1991 (6) TMI 9 - HC - Income Tax

Depreciation, Expenditure On Abandoned Film Project, Limitation For Draft Assessment Order, Rental Income

Issues Involved:
1. Legality and limitation of the Income-tax Officer's order under section 144B.
2. Assessment of income from Vijaya and Vauhini Studios as 'business income.'
3. Assessment of income derived from letting the studios as 'business income.'
4. Assessment of lease rent income from Sarada Binding Works under 'other sources.'
5. Classification of Rs. 14,000 as revenue expenditure or capital expenditure.
6. Applicability of section 34(2)(ii) when assets of a proprietary concern are converted into partnership assets.

Detailed Analysis:

1. Legality and Limitation of the Income-tax Officer's Order under Section 144B
The assessee contended that the Income-tax Officer (ITO) became functus officio after forwarding the first draft order on March 23, 1976, and had no jurisdiction to forward a second draft order on March 25, 1976. The court found that the assessee had not raised this objection at any stage of the proceedings before the authorities below. The draft order sent on March 25, 1976, was considered a supplement to the earlier draft, forming an integral part of the original draft order. The court rejected the assessee's argument of automatic extension of time for objections and held that the assessment completed on April 29, 1976, was within the extended time limit allowed under section 153(1)(a)(iii) and Explanation 1(iv) of the Act. The first question was answered in the negative and in favor of the Revenue.

2. Assessment of Income from Vijaya and Vauhini Studios as 'Business Income'
The Tribunal upheld the assessment of income from Vijaya and Vauhini Studios under the head "Business." The court referred to previous decisions in CIT v. B. Nagi Reddy [1984] 147 ITR 337 and CIT v. B. Nagi Reddy [1989] 180 ITR 457, which held that the rental income from studios should be assessed as "Business income" considering the assessee's activities in the film business. The second question was answered in the affirmative and against the Revenue.

3. Assessment of Income Derived from Letting the Studios as 'Business Income'
Similar to the second issue, the Tribunal and the court held that the income derived from letting the studios should be assessed under the head "Business." The court reiterated the principles from the same previous decisions, emphasizing the business nature of the assessee's activities. The third question was answered in the affirmative and against the Revenue.

4. Assessment of Lease Rent Income from Sarada Binding Works under 'Other Sources'
The Income-tax Officer assessed the lease rent income from Sarada Binding Works under "Income from property," but the Appellate Assistant Commissioner and the Tribunal directed it to be assessed under "Other sources" based on earlier Tribunal decisions. However, the court found no material evidence of such an earlier Tribunal order and thus could not uphold the Tribunal's conclusion. The fourth question was answered in the negative and in favor of the Revenue.

5. Classification of Rs. 14,000 as Revenue Expenditure or Capital Expenditure
The assessee claimed Rs. 14,000 incurred in the production of two abandoned films as revenue expenditure. The Income-tax Officer disallowed the claim, but the Appellate Assistant Commissioner and the Tribunal allowed it, considering the commercial expediency. The court agreed that the expenditure was incurred in the ordinary course of business and was allowable as revenue expenditure. The fifth question was answered in the affirmative and against the Revenue.

6. Applicability of Section 34(2)(ii) When Assets of a Proprietary Concern are Converted into Partnership Assets
The Income-tax Officer did not allow depreciation on assets transferred to a partnership firm, invoking section 34(2)(ii). The Appellate Assistant Commissioner and the Tribunal held that section 34(2)(ii) was not applicable as the assets were not sold, discarded, demolished, or destroyed but merely converted into partnership assets. The court upheld this view, citing decisions in CIT v. Hind Construction Ltd. [1972] 83 ITR 211, D. Kanniah Pillai v. CIT [1976] 104 ITR 520, and A. Subbiah Nadar v. CIT [1976] 104 ITR 564, which established that such a conversion does not constitute a sale. The sixth question was answered in the affirmative and against the Revenue.

Conclusion
The court provided a comprehensive analysis of each issue, ultimately ruling partly in favor of the Revenue and partly in favor of the assessee. No order as to costs was made due to the partial success of both parties.

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