could only be in the hands of the partnership firm and directed the Assessing Officer to adjudicate the correct amount of Written Down Value (WDV) in the successor company's hands.

4. Interest under Sections 234B and 234C:
The Tribunal did not provide a separate detailed analysis for the interest levied under sections 234B and 234C. However, it can be inferred that the interest would be consequential based on the adjustments and disallowances made in the assessment.

Conclusion:
The assessee's appeal was partly allowed for statistical purposes. The Tribunal upheld the disallowance of the sales commission and the carry forward of business loss, while remitting the issue of unabsorbed depreciation back to the Assessing Officer for a fresh decision in accordance with the law. The order was pronounced in open court on January 12, 2007.