COMMISSIONER OF INCOME TAX Vs. KHARWAR B M

JUDGEMENT

(1.) THE question which has been referred to us in this reference is "Whether, on the facts and in the circumstances of the case, the sum of Rs. 40,743 is assessable to tax by applying the second proviso to s. 10(2)(vii) of the Indian IT Act, 1922 ?"

(2.) THE present reference arises out of the assessment for the asst. yr. 1959-60 on the assessee which is assessed as a registered firm, and the relevant previous year is Samvat year 2014 (October 24, 1957 to November 11, 1958). THE assessee-firm was carrying on business of manufacturing art silk cloth at Surat and had and still have branches at Bombay, Calcutta and Rangoon. THE firm maintained and still maintains separate books of account for each of these branches. THE business of manufacturing art silk cloth at Surat was carried on by the assessee-firm up to June 17, 1958, when it was taken over by a private limited company. THE assessee-firm has eighteen partners and the private limited company which took over the said business have the same persons as its shareholders, and their respective interests in the limited company are the same which they had in the assessee- firm. One of the assets taken over by the limited company was machinery, the written down value of which stood at Rs. 9,962 in the books of account of the assessee-firm. THE machinery was taken over by the limited company at the value of Rs. 62,232. It is an admitted fact that the total amount of depreciation allowed in respect of the machinery in the preceding years came to Rs. 40,743. THE original cost of this machinery was Rs. 51,605.

(3.) IN respect of property which is sold, the basis of the allowance is the excess of the written down value over the sale price. It is necessary, however, that the business, to the assets of which the allowance under cl. (vii) relates, should have been carried on for at least some part of the relevant accounting year and, under the first proviso, it is necessary that the amount claimed by way of an allowance under this clause is actually written-off in the assessee's books. The principle on which the second proviso is based is that the assessee should be recouped of his capital cost of building, machinery and plant by the depreciation allowances given under cls. (vi) and (via), the allowance under cl. (vii) and the sale price or the scrap value, when he sells these assets or demolishes or destroys them. Where, therefore, an assessee is able to recover in full the written down value out of the sale proceeds, he would not be entitled to claim the allowance under cl. (vii), for cl. (vii) is intended only to recoup the balance of the cost after deducting the total depreciation allowances. What the second proviso does is to provide that if the sale price exceeds the written down value, such excess should be taxed as profits to the extent of the total depreciation allowances granted in the preceding years. IN such a case, the proviso takes back what was granted by way of depreciation allowance in the past because the result otherwise would be to recoup to an assessee an amount in excess of his original cost. The second proviso thus taxes the excess of the sale price over the written down value and that is what the taxing authorities sought to do in the present case. The effect of this proviso, therefore, is that where the sale proceeds plus the total depreciation allowances already made exceed the original cost, the excess or the aggregate of the depreciation allowances, whichever is less, is chargeable as profits.