1995 (5) TMI 46 - AT - Income Tax

Actual Cost Assessment Year Certain Assets Change In Constitution Of Firm Firm Registration Original Assessment

Summary

Issues Involved:
1. Validity of reassessment proceedings under section 147(b).
2. Applicability of section 187 versus section 188 of the Income-tax Act.
3. Allowance of depreciation on enhanced valuation of assets.

Detailed Analysis:

1. Validity of Reassessment Proceedings under Section 147(b):
The assessee challenged the validity of reassessment proceedings initiated under section 147(b). The original assessments were completed under section 143(1), and the reassessment was initiated because the Income-tax Officer (ITO) found that the assessee had claimed depreciation on an enhanced value of assets, leading to escapement of income.

The Tribunal examined various Supreme Court decisions, including Kalyanji Mavji & Co. v. CIT, Indian & Eastern Newspaper Society v. CIT, and A.L.A. Firm v. CIT. The Tribunal concluded that the ITO could initiate reassessment proceedings under section 147(b) based on information obtained from the original assessment records, provided the ITO was not aware of the material at the time of the original assessment. The Tribunal held that the reassessment proceedings were valid as the ITO had not formed any opinion about the allowability of depreciation during the original assessments under section 143(1).

2. Applicability of Section 187 versus Section 188 of the Income-tax Act:
The CIT(A) had upheld the ITO's decision to make a single assessment for the entire period, relying on the Karnataka High Court's decision in CIT v. Sree Durga Enterprises. However, the Tribunal noted that the Supreme Court in Wazid Ali Abid Ali v. CIT had disapproved the majority judgment of the Karnataka High Court in CIT v. Shambulal Nathalal & Co., which formed the basis of the Sree Durga Enterprises decision.

The Tribunal emphasized that where a firm is dissolved and a new firm is formed, section 188 applies, necessitating separate assessments for the old and new firms. The Tribunal found that the dissolution of the old firm was genuine and legally valid. Therefore, it directed the ITO to make separate assessments for the two periods corresponding to the old and new firms, reversing the CIT(A)'s decision.

3. Allowance of Depreciation on Enhanced Valuation of Assets:
The ITO had allowed depreciation based on the written-down values (WDVs) of the assets in the hands of the old firm, not on the revalued figures. The CIT(A) upheld this decision. However, the Tribunal noted that the new firm had paid the price of Rs. 35 lakhs for the assets and allowed Shri S. Nagaraja Setty to withdraw Rs. 35 lakhs from the firm's coffers. The Department did not challenge the genuineness of this payment or the transaction.

The Tribunal held that if an assessee pays a price for certain assets, depreciation must be allowed on that price unless the transaction is shown to be bogus or collusive. The Tribunal directed that depreciation be allowed in the hands of the new firm based on the enhanced value of the assets shown in its books. This direction was to be followed for both assessment years 1986-87 and 1987-88.

Conclusion:
The appeals filed by the assessee were partially allowed. The reassessment proceedings under section 147(b) were deemed valid, separate assessments were directed for the old and new firms under section 188, and depreciation was to be allowed based on the enhanced value of the assets.