1991 (11) TMI 98 - AT - Income Tax

Summary

Issues:
1. Claim for depreciation on revalued assets after dissolution of a firm.

Analysis:
The judgment by the Appellate Tribunal ITAT Bangalore addressed the issue of whether an assessee, a private limited company, could claim depreciation on revalued assets following the dissolution of a firm. The firm, which included the assessee and six other partners, owned land and a building used for a nursing home. Upon dissolution, the assets were revalued, and the other partners were paid their shares. The assessee claimed depreciation based on the revalued cost, but the Income Tax Officer (ITO) and the CIT (Appeals) denied the claim citing Explanation 3 to section 43(1). The assessee argued that there was no transfer of assets as they were allotted to the partner at dissolution, relying on legal precedents such as Malabar Fisheries Co. v. CIT and Bankey Lal Vaidya v. CIT. The departmental representative contended that a change of ownership occurred, invoking the decision in Kungundi Industrial Works (P.) Ltd. v. CIT. The Tribunal noted that the assets were revalued for dissolution, partners were paid based on revalued cost, and legal precedents established that no transfer occurred when assets were taken over by a partner at dissolution. Consequently, Explanation 3 was deemed inapplicable, and the assessee was allowed to claim depreciation on the revalued figure.

The Tribunal also referenced the case of Dewas Cine Corpn. v. CIT to illustrate that the adjustment of rights between partners at dissolution does not constitute a sale or transfer of assets. Furthermore, the judgments in Bankey Lal Vaidya's case and Malabar Fisheries Co.'s case reiterated that distribution of assets upon dissolution does not involve a transfer by the dissolved firm. The Tribunal emphasized that the revaluation of assets at dissolution and subsequent distribution among partners do not amount to a transfer, as explained by legal precedents. Additionally, the case of Kungundi Industrial Works (P.) Ltd. was distinguished as involving a different scenario where a firm was converted into a private limited company, resulting in a transfer of assets to the new entity. The Tribunal concluded that the legal principles established by the Supreme Court support the assessee's entitlement to claim depreciation on the revalued assets acquired at dissolution, and accordingly allowed the appeal.