1982 (7) TMI 139 - AT - Income Tax

Issues Involved:
1. Entitlement to depreciation on building and machinery at the cost assigned during the dissolution of the earlier firm.
2. Determination of the written down value (WDV) for depreciation purposes.
3. Applicability of the principle of res judicata or estoppel in income-tax proceedings.
4. Interpretation of "actual cost" under section 10(5)(b) of the Income-tax Act, 1961.
5. Impact of dissolution versus change in constitution of the firm on depreciation claims.

Detailed Analysis:

1. Entitlement to Depreciation on Building and Machinery:

The primary issue in this appeal for the assessment year 1976-77 is whether the assessee is entitled to claim depreciation on the building and machinery based on the cost assigned to these assets during the dissolution of the earlier firm. The earlier firm was dissolved on 20-1-1972, and the assets were revalued and taken over by the first four partners. The new firm, constituted on 12-2-1972, included seven new partners who accepted the revaluation of the assets. The assessee claimed depreciation based on this revaluation, but the Income Tax Officer (ITO) allowed depreciation only on the WDV of the assets as in the hands of the old firm.

2. Determination of Written Down Value (WDV):

The appellant-firm claimed depreciation on the revalued cost of the assets, but the ITO and the Commissioner (Appeals) allowed depreciation only on the WDV coming from the earlier firm. The Tribunal in previous years had dismissed the assessee's appeal for non-appearance, and the issue was not adjudicated on merit. The Tribunal in this judgment noted that the WDV from earlier years is not always binding and that the ITO can determine the actual cost of the assets independently.

3. Applicability of Res Judicata or Estoppel:

The Tribunal referenced the case of Karnani Industrial Bank Ltd. v. CIT, which clarified that neither the principle of res judicata nor estoppel prevents the ITO from determining the actual cost of the assets. The Tribunal emphasized that the ITO should take into consideration the actual cost, allowances granted in the past, and then compute the WDV for the assessment year.

4. Interpretation of "Actual Cost" Under Section 10(5)(b):

The Tribunal relied on the Supreme Court's decision in Maharana Mills (P.) Ltd. v. ITO, which stated that the ITO should take into consideration the actual cost, determining it for himself if necessary, and not merely scale down the WDV of the previous year. The Tribunal also referenced the Gujarat High Court decision in CIT v. Hides & Leather Products (P.) Ltd., which supported the view that the ITO can determine the actual cost independently.

5. Dissolution vs. Change in Constitution of the Firm:

The learned departmental representative argued that there was no dissolution but a change in the constitution of the firm. However, the Tribunal found that the dissolution deed clearly indicated a dissolution and revaluation of assets. The Tribunal referenced the Full Bench decision of the Punjab and Haryana High Court in Nandlal Sohanlal v. CIT, which distinguished between dissolution and change in the constitution of a firm. The Tribunal concluded that the dissolution was genuine, and the revaluation of assets was accepted by both outgoing and continuing partners.

Conclusion:

The Tribunal allowed the appeal, directing the ITO to recompute the assessee's claim of depreciation based on the actual cost of Rs. 3,80,000 (building Rs. 1,50,000, machinery Rs. 1,50,000, and racks Rs. 80,000), deducting the depreciation allowed in previous years. The Tribunal emphasized that the revaluation was not collusive or fraudulent, and the actual cost should be considered for depreciation purposes. The appeal was allowed, and the ITO was instructed to allow depreciation on the balance after deducting previously allowed depreciation.

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