1992 (1) TMI 170 - AT - Income Tax

High Court Income From Business Interest On Excess Collection Mercantile System Sugar Manufacturing Company Supreme Court Writ Petition

Issues Involved:

1. Disallowance of depreciation on business assets due to alleged discontinuation of business and transfer of assets to a private limited company.
2. Interpretation of the term "sold" within the context of Section 32(1) and Section 34(2)(ii) of the Income-tax Act.
3. Distinction between provisions for depreciation and development rebate under the Income-tax Act.
4. Applicability of case law precedents to the facts of the case.

Issue-wise Detailed Analysis:

1. Disallowance of Depreciation:
The assessee-firm objected to the disallowance of depreciation by the lower authorities, who held that the business was discontinued and the assets were transferred to a private limited company. The firm's business was taken over by N.M. Nagpal Pvt. Ltd. on 1-12-1980, and the three partners acquired equal shares in the new company. The Assessing Officer disallowed the depreciation, citing that the assets were "sold" as defined in Section 32(2), which includes transfers by way of exchange. This decision was supported by rulings in Chittoor Motor Transport Co. (P) Ltd. v. ITO and A.S. Krishna Setty & Sons v. Addl. CIT. The CIT (Appeals) confirmed this decision.

2. Interpretation of "Sold":
The assessee's counsel argued that the provisions dealing with depreciation and development rebate are distinct. Depreciation was claimed under Section 32(1)(i), which does not include the term "otherwise transferred." The counsel pointed out that the definition of "sold" in Section 32(2) applies only to the specific clause it is mentioned in and not to Section 34(2)(ii). The counsel referenced various case laws, including Baldevji v. CIT, Rogers & Co. v. CIT, CIT v. Mugneeram Bangur & Co., and CIT v. R.R. Ramakrishna Pillai, to support the argument that the assessee's case did not fall under the definition of "sale" for disallowing depreciation.

3. Distinction Between Depreciation and Development Rebate:
The Departmental Representative explained the scheme of depreciation and development rebate, emphasizing that depreciation is an invisible cost while development rebate is a specific concession. He argued that depreciation could not be allowed because the assets were transferred to a new company for consideration, and allowing depreciation would result in double deduction. The Representative also argued that the Supreme Court decision in R.R. Ramakrishna Pillai was against the assessee and distinguished the cases cited by the assessee's counsel.

4. Applicability of Case Law Precedents:
The Tribunal noted that neither the lower authorities nor the assessee provided sufficient material to decide the issue. The Tribunal agreed with the assessee's counsel that the provisions for development rebate and depreciation are distinct. It was observed that the specific provisions of the IT Act must guide the decision rather than theoretical purposes. The Tribunal found that the cases cited by both sides were not directly applicable except for R.R. Ramakrishna Pillai, which dealt with similar circumstances. The Supreme Court in that case held that the transfer of assets in exchange for shares is an exchange, not a sale.

Conclusion:
The Tribunal restored the matter to the Assessing Officer to examine the details of the agreement between the assessee-firm and the private limited company in light of the Supreme Court decision in R.R. Ramakrishna Pillai. The Assessing Officer was directed to determine whether the transaction constituted a sale or merely a transfer of assets. If it was a sale, depreciation could be disallowed; if it was a transfer, depreciation should not be disallowed. The assessment order was set aside for this purpose, and the appeal was allowed for statistical purposes.

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