1971 (1) TMI 44 - HC - Income Tax

Reconstitution of firm - transport business sale of vehicles assessability of excess realised over the written down value

Summary

Issues Involved:
1. Whether the sum of Rs. 29,800 is taxable in the hands of the assessee under section 10(2)(vii) of the Income-tax Act, 1922.
2. Whether the assessee-firm is a new and distinct entity or a continuation of the original firm.
3. Calculation of the written down value of the buses.

Detailed Analysis:

1. Taxability of Rs. 29,800 under Section 10(2)(vii):
The primary issue is whether the sum of Rs. 29,800 realized by the assessee from the sale of four buses is taxable under section 10(2)(vii) of the Income-tax Act, 1922. This section stipulates that in computing business profits, an allowance shall be made for the amount by which the written down value of the building, machinery, or plant sold exceeds the amount for which it is sold. The second proviso to clause (vii) states that if the sale amount exceeds the written down value, the excess (up to the difference between the original cost and the written down value) shall be deemed profits of the previous year in which the sale occurred.

2. Continuation vs. New Entity:
The decision hinges on whether the depreciation allowed to the previous firms can be considered for fixing the written down value of the buses in the hands of the assessee. This involves determining whether the assessee-firm is a continuation of the original firm formed in 1949 or a new and distinct entity. If it is a continuation, the past depreciation must be taken into account; if it is a new firm, it did not benefit from the past depreciation.

3. Written Down Value Calculation:
The Tribunal's supplementary statement clarified that when the second and third firms took over the buses, they were taken over at book values, i.e., cost less depreciation provided in the accounts of the predecessor firm. The Tribunal found that the written down value of the buses at the end of the second partnership was Rs. 18,328, not nil as contended by the department.

Judgment Summary:

Continuation of the Firm:
The court analyzed the deeds of partnership from 1949, 1952, and 1955. The first deed (1949) formed the firm "Messrs. Bhavnani Bus Service Company" with four partners. The second deed (1952) reconstituted the firm with new partners, stating that the first partnership had ended by efflux of time. The third deed (1955) further reconstituted the firm with only two partners, stating that the second partnership was dissolved. Despite these recitals, the court found that the business, assets, and management remained largely unchanged, particularly under the control of Tuljaram and Hiranand Bhavnani. The Tribunal's finding that there was no actual dissolution but only a change in the firm's constitution was upheld.

Depreciation and Written Down Value:
The court noted that the balance-sheet for the assessment year 1957-58 showed the value of the buses as per the last balance-sheet, indicating continuity. The written down value of Rs. 18,328 at the end of the second partnership was accepted, as both parties had agreed to these figures during the Tribunal proceedings.

Taxable Amount:
Given the written down value of Rs. 18,328, the taxable profit from the sale of the buses was determined to be Rs. 11,472 (Rs. 29,800 - Rs. 18,328). The court concluded that the sum of Rs. 11,472 is taxable under section 10(2)(vii) of the Act, not the entire Rs. 29,800.

Conclusion:
The court answered the reference by stating that the sum of Rs. 11,472 is taxable in the hands of the assessee under section 10(2)(vii) of the Income-tax Act, 1922. There was no order as to costs.