ORDER
Sanjay Arora, Accountant Member
1. This is an appeal by the Assessee arising out of the order of the Commissioner of Income fax (Appeals)-IV, Baroda, dated 11-1-2002. and the assessment years (AY) under reference is 1998-99.
2. The appeal raises three effective issues, per its first two grounds, ail of which are reproduced as under:
1. The Ld. CIT(A)-IV, Baroda erred in law and on facts in not considering the commission payment Rs. 78,300/- being sales commission.
2. The Ld. CIT(a) iv, Baroda erred in law and on facts not granting claim for set-off of carry forward of business loss of Rs. 1,00,000/- and unabsorbed depreciation of Rs. 6,16,055/-
3. The Ld. CIT (A)-IV, Baroda erred in law and on facts in confirming interest under Section 234B & 234C levied by A.O.
3. Before we proceed to deal with the aforesaid grounds, we consider it relevant to set out the facts of the case as well as the opposing stands of the two parties.
4.1 The assessee is a private limited company, limited by shares, incorporated under Part-IX of the Companies Act, 1956, on 7-1-1998, through the conversion of a partnership firm M/s. Amin Machinery Instrument. The assessee-company claims the following deductions in the computation of its taxable income:
a) Rs. 78.300/- towards payment of sales commission;
b). Rs. 1,00,000/- by way of set off of unabsorbed business loss of the erstwhile partnership firm, aforesaid (which stands succeeded to by this assessee-company);
c) Rs.6,16,055/- by way of carry forward and set off of unabsorbed depreciation of the said partnership firm;
4.2 The assessee-company claimed the following on the basis that upon registration of an eligible company (partnership firm, in the present case) under Part IX of the Companies Act, 1956, the same stands converted into a company within the meaning of Section 2(10) read with Section 3 of the said Act, with the statutory yesting of all the assets and liabilities of the former in the new company, requiring no separate conveyance, so that there are two entities involved, but only one. In other words, it is only a case of change of form; the older entity (partnership firm) getting itself registered under a different statute (Companies Act. 1956), preferring to be henceforth governed by its provisions.
4.3 The assessee has cited the decision in the case of CIT v. Texspin Engineering and Manufacturing Works , to the effect that there is no transfer of assets involved where a company is formed/incorporated under Part IX of the Companies Act, and as such, no liability to capital gains tax enures thereby on the capital assets that were the property of the erstwhile partnership firm and now that of the Part IX company. It has further also relied upon the decisions in case of HUF, where the ancestral property falling to the assessee, an individual, is assessed, as also the income therefrom, in his individual hands where he has no family of his own, though stands to be assessed in the status of an HUF on the family coming into being, i.e., a case of change of status, without there being any transfer of the assets, or of two entities being involved:- 97 ITR 493(SC), 121 ITR 347 (All).
4.4 The Revenue’s case is that it is the case of succession of business, otherwise than by way of inheritance. The relevant provisions of the Income-tax Act, 1961 (‘the Act’ hereinafter) are clear. The assessment up to the date of succession and thereafter, during the year of succession, is to be in the hands of the predecessor and successor, respectively (Section 170). As such, the claim of expenditure contracted by the predecessor partnership firm cannot be allowed in the hands of the succcssor-company. The carry forward of unabsorbed business loss and unabsorbed depreciation is governed by the provisions of Section 78(2) and Section 32(2) of the Act. respectively. Section 32(2) restricts the allowance of claim of an unabsorbed depreciation only where the business continues to be carried on by the assessee himself, i.e., in whose hands the depreciation allowance under Section 32(1) is exigible. Section 78(2) proscribes allowance of unabsorbed business loss in the case of succession other than where it is by wav of inheritance, and which the present case is certainly not.
5. We have heard the parties, and perused the material on record.
5.1 At the outset, we would like to clarify that the stand of the assessee-company as being only a modified version of the erstwhile firm, which only stands now registered under the Companies Act, 1956, is unacceptable. A partnership firm and a company are distinct and separate legal entities, and recognized as separate persons under the Act. A partnership has no identity of its own, i.e., apart and distinct from the several persons constituting it for the time being, only signifying the contractual relationship between them, and the firm name only a compendious name given to all of them together. A company, as defined Under Section 2(10) r/w Section 3 of the Companies Act, 1956, on the other hand, is a separate legal entity, a creature of the statute, separate and distinct from the several persons, natural or purely legal, who may be its members for the time being. As such, that the assessee-company stands formed and registered in terms of Part IX of the Companies Act, 1956, would, therefore, by itself, be of no moment. It may well have been a company formed and registered under the said Act by the partners of the erstwhile firm. And taking over the running business of the said firm. In other words, no special significance, to our mind, could be attached to the manner of the formation of the assessee-company. Further, that the erstwhile partnership ceases to be in existence, upon the registration of the assessee, is of little significance; its legal effect being of its dissolution, which, in terms of the partnership law, to which it is subject, could be on the partners mutually deciding so, and which the act of registration (of the firm) under the Companies Act itself conveys. As such, the two cannot be treated as one, even as. without doubt, thereby, a succession to business of the partnership takes place, with all its legal incidents.
5.2 As regards the assessee’s claim of deduction of sales commission of Rs. 78,3000/-, we do not consider the assessee’s case as meriting acceptance. No doubt the assessee assumes all the assets and liabilities of the erstwhile partnership firm, but that only implies that the liability in its respect actually existed as on the date of conversion/succession, so that assessee-company, as a successor, honoured the same. But acceptance of a liability, even in relation to the business, would not, by itself, qualify for claim for deduction thereof. It is not a case where the liability, which is only a contractual one, crystallized subsequent to the date of conversion, being under dispute at the relevant time. The liability arose on the execution of the corresponding sales by the predecessor firm, so that it could be taken into account by the said firm on the closure of its accounts for the relevant year (period), and which would only the subsequent to 30-1-1998, i.e., the date on which the relevant debit notes are stated to have been received. The firm’s income is to be computed only on the basis of the method of accounting which it regularly follows, and which is admittedly mercantile/accrual. In any case, even booking of the expenditure is not a precondition, so that the same could be claimed in the firm’s return, filed subsequently (to 30-1-1998). even as the expenditure stood accounted for in the company’s books. As such, the discharge by the asscssec-company of the firm’s existing liability would not entitle it to claim deduction of the relevant expenditure in its respect; it being subject to the provision of Section 145, and neither it being a case of under- provision by the said firm, so that, having been made bona fide, on the basis of the available information, the difference in the amount of the liability, on its actual determination, could be said to have crystallized later. We, therefore, decline to interfere with the order of the Ld. CIT(A) on the first ground for appeal, disposing the same.
5.31 The assessee’s second claim is for carry forward and consequent set off of unabsorbed business loss of Rs. 1,00.000/-, which the Revenue has disallowed on the basis of the express provision of Section 78(2) which reads as:
78.(1)…
(2) Where any person carrying on any business or profession has been succeeded in such capacity by another person otherwise than by inheritance, nothing in this Chapter shall entitle any person other than the person incurring the loss to have it carried forward and set off against his income.
3. The law, thus, envisages succession of business, but precludes the carry forward of unabsorbed business loss, except where the same is by way of inheritance. The only question, therefore, before us would be whether the word ‘inheritance’ could cover within its ambit the conversion of a partnership firm into a company as defined under the Companies Act, 1956, under the provisions of Part IX thereof. There is a statutory devolution of the assets and liabilities of the firm on its registration as a Part IX company, and thereto. As such, could a statutory devolution be considered as amounting to inheritance, which, by definition, can only be to and by individuals. Another essential feature of inheritance is that it is purely a natural phenomenon, as neither the time of one’s expiry nor the set of individuals who would stand to inherit (the property business in the present case) can be defined or specified by the predecessor, which is not the case in case of the conversion of an incorporeal entity, though through the process of law. The Act is a separate code in itself and, therefore, transmission would stand to be viewed in the context of its provisions. Section 170 of the Act contemplates the transmission of assets or business from one entity to another, and the relevant part of which reads as:
Succession to business otherwise than on death
(1) Where a person carrying on any business or profession (such person hereinafter in this section being referred to as the predecessor) has been succeeded therein by any other person (hereinafter in this section referred to as the successor) who continues to carry on that business or profession, –
(a) the predecessor shall be assessed in respect of the income of the previous year in which the succession takes place to the date of the succession;
(b) the successor shall be assessed in respect of the income of the previous year after the date of the succession.
(2) Notwithstanding.
5.32 It is not that, therefore that succession to business is a phenomenon/transaction that the Act does not contemplate or is silent upon, so that analogy from the general law may have to be resorted to. The Act, evidently, considers ‘inheritance’ as one of the modes of the succession, excluding it. while barring the benefit of carry forward of business loss in the hands of the successor (section 170). Similarly. Section 47(iii)(a). which defines the cost of acquisition in respect of certain modes of acquisition as being equal to the cost of acquisition to the previous owner (plus cost of improvement, if any), considers acquisition by succession, inheritance or devolution, as one of the specified modes. Clearly, devolution of assets (including business) is treated as separate and distinct mode of acquisition, so that there is no scope for considering the two as one, by carving out a separate case for a Part IX Company, in contra-distinction to other modes of succession, the law on which is clear, on the ground of a statutory devolution (as sought to be pleaded), and which does not bear the essential attributes of inheritance (which stands specified, i.e., where so deemed fit by the Legislature). The golden Rule of interpretation is that of literal interpretation; there being no consideration of equity in the interpretation of the taxing statute, where the language is clear and unambiguous, even as explained by the Apex court in the case of Tarulata shyam v. CIT 108 ITR 345 (SC) in the following words:
The language of Sections 2(6A)(e) and 12(1B) is clear and unambiguous. There is no scope for importing into the statute words which are not there. Such importation would be not to construe, but to amend, the statute. Even if there be a casus omissus the defeat can be remedied only by legislation and not by judicial interpretation.
To us, there appears no justification to depart from the normal rule of construction according to which the intention of the legislature is primarily to be gathered from the words used in the statute. It will be well to recall the words of Rowlatt J. in Cape Brandy Syndicate v. Inland Revenue Commissioners [1921] 1 KB 6-1 (KB) at page 71, that:
…in a taxing Act one has to look merely at what is clearly said. There is no room for any intendment. There is no equity about a tax. Nothing is to be read in, nothing is to be implied. One can only look fairly at the language used.
Once it is shown that the case of the assessee comes within the letter of the law, he must be taxed, however great the hardship may appear to the judicial mind to be.
In fact, the provisions of Section 47(xiii) and Section 72A[(4) & (5)] stand co-opted statute by finance (No. 2) Act 98. w.e.f. 1-4-99, and which, clearly provide for the case of the succession of a proprietary firm or a partnership firm by a company, subject to fulfillment of certain conditions (extending over a period of time), as not amounting to transfer, as also for the benefit of carry forward of the unabsorbed depreciation and business loss of the erstwhile firm in the hands of the succeeding company. Vide the Memorandum explaining the provisions of finance (No. 2) Bill, 1998 (clause 23). it stood explained that under the existing provisions of the Income-tax Act. business re-organisations, which have definite tax implications, transfer of assets attracts levy of capital gains tax. Similarly, carry forward of losses and that of unabsorbed depreciation is not available to the successor business entities, while it is so in the case of amalgamation. As such, the Bill proposes that:
a) subject to the satisfaction of the certain conditions, transfer of assets to a company shall not be regarded as transfer under the Act; and
b) similarly, carry forward of business loss and unabsorbed depreciation to successor companies on the satisfaction of the aforesaid conditions.
Further, the amendment would be effective from 01-04-1999 and, accordingly, would apply in relation to assessment year 1999-2000 and subsequent years.
The said explanatory notes, explaining the basis and the rationale of the proposed amendments to the Act, for the consideration of the Legislature, have a definitive interpretative value; in the present case clearly pointing out to the fect of, except in the case of amalgamations, the business reorganizations as being not tax-neutral.
5.33 In view of the foregoing, the issue under reference being the subject matter of a specific provision of the Act, and a substantive one at that, which stands clearly worded, there is no scope for allowance of the assessee’s claim, i.e., in respect of carry forward of unabsorbed business of the predecessor partnership firm, a distinct and separate person under the Act. We decide accordingly.
5.41 The assessee’s third claim, covered by the second ground of appeal, is for grant of carry forward of unabsorbed depreciation as determined in the case of the erstwhile firm. Proviso 4 to Section 32(2) clarifies that in case of succession to business the aggregate of depreciation allowance in the hands of both the predecessor and successor would not exceed the amount of depreciation allowable if the succession had not taken place, and further, would stand allocated amongst the two in the ratio of the number of days the relevant assets stand used by them during the relevant year. Section 32(2). which governs the case of unabsorbed depreciation, as it stood at the relevant time, with its relevant part reading as:
(2) Where in the assessment of the assessee full effect cannot he given to any allowance under Clause (ii) of Sub-section (I) in any previous year owing to there being no profits or gains chargeable for that year or owing to the profits or gains being less than the allowance, then, the allowance or the part of the allowance to which effect has not been given (hereinafter referred to as unabsorbed depreciation allowance), as the case may be, –
(i) shall be set off against the profits and gains, if any, of any business or profession carried on by him and assessable for that assessment year;
(ii)…
5.42 The AO has denied the assessee’s claim, by construing the word ‘him’ as occurring in Section 32(2)(i) to mean as the assessee only, and not the succeeding entity. The Act enjoins the assessee to have business/professional income, not necessarily from the same business in which the relevant depreciable asset(s) stood employed, in the year in which the set-off of the carried forward depreciation takes place. Section 43(6), which defines ‘written down value’ (‘WDV’ for short), states that the WDV in the hands of the successor shall be the same as would be in the case of the predecessor if the succession had not taken place. Further, the WDV is to be computed after deducting therefrom the depreciation actually allowed, and which would include that allowed to be carry forward for subsequent set-off in terms of, and under the provision of, Section 32(2).
5.43 A conjoint and harmonious reading of the different provisions of law having a bearing in the matter, clarify that under the Act:
(a) predecessor and successor have been considered as separate persons;
(b) succession to business has been sought to be made into tax neutral transaction, i.e., from the stand-point of the Revenue;
(c) envisages the survival of the assessee beyond the date of expiry of the relevant previous year, for the claim of depreciation to be carried forward;
5.44 In the present case, the AO has allowed full depreciation in the hands of the partnership firm only, while denying any depreciation allowance in the assessee-company’s hand, on the ground of being not claimed in the original return but done so only subsequently in the assessment proceedings. He. therefore, allowed depreciation for the full year in the hands of the firm. i.e. as claimed per the return of income as tiled by it. denying any depreciation in the assessee’s hand, arguing that the depreciation for the said period could be claimed in the hands of only one person, The assessment, both for the proceeding and succeeding period during the relevant previous year; the predecessor having lost its identity, can only be in the hands of the successor-company (though in a different capacity): the partnership firm dissolving w.e.f the date of conversion, so that it does not survive the succession. As such, we would consider depreciation as allowable in terms of relevant provisions of the Act, reference to which has not been made by the AO, be allowed in the hands of both the predecessor-firm and the successor assessec-company; the purpose of assessment being the determination of the correct liability under the Act and of fair assessment in terms of the extant law, and which would, therefore, require allowance of depreciation at the correct amount(s) in the hands of both, including adjudication on the correct amount of WDV in the assessee’s hands, even as we are in agreement with the AO that the carry forward of depreciation Under Section 32(2) could only be in the hands of the partnership firm. Giving rise to the question, that remains unaddressed by him, that, in view thereof, whether the WDV in the assessee’s hands could be after excluding depreciation that stands held as not eligible for carry forward in terms of Section 32(2). We, therefore, remit this matter, for a decision in accordance with law, to the file of the AO, after hearing the assessee in the matter, per a speaking order. We decide accordingly, and the assessee gets partial relief.
6. In the result, the assessee’s appeal is partly allowed for statistical purposes. Order pronounced in open court on 12-01-02007.