2003 (2) TMI 159 - AT - Income Tax

Summary

Issues Involved:
1. Sufficient opportunity of being heard.
2. Existence and merger of partnership firms.
3. Transfer and use of machineries.
4. Eligibility of unabsorbed depreciation set-off.
5. Application of the principle from Mathurdas Govardhandas v. CIT.
6. Validity of the CIT's cancellation of the assessment.

Detailed Analysis:

1. Sufficient Opportunity of Being Heard:
The assessee contended that the CIT did not provide sufficient opportunity to be heard before passing the order under section 263 of the Income-tax Act, 1961. However, the tribunal found that the explanation given by the assessee was duly considered by the CIT in the order passed under section 263, thus dismissing the contention.

2. Existence and Merger of Partnership Firms:
The assessee claimed that M/s. Anand & Co. and M/s. MDC had merged on 1-4-1992, forming a new firm with the same partners and profit-sharing ratio. The CIT concluded that the acceptance of the set-off of brought forward unabsorbed depreciation from M/s. MDC in the assessment of the new firm was erroneous and prejudicial to the interest of revenue. The tribunal upheld this view, stating that the two firms were distinct and separate entities before the merger and that the new firm constituted a separate assessable entity.

3. Transfer and Use of Machineries:
The assessee argued that the machineries used in M/s. MDC were transferred to the new firm, M/s. Anand & Co., by virtue of a partnership deed dated 1-4-1992. The tribunal noted that the mere transfer and continued use of the same assets by a different entity do not entitle the new entity to claim the set-off of unabsorbed depreciation determined in the hands of the predecessor firm.

4. Eligibility of Unabsorbed Depreciation Set-Off:
The assessee contended that the unabsorbed depreciation was eligible for set-off due to the continuity of the business. The tribunal, however, observed that the unabsorbed depreciation is a statutory privilege personal to the owner and cannot be transferred to a successor. The tribunal cited various legal precedents to support this view, including the Supreme Court's decision in CIT v. Virmani Industries (P.) Ltd., which clarified that the continuance of the same business is not a prerequisite for claiming set-off of unabsorbed depreciation.

5. Application of the Principle from Mathurdas Govardhandas v. CIT:
The assessee argued that the CIT erred in applying the principle from Mathurdas Govardhandas v. CIT, as the facts of the present case were distinguishable. The tribunal agreed with the CIT, stating that the principle was correctly applied, given that the new firm was a separate assessable entity and not merely a continuation of the old firm.

6. Validity of the CIT's Cancellation of the Assessment:
The CIT's action in cancelling the assessment under section 143(3) and directing the Assessing Officer to re-compute the total income without allowing the set-off of unabsorbed depreciation was challenged by the assessee. The tribunal upheld the CIT's order, stating that the Assessing Officer's original order was erroneous and prejudicial to the interest of revenue. The tribunal emphasized that the unabsorbed depreciation determined in the hands of M/s. MDC could not be set off in the hands of the new firm, M/s. Anand & Co., as there was no legal provision supporting such a transfer.

Conclusion:
The tribunal dismissed the appeal filed by the assessee, upholding the CIT's order passed under section 263 of the Income-tax Act, 1961. The tribunal concluded that the CIT's order was proper and justified, and the Assessing Officer's original order allowing the set-off of unabsorbed depreciation was erroneous and prejudicial to the interest of revenue.