2005 (3) TMI 25 - HC - Income Tax

Whether, the Tribunal is right in law and on facts in holding that the assessee is entitled to claim depreciation allowance under section 32 for the full year thereby granting depreciation twice on the same assets in one assessment year to the firm before the dissolution and to its partner after dissolution? - it is held that the Tribunal was right in law and on facts in holding that the assessee is entitled to claim full depreciation allowance under section 32. Accordingly, the question referred to this court is answered in the affirmative, i.e., in favour of the assessee and against the Revenue

Summary

Issues Involved:
1. Entitlement of the assessee to claim full depreciation allowance under section 32 for the full year.
2. Whether the transfer of business assets upon dissolution amounts to a transfer under section 34(2)(ii) of the Income-tax Act, 1961.
3. Applicability of depreciation allowance on assets used for part of the year.

Issue-wise Detailed Analysis:

1. Entitlement of the Assessee to Claim Full Depreciation Allowance under Section 32 for the Full Year:

The Tribunal held that the assessee is entitled to claim depreciation allowance under section 32 at the full rate. The Tribunal relied on the decision of the Chandigarh Bench in Sita Ram Salluja v. ITO and the Supreme Court decision in Malabar Fisheries Co. v. CIT, which stated that allotment of all assets and liabilities to one of the partners upon dissolution of the firm could not be regarded as a transfer of assets as contemplated in section 155 read with section 32A(1) of the Income-tax Act. The Tribunal emphasized that as per amended rule 5 of the Income-tax Rules, 1962, depreciation at the full prescribed rate is allowable for assets owned and used at any time during the year, without provision for splitting based on the number of months of usage.

2. Whether the Transfer of Business Assets upon Dissolution Amounts to a Transfer under Section 34(2)(ii) of the Income-tax Act, 1961:

The Income-tax Officer disallowed the depreciation claim, holding that the taking over of the business by M/s. Himalaya Machinery (P) Ltd. amounted to a transfer of assets, invoking section 34(2)(ii). The Commissioner of Income-tax (Appeals) supported this view, stating that the transaction amounted to a transfer by exchange, thus fitting the definition of "sold" under Explanation (2) below clause (iii) of sub-section (1) of section 32. However, the Tribunal disagreed, citing the Supreme Court's ruling in CIT v. Dewas Cine Corporation and Malabar Fisheries Co. v. CIT, which clarified that the adjustment of rights among partners upon dissolution does not constitute a transfer or sale.

3. Applicability of Depreciation Allowance on Assets Used for Part of the Year:

The court examined sections 32 and 34 of the Act and rule 5 of the Income-tax Rules, 1962. It was noted that depreciation is allowable on buildings, machinery, plant, or furniture owned and used by the assessee for business purposes at any time during the previous year. The provisions do not limit the depreciation allowance based on the duration of ownership within the year. The court concluded that once the conditions of sections 32 and 34 are met for any part of the year, the assessee is entitled to full depreciation. The court emphasized that the legislative intent is to account for wear and tear of assets used in business, regardless of the duration of use within the year.

Conclusion:

The court concluded that the Tribunal was correct in law and on facts in holding that the assessee is entitled to claim full depreciation allowance under section 32. The court affirmed that the adjustment of rights among partners upon dissolution does not amount to a transfer, and thus, the provisions of section 34(2)(ii) do not apply. The court held that the assessee is entitled to full depreciation for assets owned and used at any time during the previous year, even if another entity claims depreciation for the same assets within the same year. The question referred to the court was answered in the affirmative, in favor of the assessee and against the Revenue. The reference was disposed of with no order as to costs.