1939 (4) TMI 23 - HC - Income Tax

Summary

Issues Involved:
1. Entitlement to depreciation on machinery and buildings from the date of possession.
2. Inclusion of losses, interest on sums advanced, and interest on capital invested as part of the original cost.
3. Entitlement to depreciation on the cost of additions to buildings and machinery.

Detailed Analysis:

1. Entitlement to Depreciation on Machinery and Buildings from the Date of Possession:
The primary issue was whether the assessee was entitled to depreciation on the machinery and buildings from December 28, 1926, the date on which they were put in possession of the Mills. The court held that the assessee succeeded to the business of the Mills in May 1932, and the assessment should be made in accordance with Section 26(2) of the Income Tax Act. This means the successor is assumed to have carried on the business throughout the previous year and received the profits for that year. Therefore, the computation of profits for the year 1932 must include all deductions to which the predecessor would have been entitled under Section 10(2). The court referenced the Full Bench decision of the Bombay High Court in Commissioner of Income-tax, Bombay Presidency, Sind and Baluchistan v. Mazagaon Dock Ltd., Bombay, which supported this interpretation. The court concluded that the assessee must be deemed to be the predecessor for the purposes of notional assessment and entitled to depreciation on that basis. Thus, the answer to the first question was in the affirmative.

2. Inclusion of Losses, Interest on Sums Advanced, and Interest on Capital Invested as Part of the Original Cost:
The second issue was whether the original cost of the machinery and buildings should include losses incurred, interest on sums advanced to the liquidators, and interest on capital invested by the assessee during its incumbency as mortgagee and managing agent. The court examined the sale deed and concluded that the consideration for the transfer of the Mills was only Rs. 11,12,000. The losses, interest on sums advanced, and interest on capital invested did not form part of the consideration for the sale. Therefore, these amounts could not be included in determining the "original cost" to the assessee of the machinery and buildings. The answer to the second question was in the negative.

3. Entitlement to Depreciation on the Cost of Additions to Buildings and Machinery:
The third issue was whether the assessee was entitled to depreciation on the amounts spent on additions to buildings and machinery during its incumbency. The court noted that it was not disputed that the two items mentioned (Rs. 13,391 and Rs. 14,035) were spent on making additions to buildings and machinery. Consequently, these amounts must be taken into account in calculating the depreciation to which the assessee is entitled. The answer to the third question was in the affirmative.

Conclusion:
The court concluded that the assessee was entitled to depreciation from the date of possession, the original cost did not include losses and interest, and the assessee was entitled to depreciation on the cost of additions to buildings and machinery. The court allowed the assessee the costs of the reference, assessed at Rs. 500, and fixed the fee for the counsel for the Income-tax Department at Rs. 200. The reference was answered accordingly.