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TMI Blog1937 (10) TMI 11X X X X Extracts X X X X X X X X Extracts X X X X ..... year ending 31st March, 1935. The assessees claimed to deduct from the profits made by the vendor firm during the previous year the allowance for depreciation which would have been permissible to the vendor firm had they not disposed of their business. The Commissioner of Income-tax disallowed the claim, and the question is whether this decision is right. The position turns upon the construction of Sec. 26(2) read with Sec. 10 of the Income-tax Act. Sec. 26 was introduced by an amending Act passed in the year 1928, the previous section having been couched in much more general terms, though probably its effect was much the same as that of the amending section. By sub-section (2) of the existing section it is provided that where at the time of making an assessment under Sec. 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 . In the absence of authority to the contrary it would cer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the Act so as to make the word include not only a person by whom income-tax is payable but also a person on whose income, profits or gains an assessment is being based. It is to be noted that the definitions in the Act are to yield to the context. The Court has to construe the Income-tax Act as a whole and the only alternative to the construction of Sec. 10 which I suggest is to hold that in the case of an assessment under Sec. 26(2) the assessee can claim no allowance in respect of depreciation of buildings, machinery, plant or furniture. This in my view is not the true meaning of the act. I may observe that a similar difficulty would arise under Sec. 11 in the case of the assessment of the profits of a profession or vocation under Sec. 26(2). The Advocate-General has not seriously contended that any other rational construction can be given to Sec. 10 as allied to an assessment under Sec. 26(2), but he says that the words of Sec. 10 read with the definition of assessee are plain and must be given effect to, whatever the consequences, and further that the case is covered but the decision of the Privy Council in Commissioner of Income-tax, Madras v. The Buckingham and Carna ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ose assets to such predecessor companies or not the value at which those assets were taken over they the Buckingham and Carnatic Co., Ltd., from the predecessor companies. The privy Council answered that question in the sense in which the Bombay and Patna High Courts had answered it, namely, that the depreciation was to be based not the value at which the assets were taken over but purchasing company. The second question raised was in these terms : whether Buckingham and Carnatic Co., Ltd., is entitled to have depreciation allowance from the years 1921-22 to 1930-31 recalculated on the basis of that decision, and to claim that the excess depreciation not allowed in those years would be allowed in its subsequent assessments or whether the claim for such excess depreciation lapses altogether. Their Lordships of the Privy Council considered that it was not necessary to express any opinion onto at question, or on the other question raised, for thus equations would have arisen only if the answer to the first question had been other than that which the Privy Council gave to it. It is therefor clear that the Privacy Conical did not actually decide whether the assessment for the year 1921- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... st April 1936, carrying on business as shipbuilder and repairers. Before that the business was carried on by a partnership firm known as the Mazagaon Dock. As the business of the partnership firm was taken over but the Company from the 1st April 1935, the Income-tax Officer assessed the company under Sec. 26(2) of the Act for the financial year 1935-36 on the profits earned but the firm in the year which ended on the 31st March 1935, which was the previous year of the firm as defined in Sec. 2(11) of the Act. In arriving at the tax payable by an assessee in accordance with Sec. 10 of the Act under the head business in respect of the profits or gains of any business carried on by him, certain allowances are to be made, and among them an allowance is to be made on account of depreciation on buildings, machinery, plant or furniture as laid down in Sec. 10(2) (vi) of the Act which reads as follows : (2) such profits or gains shall be computed after making the following allowances, namely - (vi) In respect of depreciation of such buildings, machinery, plant or furniture being the property of the assessee, a sum equivalent to such percentage on the original cost thereof to the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o the Court under Sec. 66(2) of the Act, and he has accordingly submitted with a statement of the case the following question of law :- Whether in the circumstances of the case, the Income-tax Officer has correctly computed the depreciation allowance under Sec. 10(2) (vi) of the act on the original cost to the assessee company itself, notwithstanding the fact that it was being assessed under Sec. 26(2) of the Act as the successor to the partnership firm known as the Mazagaon Dock . Mr. Coltman for the company contended that the case of Commissioner of Income-tax, Madras v. Buckingham and Carnatic Co., Ltd., has no application to the facts of the present case. He said that in that case the assessment was for the year 1931-32, the Company having succeeded to the business some ten years befores, and that it was not a case in which the company was being assessed upon the profits of the previous year as if it had been carrying on the business during the previous year and had received those profits. Mr. Coltman relied upon Sec. 26(2) which is in the following terms :- Where at the time of making an assessment under Sec. 23, it is found that the person carrying on any business, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the written down cost, namely, the actual cost to the Company only was allowed. Although their Lordships were dealing with the assessment for the year 1931-32, Mr. Hills in the course of his argument for the company is reported to have said :- Here the successor who is taxed is carrying on, continuing, the same business. It is fair that he should be taxed as his predecessor would have been if he had continued the business. Normally Assessee means assessee for the taxing year, but original cost to the assessee might mean to the assessee from whom the purchase was made. This is an argument similar to that of Mr. Coltman based upon Sec. 26(2), and although the question of the correctness of the assessment for 1921-22. was not directly before their Lordships, the argument of Mr. Hills certainly raised that question there is not a word in their Lordships judgment which suggests that their Lordships though that claims was in that year wrongly disallowed, or that a different meaning should be given to the words used in Sec. 10(2) (iv) if the question from the meaning which should be given to them if the question arises either in the next year after that or ten years later. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Sec. 10(2) (vi) was not envisaging any case of a successor company, and that what was in mind was the original company. That opinion did not commend itself to their Lordships of the Privy Council. The argument for the company in the present case appears to me to involve the supposition that the Legislator intended that Sec. 10(2) (vi) when it was first enacted should have one meaning in the case of an original assessee being taxed and another meaning in the case of a successor being taxed on the profits for the previous year as if it had been carrying on the business during the previous year if the Act were subsequently amended in that behalf. I cannot suppose that the Legislature had any such intention. Certainly if that had been the intention when Sec. 26 was intruded it would have been perfectly simple to employ appropriate language in reference to Sec. 10(2) (vi) to say so. It may be that it would be just to amend the Act to meet a case like the present, but that is a matter for the Legislature, and upon the plea that justice requires it I do artificial meaning in the first year after a succession, while giving to it, as I am bound to do by the ordinary cannons of construction ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... year ended 31st March 1935, which was the previous year of the firm as defined in Sec. 2(11) of the Act. In computing the income of the Company, under the head business an allowance on account of depreciation of building, machinery, plant or furniture is to be made at the prescribed rates as laid down in Sec. 10(2) (vi) of the Act. The company claimed that the allowance should be computed on the original count of the building, machinery, plant, etc., to the firm, and not on the cost paid by the Company which succeeded to the business of the firm. The Company further claimed, that in addition, all the unabsorbed depreciation due to the firm under Proviso (b) to Sec. 10(2) (vi) of the Act should be allowed. The Income Tax Officer relying not he Privy Council decision in The Commissioner of Income-tax, Madras v. Buckingham and Carnatic Co., Ltd. (1935) (I.L.R. 59 Mad. 175), rejected the claim and computed the total depreciation allowance by reference to the cost of the building, machinery, etc., paid by the Company to the firm. The Company appealed to the Assistant Commissioner of Income Tax, who however, confirmed the assessment made by the Income Tax Officer. If the claim m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (a) the prescribed particulars have been duly furnished; (b) where full effect cannot be given to any such allowance in any year owing to there being no profits or gains chargeable being less than 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 that allowance, or there is no such allowance, for that year, be deemed to be the allowance of the at year, and so on for succeeding years; and (c) the aggregate of all such allowances made under the act or any Act repealed hereby, or under the Indian Income Tax Act, 1886, shall, in no case, exceed the original cost to the assessee of the buildings, machinery, plant or furniture, as the case may be. So far then the position seems to be simple. A successor to a business is to be assessed not on his own income but on the income made by his predecessor and that income can only be ascertained after making certain deductions sanctioned by Sec. 10(2) (vi). The dispute between the parties is as to the manner in which the allowance in respect of depreciation of the buildings, machiner ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... me Tax Officer may determine having regard to the proportional part so used. Under Sec. 10(3) the word paid means actually paid or incurred according to the method of accounting upon the basis of which the profits or gains are computed under this section. Now, what is the rent which will have to be considered and who paid the rent in the previous year? Surely, it soul due rent actually paid by the predecessor; the successor has admittedly paid no rent in the year in question. Similarly if, part of the premises were used as a dwelling house, the allowance is to be calculated in a particular manner. If part of the premises are used but the predecessor during the previous year, then it is difficult to see how the word assessee could be used with reference to the successor. The next clause refers to repairs : (ii) in respect of repairs, when the assessee is the tenant only of the premises, and has undertaken to bear the cost of such repairs, the amount paid on account thereof, provided that, if any substantial part of the premises is used by the assessee as a dealing house, a proportional part only of such amount shall be allowed. If any such allowance is claimed for re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ody else. How can it then be said that the income arrived at in this fictitious manner represents the true taxable income of the predecessor? Is there anything which compels us to say that? I think not. Otherwise, the result is this not only the assessment is hypothetical, but the method of calculating the income of the predecessor must also be hypothetical. But the Legislature has not said so. In my opinion, where that is the position, the Court ought to adopt the construction which is most favorable to the subject. The difficulties that I have pointed out are not denied by the Advocate-General. But he says that under Sec. 26(2), the assesses the successor and he must be treated as if he was carrying on business in the previous year, and he relies in support of this argument on the Privy Council decision in the case of the Commissioner of Income Tax, Madras v. The Buckingham and Carnatic Co. Ltd. He submits that the point which is now raised is covered by the decision of their Lordships in treat case. In my opinion, there is nothing in that case which is applicable to the facts of this case. The case arose under the Act of 1922, and in that case, their Lordships were not consid ..... X X X X Extracts X X X X X X X X Extracts X X X X
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