A.M. Ponnurangam Mudaliar vs Commissioner of Income Tax and Another

Abdul Hadi, J.—A short question on the Income Tax law is involved in this writ petition by the assessee, which is an HUF. Since the matter

arises from an order of the CIT in revision under s. 264 of the IT Act, 1961 (hereinafter referred to as ''the Act'') it has come by way of writ

petition.

The prayer in the writ petition is to quash the said order of the CIT dt. 14th October, 1995 and consequently, to direct the said CIT (1st

respondent) to grant the ""relief"" ""to the petitioner-assessee for the asst. yr. 1980-81. The said ""relief"" sought for is depreciation allowance under s.

32(1)(ii) of the Act in respect of buses plied by the assessee during the first three months of the previous year in relation to the abovesaid

assessment year, that is from 1st April, 1979 to 30th June, 1979.

The assessee-HUF was a bus operator during the said asst. yr. 1980-81 and was running the buses upto the abovesaid date 30th June, 1979.

The Karta of the HUF gave the buses owned by the HUF to a firm by name Barathi Travels, in which he became a partner, representing the said

family. From 1st July, 1979, HUF ceased to continue as a bus transport operator. The buses were given to the firm towards the capital

contribution by the Karta. As per s. 34(2)(ii) of the Act, inter alia, the abovesaid allowance under s. 32(1)(ii) of the Act cannot be granted for any

previous year in respect of any plant (which would include buses) ""sold, discarded, demolished or destroyed, in that year"". However, it must be

noted that in such a case what is popularly known as ""terminal allowance"" will be granted under s. 32(1)(iii) of the Act in the assessment year in

relation to the previous year, in which the asset in question is ""sold, discarded, demolished or destroyed"".

The contention of the writ petitioner (assessee) is, when the assessee gave the abovesaid buses to the firm as capital contribution, the said buses

cannot be said to have been discarded, demolished or destroyed and that, therefore, s. 34(2)(ii) will not apply and depreciation allowance under s.

32(1)(ii) should have been given to the assessee.

Further, according to learned counsel for the petitioner buses became the property of the firm on and from 1st July, 1979, only by operation of

law as per s. 14 of the Partnership Act and there is actually no ""sale"" to the firm by the HUF. In this connection he drew my attention to the

following passage in Sunil Siddharthbhai Vs. Commissioner of Income Tax, Ahmedabad, Gujarat, :

Our attention has been invited to Commissioner of Income Tax, West Bengal Vs. Hind Construction Ltd., . In that case, the assessee entered into

a partnership and as its share of the capital, it transferred its stock of machinery to the partnership firm. This Court held that when the assessee

made over its machinery to the partnership firm, there was no sale and the assessee did not derive any income. In Commissioner of Income Tax

Vs. Janab N. Hyath Batcha Sahib, , the Madras High Court held that when a partner introduces his property into a partnership firm as his

contribution to its capital, the transaction does not involve a sale of the property. The High Court referred to s. 14 of the Indian Partnership Act,

1932 and observed :

''When partnership is formed for the first time and one of the members of the partnership brings into the firm assets, they become the property of

the firm, not by any transfer, but by the very intention of the parties evinced in the agreement between them to treat such property belonging to one

or more of the members of the partnership as that of the firm ....''.

We find no difficulty in accepting that proposition.

The first respondent-CIT has negatived the contention of the assessee-petitioner on the footing that the assessee has at any rate ""transferred"" the

said buses to the firm within the meaning of s. 2(47) of the Act. This reasoning of the 1st respondent, obviously is not correct since the term

transferred"" is not used in s. 34(2)(ii) of the Act and it has used only the words ""sold, discarded, demolished, destroyed"". It has not even used the

expression ""or otherwise transferred"" ""or disposed"" as for example, found in certain other provisions of the Act. Further definition in s. 2(47) of the

term ""transfer"" is only in relation to a ""capital asset"" as defined under s. 2(14). In other words, the said term ""transfer"" is in relation to computation

of ""capital gains"" coming under Chapter IV-C of the Act.

In view of the abovesaid feature, learned counsel for the respondent also fairly submits that the abovesaid reasoning of the respondent-CIT, is

not correct. He could also not controvert the above referred to legal position explained in Sunil Siddharthbhai Vs. Commissioner of Income Tax,

Ahmedabad, Gujarat, based on s. 14 of the Partnership Act.

However, what he points out is that as per s. 32, in order to claim depreciation allowance, the assessee must have been owner of the abovesaid

buses, since s. 32(1) begins thus :

In respect of depreciation of buildings, machinery, plant or furniture owned by the assessee and used for the purposes of the business or

profession.

On the other hand, learned counsel for the assessee submits that the assessee was admittedly the owner of the abovesaid buses during the

previous year, that is, for the period from 1st April, 1979 to 30th June, 1979. Therefore, he submits that there is no bar for granting the assessee

the depreciation allowance and claimed the assessee having admittedly used the said buses for the said entire three months'' period for the

purposes of its abovesaid business. In this connection he also points out that as per r. 5 of the IT Rules, 1962, as it existed at the relevant point of

time, even when the assessee has used the asset in question for the purpose of its business ""at any time"" during the previous year, that is even for

any single day in the previous year, it is entitled to the above depreciation allowance in full.

10A. I have considered the rival submissions in this regard. There is no difficulty in accepting the contention of learned counsel for the assessee.

Though the term ""owned by the assessee"" is used in s. 32(1), it cannot mean that the assessee should have remained owner of the asset in question

for the entire previous year in question. Admittedly, the assessee, in this case was owner of the abovesaid buses during the previous year, that is

from 1st April, 1979 to 30th June, 1979, though not for 365 says of a year. In fact, since the business itself was closed on 30th June, 1979 the

assessee had been fully using the asset for the business during the entire accounting year of the abovesaid three months ending with 30th June,

1979.

10A. The object of the legislature in granting depreciation allowance under s. 32 of the Act is to give due allowance to the assessee for wear and

tear suffered by the asset used by him in his business so that net income (total income) is duly arrived at. Further, the enactment read with the

abovesaid rules, as it existed at the relevant point of time, goes to the extent of granting such allowance even when the asset in question issued for

the purpose of the business at any time ""during the previous year"". In other words, at the relevant point of time, even if the asset has been used for

a single day, in the business of the assessee, depreciation allowance, in full was given under s. 32(1) of the Act. When such is the case, it cannot be

said that the assessee cannot be granted the said depreciation allowance if he is not the owner for the entire period of the previous year or if he is

not the owner of the last day of the previous year in question. There is no such stipulation in the Act.

In COMMISSIONER OF Income Tax, BIHAR AND ORISSA Vs. S.K. SAHANA and SONS., also, full depreciation was allowed even

though the assessee was owner during the previous year only for 5-1/2 months. In the said decision Fazl Ali, C.J., and Manohar Lall, J. made the

following significant observation :

It is not disputed that the assessee was the owner of the building, machinery, etc., during the accounting year. I do not see any provision in the Act

which authorises an apportionment of depreciation on the assessee having sold the machinery or plant during the accounting period. I am of the

opinion that there is no such provision in the Act as would justify that if the machinery is not the property of the assessee throughout the year then

the period for which it was the property of the assessee should be calculated and depreciation should be allowed in proportion to such period .....

It was contended by the learned standing counsel that the acceptance of this view is most inequitable as it would enable both the transferor and the

transferee to claim full deduction for the depreciation although the machinery, etc., have been used by either of them only for a broken period in the

same year. But it has been rightly pointed out that equity and taxation are as poles asunder and the Court cannot invoke an equitable rule in the

construction of a taxing statute.

The net result is, that the impugned order is quashed and the respondents are directed not to refuse the depreciation allowance claimed by the

assessee either on the ground that the assessee was not the owner of the abovesaid buses for the full previous year in relation to the assessment

year in question or on the ground that the abovesaid s. 34(2)(ii) would apply to the case of the assessee.