1992 (7) TMI 114 - AT - Income Tax

1961 Act, A Partner, Actual Cost, Firm Consisting, In Part, Market Value, Partnership Firm, Setting Up, Tax Liability

Issues Involved:
1. Entitlement to claim depreciation on revalued assets.
2. Validity of revaluation of assets.
3. Application of Explanation 3 to Section 43(1) of the Income Tax Act.
4. Allegation of the transaction being a tax avoidance device.
5. Deduction of the appellant's share in the partnership assets from the revalued figure.
6. Disallowance of Rs. 12,950 for the assessment year 1986-87.
7. Depreciation claim for the assessment year 1987-88.

Detailed Analysis:

1. Entitlement to Claim Depreciation on Revalued Assets:
The core issue was whether the appellant company could claim depreciation on assets taken over from a partnership firm at their revalued figures or at the written down value as recorded in the partnership firm's books. The appellant argued that revaluation was done by an approved valuer and was below market value, thus justifying the claim for depreciation at the revalued figures.

2. Validity of Revaluation of Assets:
The appellant company, upon dissolution of the partnership firm, revalued the assets, which was a standard practice for settling mutual claims among partners. The revaluation was conducted by an approved valuer, and the values were supported by market quotations. The tribunal confirmed that the revaluation was not arbitrary but based on a systematic assessment by the valuer.

3. Application of Explanation 3 to Section 43(1) of the Income Tax Act:
The revenue contended that the revaluation was a device to claim higher depreciation and reduce tax liability, invoking Explanation 3 to Section 43(1). The tribunal held that this explanation applies only if assets are taken over at a value higher than the market value, which was not the case here, as the revalued figures were below market value.

4. Allegation of the Transaction Being a Tax Avoidance Device:
The revenue argued that the appellant's admission as a partner and the subsequent dissolution of the firm were designed to reduce tax liability. The tribunal found that the revaluation was done bona fide for adjusting mutual rights among partners, a practice supported by the Supreme Court's decision in A.L.A. Firm v. CIT. The tribunal rejected the allegation of the transaction being a sham or a tax avoidance device.

5. Deduction of the Appellant's Share in the Partnership Assets from the Revalued Figure:
The revenue suggested deducting Rs. 1,91,468 (the appellant's share in the partnership) from the revalued figure of the assets. The tribunal rejected this, stating that the appellant had paid for the assets through settlement, and thus, the revalued figure should be considered the cost.

6. Disallowance of Rs. 12,950 for the Assessment Year 1986-87:
The appellant did not press this issue, and hence, the tribunal dismissed this ground.

7. Depreciation Claim for the Assessment Year 1987-88:
The issue for the assessment year 1987-88 was consequential to the 1986-87 decision. Given the tribunal's decision to allow depreciation on revalued figures for 1986-87, the appellant's claim for 1987-88 was also allowed.

Conclusion:
The tribunal set aside the CIT(Appeals) order on the primary issue and directed the Income-tax Officer to adopt the revalued figures for depreciation purposes. The appeal for the assessment year 1986-87 was partly allowed, and the appeal for the assessment year 1987-88 was allowed in full.

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