1970 (2) TMI 24 - HC - Income Tax

Assets sold by firm on which depreciation has been allowed - changes in the constitution of the firm - whether assessment of excess over written down value is permissible - there was no cesser of business or change in the unit, therefore, the assessee was liable to be assessed under the second proviso to section 10(2)(vii) in respect of the depreciation allowed

Issues Involved:
1. Whether the taking over by the Government of the assessee's electricity undertaking was a sale.
2. If it was a sale, whether it took place within the previous year relevant to the present assessment year 1955-56.
3. Whether the amount of 20% added to the fair market value formed part of the sale consideration.
4. Whether the assessee is liable to be assessed to tax in respect of depreciation allowed to it since 1930.

Issue-wise Detailed Analysis:

1. Whether the taking over by the Government of the assessee's electricity undertaking was a sale:

The court referenced the Fazilka Electric Supply Company Ltd. case, where it was held that the taking over of an electrical undertaking by the government on payment of its value was a sale within the meaning of section 10(2)(vii) of the Income-tax Act, 1922. The court affirmed this position, stating that the undertaking's acquisition by the Punjab State Government on February 24, 1955, constituted a sale. The assessee conceded this point in light of the Supreme Court's decision in the Fazilka case, leading the court to answer this question in the affirmative.

2. If it was a sale, whether it took place within the previous year relevant to the present assessment year 1955-56:

The court discussed the argument that the sale was not effected until the full payment was made, referencing section 7 of the Indian Electricity Act, 1910, and section 54 of the Transfer of Property Act, 1882. The court, however, held that the sale was complete upon the exercise of the option by the government, despite the full payment being made later. The court noted that the Punjab Government started paying interest on the balance from August 24, 1955, indicating the sale was deemed to have been effected on February 24, 1955. Thus, the court answered this question in the affirmative.

3. Whether the amount of 20% added to the fair market value formed part of the sale consideration:

The court, following the Supreme Court's decision in the Fazilka case, held that the statutory excess payment of 20% over the fair market value formed part of the sale consideration. The assessee conceded this point, leading the court to answer this question in the affirmative.

4. Whether the assessee is liable to be assessed to tax in respect of depreciation allowed to it since 1930:

The court examined the changes in the partnership and their impact on the continuity of the business. It referenced the Indian Partnership Act, 1932, and relevant case law, concluding that despite changes in the partnership's constitution, the business continued as the same unit. The court cited the Supreme Court's decisions in Commissioner of Income-tax v. A. W. Figgies and Companies and Commissioner of Income-tax v. Kirkend Coal Co., emphasizing that a firm is a distinct assessable entity under the Income-tax Act. Therefore, the court held that the assessee was liable to be assessed to tax in respect of the depreciation allowed since 1930, answering this question in the affirmative.

Conclusion:

The court answered all four questions in the affirmative, affirming the sale of the assessee's undertaking, its timing within the relevant assessment year, the inclusion of the 20% statutory excess in the sale consideration, and the assessee's liability for tax on the depreciation allowed since 1930. The assessee was ordered to bear the costs of the Commissioner of Income-tax, with counsel's fee set at Rs. 250.

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