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TMI Blog1943 (3) TMI 14X X X X Extracts X X X X X X X X Extracts X X X X ..... ecember (1) the appellant carried on the business previously carried on by that company as part of and in combination with its own existing business, and (2) the Bengal Company ceased to carry on business and went into voluntary liquidation. In addition to the provisions already set out, the agreement of the 8th September contained (inter alia) a further clause assigning. "so far as capable of being assigned, any claim which the Bengal Company may have in respect of unabsorbed depreciation allowances." These allowances are those specified in Section 10 of the Indian Income-tax Act, 1922, a section which, so far as is material, contains the following provisions: 10. (1) The tax shall be payable by an assessee under the head "Business" in respect of the profits or gains of any business carried on by him. (2) Such profits or gains shall be computed after making the following allowances, namely:- (i) any rent paid for the premises in which such business is carried on, provided that, when any substantial part of the premises is used as a dwelling house by the assessee, the allowance under this clause shall be such sum as the Income-tax Officer may determine havin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of these allowances is reasonably well settled, but where one company absorbs another at the end or in the course of a current fiscal year difficulties have from time to time arisen as to the correct allowances to be made. The statutory provision dealing with the liability to tax of a company whose business is transferred at these times is contained in Section 26(2) of the same Act and is as follows:- "26. (2) Where, at the time of making an assessment under Section 23, it is found that the person carrying on any business, profession or vocation has been succeeded in such capacity by another person, the assessment shall be made on such person succeeding, as if he had been carrying on the business, profession or vocation throughout the previous year, and as if he had received the whole of the profits for that year. The question for their Lordships' determination is to ascertain the true construction to be placed upon the two sections quoted when read together and to determine the principle upon which depreciation is to be computed and allowed in the case of such a change. After the amalgamation of the two companies an assessment was made upon the appellant company for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assets upon which depreciation was allowable. Similarly, it was said, with reference to the Indian Company the profits must be ascertained by the same method of computation, and were subject to the deduction of the original unabsorbed depreciation allowance allotted to that company of ₹ 62,00,775, together with the appropriate depreciation for the current year calculated upon the same principles as those adopted in the case of the other company. The profits and allowances having been ascertained in this way, the appellants contended that the lesser sum, i.e., profits, should be deducted from the greater, i.e., the unabsorbed depreciation allowance, and the resultant figure carried forward to the next year, the appellant being thus entitled to the future benefit of both sets of unabsorbed depreciation allowance as a deduction from its future profits. The respondent, on the other hand, asserted that the correct method to adopt was to find the profits of the Bengal Company for the 8 months from the 1st April to the 2nd December, 1936, and to deduct the resultant figure from the unabsorbed depreciation allowance standing to the credit of that company on the 1st April, 1936, to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ) Indian Iron and Steel Company. (a) Depreciation allowed in respect of the original property of the Indian Company for the year 1936-37... 7,60,077 0 0 (b) Depreciation allowance in respect of the property acquired form the Bengal Company, for the period 3rd December, 1936, to the 31st March, 1937... 3,77,767 0 0 (c) Unabsorbed depreciation allowance as above 62,00,775 0 0 Total... 73,38,619 0 0 Less profits of the original business for the fiscal year, together with that of the acquired business for the period 3 36,54,295 0 0 Depreciation allowance left unabsorbed... 36,84,324 0 0 In the figures of the appellant's claim the sum of 23,49,815 0 0 was calculated upon the original cost to the Indian Company of its own assets and the original cost to the Bengal Company of the assets taken over from it. On the other hand, the figure of 3,77,767-0-0 in the Assistant Commissioner's calculation was based upon the cost to the Indian Company of the assets which it took over from the Bengal Company. This difference of computation is a further but subsidiary matter of contention between the parties and is best dealt with in considering the major dispute. The argument o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... redecessor still owned the property and the successor had not acquired it. There is no doubt truth in the contention that the word "assessee" in Section 10(2) must, when there is a successor to the business charged to tax, be read in certain of the paragraphs as including both predecessor and successor, but their Lordships are not prepared to assent to the argument that it follows as a consequence that the unabsorbed depreciation allowance of the predecessor must be added to that of the successor or to agree that even in a case when the only business concerned is that which is transferred, the business when transferred carries to the purchaser its unabsorbed allowance. Indian income-tax is assessed and paid in the next succeeding year upon the results of the year before. If then Company A sold its business to Company B in the first of the two years, apart from the provisions of Section 26(2), the former company could not be assessed and would not be liable for any profits it then made, because it would not be carrying on the business in the next year for which in the normal course the assessment would be made and in respect of which tax would be due, nor would Company B ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... his allowance is to be added to that for the following year and to be deemed to be part of that allowance, and so on for succeeding years. To the answer that what is given is "such allowance" only and "such allowance" when read together with the previous language of sub-section (2)(vi) can mean only an allowance in respect of depreciation of buildings, etc., being the property of the assessee, it is replied that "assessee" in this as in the other sub-sections previously referred to includes predecessor as well as successor, and that the proviso in conjunction with Section 26 should be read as saying: "Where full effect cannot be given in any year to the allowance proper to be given to the assessee or to his predecessors or to both, the allowance or the unused part thereof shall be added to the amount of the allowance to which the assessee is entitled for the following year." Their Lordships see no reason for giving this wide meaning to the word "assessee" in the proviso to Section 10(2)(vi). Under the definition in Section 2(2) "Unless there is anything repugnant in the subject or context...'assessee' means a person ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hands? No doubt the example given does indicate a case in which some hardship may be said to arise, but the object of Section 10 is not to bolster up unsuccessful businesses, it is merely to protect them, in the hands of those who find the capital, against undue taxation. The example may be countered by quoting a case in which a bankrupt business with a large unabsorbed depreciation allowance is bought by a flourishing house in order to enhance its own allowance and decrease its taxation. Success in the latter circumstances would be at least as undesirable as failure in the former is unfortunate. But in any case, the the matter must depend on the wording of the section, and not upon the consequences which follow. Their Lordships desire to refer to two more matters raised in argument. (1) The appellant in its case placed some reliance upon the assignment to them in the agreement of the 8th September, 1936, by the Bengal Company of "the benefit, so far as capable of being assigned, of any claim which the Bengal Company may have in respect of unabsorbed depreciation allowances." It was, however, admitted before the Board that these allowances were unassignable in law and ..... X X X X Extracts X X X X X X X X Extracts X X X X
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