1937 (10) TMI 11 - HC - Income Tax

Summary

Issues Involved:
1. Whether the Income-tax Officer correctly computed the depreciation allowance under Section 10(2)(vi) of the Indian Income-tax Act on the original cost to the assessee company itself.
2. Whether the assessment under Section 26(2) of the Act as the successor to the partnership firm should consider the original cost to the predecessor firm.

Issue-wise Detailed Analysis:

Issue 1: Computation of Depreciation Allowance

Beaumont's Judgment:
The assessment year in question is 1935-36, with the previous year ending on 31st March 1935. The Mazagaon Dock Ltd. acquired the assets of the Mazagaon Dock firm on 1st April 1935. The assessee company argued that the depreciation allowance should be based on the original cost to the predecessor firm. The Income-tax Officer disallowed this claim, leading to the reference. Beaumont concluded that in the context of Section 26(2), which deals with the assessment of a successor, the term "assessee" in Section 10(2)(vi) should refer to the predecessor. This interpretation aligns with the purpose of calculating the profits of the previous year, which includes deductions the predecessor would have been entitled to. Beaumont emphasized that the definitions in the Act should yield to the context, and the only rational construction of Section 10 in relation to Section 26(2) is to allow deductions based on the predecessor's costs.

Blackwell's Judgment:
Blackwell disagreed, stating that the language of Section 10(2)(vi) is clear and must be applied as written. He noted that the assessment under Section 26(2) is artificial, treating the successor as if it had carried on the business throughout the previous year. Therefore, the depreciation should be calculated based on the original cost to the successor company. Blackwell referenced the Privy Council decision in the Buckingham and Carnatic Co. case, which supported the view that "assessee" refers to the person being assessed, i.e., the successor.

Rangnekar's Judgment:
Rangnekar supported Beaumont's view, emphasizing that Section 26(2) creates a hypothetical assessment where the successor is assessed on the predecessor's income. He argued that the income of the predecessor can only be accurately ascertained by considering the predecessor's costs, including depreciation. Rangnekar pointed out the difficulties in applying the successor's costs to allowances under Section 10(2) and concluded that the term "assessee" in Section 10(2)(vi) should refer to the predecessor in the context of a hypothetical assessment under Section 26(2).

Issue 2: Assessment Under Section 26(2)

Beaumont's Judgment:
Beaumont highlighted that Section 26(2) requires the successor to be assessed as if it had carried on the business throughout the previous year. This necessitates considering the predecessor's deductions to accurately calculate the profits of the previous year. He noted that the Privy Council decision did not address assessments under Section 26(2), and thus, it is open to the court to interpret the section in the context of hypothetical assessments.

Blackwell's Judgment:
Blackwell maintained that the artificial nature of the assessment under Section 26(2) means the successor must be treated as the owner of the assets during the previous year. Consequently, depreciation should be based on the successor's costs. He argued that the plain language of Section 10(2)(vi) supports this interpretation, and the Privy Council decision reinforces it.

Rangnekar's Judgment:
Rangnekar reiterated that Section 26(2) involves a hypothetical assessment, where the successor is assessed on the predecessor's income. He argued that the term "assessee" in Section 10(2)(vi) should be interpreted in this context to refer to the predecessor, ensuring that the income is accurately calculated based on the predecessor's costs. Rangnekar emphasized that this interpretation avoids the difficulties and inconsistencies that would arise from applying the successor's costs.

Conclusion:
The majority view (Beaumont and Rangnekar) concluded that in the context of an assessment under Section 26(2), the term "assessee" in Section 10(2)(vi) should refer to the predecessor, and the depreciation allowance should be based on the original cost to the predecessor firm. Blackwell dissented, maintaining that the depreciation should be calculated based on the original cost to the successor company. The final answer to the question submitted was in the negative, supporting the majority view.