1973 (7) TMI 21 - HC - Income Tax

1. Whether, on the facts and in the circumstances of the case, the assessee was entitled to a set-off in respect of the loss determined under section 10 of the Act including unabsorbed depreciation of Rs. 37,103 relating to the assessment years 1957-58 and 1958-59 and pertaining to the business carried on by him as sole proprietor against his share of income for assessment years 1959-60 and 1960-61 from the same business converted into partnership firms, consisting of himself and his sons ? - question referred to us is answered in the negative

Summary

Issues Involved:
1. Entitlement to set-off unabsorbed depreciation from previous years against income from a converted partnership business.

Issue-wise Detailed Analysis:

1. Entitlement to Set-off Unabsorbed Depreciation:

The primary issue revolves around whether the assessee could set off unabsorbed depreciation of Rs. 37,103 from the assessment years 1957-58 and 1958-59, when he was a sole proprietor, against his share of income for the assessment years 1959-60 and 1960-61, after the business was converted into a partnership firm.

Facts:

- The assessee initially operated as a sole proprietor under the names Messrs. Kumandas Kishandas and Messrs. Kala Silk Factory until October 23, 1957.
- These businesses were converted into partnerships with effect from October 24, 1957.
- The assessee suffered losses in 1957-58 and 1958-59, including unabsorbed depreciation.
- For the assessment years 1959-60 and 1960-61, the assessee was a partner in the firms, and his income included profits from these partnerships.
- The Income-tax Officer and the Appellate Assistant Commissioner rejected the assessee's claim for set-off of unabsorbed depreciation.
- The Income-tax Appellate Tribunal allowed the set-off for business loss but not for unabsorbed depreciation.

Legal Provisions:

- Section 10(2)(vi) of the Indian Income-tax Act, 1922, allows for depreciation on buildings, machinery, plant, or furniture owned by the assessee.
- Proviso (b) to this clause allows unabsorbed depreciation to be carried forward and added to the depreciation allowance for the following year.
- Proviso (c) limits the aggregate depreciation allowance to the original cost of the assets.

Court's Analysis:

- The court emphasized that depreciation can only be claimed if the assets are the property of the assessee.
- Once the business was converted into a partnership, the plant and machinery became the property of the partnership, not the individual assessee.
- The Supreme Court's decision in Narayanappa v. Bhaskara Krishnappa clarified that partnership property belongs to the firm, and individual partners cannot claim exclusive rights over it.
- Therefore, during the relevant assessment years, the plant and machinery were not the property of the assessee, disqualifying him from claiming depreciation.
- Proviso (b) to clause (vi) allows carrying forward unabsorbed depreciation only if the assessee is entitled to claim depreciation in the subsequent year.
- Since the assessee was not entitled to claim depreciation as a partner, he could not carry forward unabsorbed depreciation from the years he was a sole proprietor.

Conclusion:

The court concluded that the assessee was not entitled to set off unabsorbed depreciation from the assessment years 1957-58 and 1958-59 against his share of income for the assessment years 1959-60 and 1960-61. The answer to the referred question was in the negative, and the assessee was ordered to pay the costs of the revenue.