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TMI Blog1941 (3) TMI 23X X X X Extracts X X X X X X X X Extracts X X X X ..... ters and founders and steel makers. The Bengal Iron Company was registered in England under the English Companies Act many years ago; the Indian Iron and Steel Company was registered under the Indian Companies Act later-about the year 1918. For some years previous to 1936 both the companies made small profits or suffered losses and each was entitled, under the provisions of Section 10(2)(vi) of the Indian Income-tax Act of 1922 to large amounts of unabsorbed depreciation arising from the fact that in both companies the depreciation allowable under the Income-tax Act had for several years exceeded the profits earned. The proper legal formalities regarding the transfer were complied with and such transfer took effect from December 2, 1936. The transfer itself, as is evidenced by the documents annexed to the case mentioned above, was a complicated transaction but put shortly the relevant portions of it are as follows :- (1)The Bengal Iron Company, Limited, went into liquidation ; (2)The liquidator of the Bengal Iron Company transferred to the Indian Iron and Steel Company, which took over on December 2, 1936, the entire undertaking, business, property and assets of the Bengal Iro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e depreciation allowance of ₹ 90,31,317 left unabsorbed at the date of the transfer. The Assistant Commissioner of Income-tax refused to allow this unabsorbed depreciation allowance of the Bengal Iron Company to be carried forward into the accounts of the Indian Iron and Steel Company. As regards the combined Company, the Assistant Commissioner of Income-tax allowed the Indian Iron and Steel Company a depreciation of ₹ 7,60,077 in respect of the original buildings, plant, etc., of the old Indian Iron and Steel Company based on the original cost to that Company for the whole year, and a further depreciation allowance in respect of the buildings, plant, etc., acquired from the Bengal Iron Company for the part of the financial year after the transfer, i.e., from December 3, 1936, to March 31, 1937, amounting to ₹ 3,77,767 based on the cost to the Indian Iron and Steel Company of the acquired Bengal Iron Company's assets; in all ₹ 11,33,844. He further allowed the Indian Iron and Steel Company to bring into this account the unabsorbed depreciation allowance that they were entitled to in respect of the original buildings, plant, machinery, etc., of the India ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... shoes of the Bengal Iron Company at the beginning of the year and obtain credit for the Bengal Iron Company's unabsorbed depreciation allowance at the beginning of such year, namely, Rs, 85,45,150 together with their own unabsorbed depreciation allowance of ₹ 62,00,775; that at the end of the transfer year they would be entitled to the remaining depreciation allowance derived partly from the ₹ 85,45,150 and the ₹ 62,00,775 together with the current year's depreciation allowance on the whole concern; such sum less profits made during the year would be automatically carried forward to the following year as an allowance against profits and so on for the succeeding years by reason of proviso (b) of Section 10(2)(vi) which runs as follows:- "Where full effect, cannot be given to any such allowance in any year owing to there being no profits or gains chargeable for that year, or owing to the profits or gains chargeable being less than the allowance, the allowance or part of the allowance to which effect has not been given, as the case may be, shall be added to the amount of the allowance for depreciation for the following year and deemed to be part of tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sed on the average of the previous three years and substituted therefor the profits of the single previous year. It may be, though I speak with no authority upon it, that Section 32 of the Finance Act, 1926, was considered necessary to give proper effect to the operation of Section 29 of the same Act. It should be noted that at all material times under the Indian Income-tax Acts the profits of the single previous year have been the basis of assessment. Reference has been made to the case of the United Steel Companies Ltd. v. Cullington [1940] AC 812; 9 ITR Suppl. 20. There the appellant Company was incorporated in 1930 to acquire the undertakings of, and to amalgamate, two steel companies respectively formed in 1918 and 1920 on the terms of a scheme sanctioned by an order of Court under the Companies Act, 1929, Sections 153 and 154. The scheme was carried out and the undertakings and properties of the two old component companies were vested in the appellant company in return for shares. The two old companies being dissolved, the new company took over their business as from August 22, 1930. The business of the two companies had been carried on at a loss for several years before th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... making the deduction out of profits. It is clear that if the trader goes out of business this right to carry forward a deduction is lost, unless indeed there is a statutory right given to some other trader, presumably a successor, to deduct the diminished value (by wear and tear) of machinery and plant used by the predecessor from the profits or gains of the successor. It will be remarked that the machinery and plant might have been placed on the scrap-heap, or perhaps acquired by the successor for a very small sum. It is a little difficult to see the reason in such a case for giving to the successor the right claimed. But there is always a possibility of finding in the twists and turns of the Income-tax maze some relief or refuge for the harassed tax-payer, and this possibility we must now examine..........." Again at page 823:- "To my mind it is clear that there is no possibility of reading into the Rule, i.e., 11(2), or any other existing rule to which we were referred, a right to exercise the remarkable privilege contended for, namely, of deducting from profits made after a previous business has been discontinued the diminished value of plant and machinery which the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ompany did was to buy the assets of the Bengal Iron Company when it went into liquidation. They paid for them less than their cost. This fact was admitted in argument and is clear from an examination of the returns made by the assessees. For instance, the Bengal Iron Company's depreciation before the transfer for eight months was ₹ 8,62,329 and, therefore, for a whole year ₹ 12,93,394. The Appellate Officer in his order dated August 21, 1939, which is Annexure 'E', stated the Bengal Iron Company's assets depreciation to be "on Bengal Iron Company's assets on the cost to the appellant-₹ 11,33,301." Put another way, the assets in respect of which depreciation is claimed were taken over by the assessees at a depreciated figure, though perhaps not the figure at which they stood in the Bengal Iron Company's books. To ascertain the nature, purpose and effect of the depreciation allowance, Section 10 of the Indian Income-tax Act must be examined. Summarizing the relevant part of Section 10, sub-section (1) provides that the tax shall be payable by an assessee in respect of the profits or gains in any business carried on by him. Sub-se ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cessor may acquire this benefit when he acquires his predecessor's business. Lord Caldecote in the United Steel Companies' Case (supra ) at page 818 speaking of depreciation allowances under the English Income-tax Acts said: "The deductions claimed are by way of relief from the liability to pay income-tax upon profits or gains, and the taxpayer must establish his claim upon a correct interpretation of the language of the material enactments." Applying that pronouncement, (which is of a general character and not based on any particular wording of the English Income-tax Acts), in this case the position is that under Section 10(1) of the Indian Income-tax Act the tax is payable by the assessee on the profits and gains of any business carried on by him; since no exemption from tax is expressly given anywhere in the Act to the successor arising from the unabsorbed depreciation allowance of the predecessor, therefore none is given, The depreciation allowance therefore, being a deduction permitted to the assessee under Income-tax Act in respect of wear and tear of his plant and machinery based on its cost to him against the profits he may make when carrying on his bu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eciation allowances for the period since December 2, 1936, those allowances are based on the cost of the plant, etc., to the assessee-the Indian Iron and Steel Company, Limited. See Section 10(2)(vi) of the Act and the case of Commissioner of Income-tax, Madras v. Buckingham and Carnatic Co., Ltd. [1935] 3 ITR 384 ; 63 IA 74. As regards the period April 1, 1936, to December 2, 1936, the allowances are based on the cost of the plant, etc., to the person who carried on the business during that period, i.e., on the original cost of such plant, etc., of the Bengal Iron Company, Limited. This follows from what I have said above and from Section 26(2) of the Act and also from the decision in the case of Commissioner of Income-tax, Bombay v. The Mazagaon Dock Ltd. [1938] 6 ITR 124 ; 1938 Bom. 374. For the reasons I have given above I am of the opinion that the assesment made by the Assistant Appellate Commissioner of Income-tax in this case was right and that the questions asked in the reference should be answered as follows :- (1)Whether in assessing, under the provisions of Section 26(2) of the Indian Income-tax Act, in the circumstances of the present case, a person succeeding to th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Company. It is common ground that the assessees succeeded to the business of the Bengal Company within the meaning of Section 26(2) of the Indian Income-tax Act, 1922, (as that section stood before the recent amendment), on December 3, 1936. The transfer was in terms of an agreement in writing dated September 8, 1936, a copy of which, together with the scheme of arrangement and amalgamation attached thereto, is Annexure "A" to the letter of reference. At the date of the transfer the unabsorbed depreciation allowance, to which the Bengal Company were entitled under the provisions of Section 10(2)(vi) of the Act and the proviso thereto, amounted to ₹ 85,45,150. It was thought prudent to make it clear in the agreement that the assessees were, if possible, to have the benefit of this balance as from the date of the transfer of the assets, and clause 3(a) of that document provides that the undertaking, properties, and assets of the transferor company shall include the benefit, so far as capable of being assigned, of any claim which the transferor company may have in respect of all unabsorbed depreciation allowances. The position of the assessees at the time of the a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sessment is not very great. For the four post-succession months current depreciation computed on the cost to the Bengal Company would be ₹ 4,31,000 odd, while on the basis of the cost to the assessees they have been allowed ₹ 3,77,000 odd as current depreciation on the assets taken over. Moreover if the authorities are right in their treatment of the unabsorbed depreciation allowances of the Bengal Company, it appears that the "split" previous year favours the assessees. The reason for this is that the authorities have allowed the current depreciation of ₹ 3,77,000 to be taken into the general depreciation account of the assessees, and added, together with the current depreciation allowance on their original assets, to their unabsorbed depreciation balance. If current depreciation had been reckoned for the whole of the previous year on the cost to the Bengal Company, the assessees would have had no advantage from it whatever, for the unabsorbed depreciation allowance of the Bengal Company, the benefit of which has been refused to the assessees, would merely have been increased by ₹ 4,31,000. The real point at issue concerns the accumulated unab ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of ₹ 85,45,150 of the Bengal Iron Company Limited? I do not think that the first question requires a separate answer. Read with the second question, it calls upon us to decide whether the Assistant Commissioner was right in computing current depreciation on the Bengal Company's assets on one basis up to the date of transfer, and on a different basis thereafter. The Mazagaon Dock's case ( supra) affords no direct guidance on the point, as there the succession occurred on the first day of the financial year. It followed that the profits and gains of the previous year on which the successor was assessed were all profits and gains made by the predecessor. I confess I do not altogether understand the decision of the Allahabad High Court in Kamlapat Moti Lal ( supra) , From page 391 of the report it appears that the income-tax authorities "split' the year of succession in a manner which resembles the method employed in this case: the Court referred to the Mazagaon Dock's case ( supra) and observed as follows: "It is clear that an assessment under Sec. 26(2) is not made on the profits actually received by the successor referred to in that section and is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Company, Limited, only from April 1, 1936, to December 3, 1936". I now pass to the question of the Bengal Company's unabsorbed depreciation allowance. The assessees claim to have transferred it to their accounts. In United Steel Companies, Limited 's case (supra) , Viscount Maugham at page 823 described a claim, somewhat similar to the claim of the assessees in this case, as one for "a remarkable privilege". It would certainly seem astonishing if the assessees were entitled to use this immense unabsorbed allowance to protect the profits, not only of the business they have acquired, from taxation, but also the profits of their original business. They specifically claim to take the unabsorbed balance into general depreciation account and use it to set against their entire future profits, although they are compelled to admit that the limitation imposed by proviso (c) to sub-clause (vi) must be read with reference only to the assets taken over from the Bengal Company. On the other hand, it may be said that the fact that in this case the successor has a business of his own is accidental, and that it seems unjust that a business should lose the privileges the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arging the profits or gains of a trade under this Schedule , such deduction may be allowed as the commissioners having jurisdiction in the matter may consider just and reasonable, as representing the diminished value by reason of wear and tear during the year of any machinery or plant used for the purpose of the trade and belonging to the person by whom it is carried on". Rule 3 makes provision for the carrying forward of such deductions in terms closely resembling those of our proviso (b). The difference, however, is obvious. The deduction for wear and tear is fixed by the Commissioners on a just and reasonable basis provided that the conditions of the rule are satisfied. There is no reference to the original cost to the assessee whose profits and gains are being taxed. There is nothing, therefore, to prevent the provisions as to carrying forward continuing to be effective after a person in the words of Rule 11 "succeeds to the trade". Under the Indian Income-tax Act the situation is different, inasmuch as the allowances must be directly connected with the assessee before the proviso can have any application. I formally concur with the answers to the question a ..... X X X X Extracts X X X X X X X X Extracts X X X X
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