JUDGMENT
H.N. Devani, J.
1. The Income Tax Appellate Tribunal, Ahmedabad Bench ‘B’ has referred the following question of law for the opinion of this Court under Section 256(1) of the Income Tax Act, 1961 (the Act) at the instance of the Commissioner of Income Tax, Baroda.
“Whether, the Appellate Tribunal is right in law and on facts in holding that the assessee is entitled to claim depreciation allowance u/s. 32 for the full year therebygranting depreciation twice on the same assets in one assessment year to the firm beforethe dissolution and to its partner after dissolution?”
2. The Assessment Year is 1983-84. The relevant Accounting period is from 1/1/1982 to 31/07/1982. During the previous year relevant to the Assessment Year under consideration the assessee, a partnership firm was dissolved on 31/07/1982 and its business was taken over by one M/s. Himalaya Machinery (P) Ltd., a partner, as a going concern along with all assets and liabilities with enffect from 01/08/1982.
3. The assessee firm filed return of income on 30/06/1983 showing total income of Rs. 2,92,500/-. At the first instance the assessee claimed depreciation proportionately for seven months period of accounting year i.e. upto 30/07/1982. However, subsequently by a letter dated 22/11/1985, theessee claimed full depreciation.
4. The I.T.O. disallowed the claim of Rs. 1,76,382/towards depreciation, holding that the taking over of the running business of the partnership firm by the partner M/s. Himalaya Machinery (P) Ltd., which is a separate legal entity, amounted to transfer of the assets. That transfer includes sale and therefore, provisions of Section 34(2)(ii) are applicable in the facts of the case. The I.T.O. also held that depreciation cannot be claimed on the same assets twice, and as full depreciation allowance was already claimed for the period which ended on 31/12/1982 by M/s. Himalaya Machinery (P) Ltd., depreciation cannot be allowed to the assessee firm for a part period. Accordingly, the claim for depreciation was disallowed.
5. The assessee carried the matter in appeal before the CIT (Appeals), who for the reasons stated in his order dated 15/6/1983 held that I.T.O. had rightly disallowed the claim for depreciation on the assets of the appellant firm.
6. The CIT(A) observed that the appellant firm was dissolved with effect from 31/07/1982 by a deed of dissolution, executed on 1/8/1982 and that after dissolution, the business of the appellant firm as a running business with all assets and liabilities was taken over by Himalaya Machinery (P) Ltd., one of the partners having 20% share in the partnership. That the company Himalaya Machinery (P) Ltd. comprises only of the partners of the dissolved appellant firm as its shareholders/directors and that under these peculiar circumstances the business of the appellant firm taken over as a going concern by Himalaya Machinery (P) Ltd. amounts to a transfer. The CIT (Appeals) further observed that sub clause (ii) of sub-section (2) of Section 34 incorporates the words “sold, discarded, demolished or destroyed in that year” and that it does not include the word ‘transfer’. The CIT (A) held that Explanation 2 below sub-clause (iii) of sub section (1) of Section 32 gives definition of ‘sold’ and this definition includes a transfer by way of exchange or a compulsory acquisition under any law. That in the instant case the partners of the appellant firm have exchanged their interest which was received on the dissolution of the appellant in the form of assets with the shares of Himalaya Machinery (P) Ltd. and hence, this transaction of exchange amounted to transfer.
7. The assessee challenged the aforesaid order of the CIT (Appeals) by way of Second Appeal before the Tribunal, and vide order dated 16/3/1992 the Tribunal allowed the appeal and held that the assessee is entitled to claim depreciation allowance under Section 32 of the Act at full depreciation rate. The Tribunal placed reliance upon a decision of the Chandigarh Bench of the Tribunal in case of Sitaram Saluja v. I.T.O., reported in 1 ITD 754 wherein on similar set of facts the Tribunal had held that claim for full depreciation on the same assets cannot be denied to the assessee on the ground that depreciation would not be allowed twice in the same year on the same assets. The Tribunal also relied upon the decision of the Supreme Court in the case of Malbar Fisheries Co. v. CIT, 120 ITR 49 as well as decision of the Tribunal, Ahmedabad Bench ‘A’ in case of I.T.O. v. Pratik Prince, 37 ITD 159 while holding that allotment of all assets and liabilities to one of the partners upon dissolution of the firm could not be regarded as transfer of assets as contemplated in Section 155 read with Section 32A(1) of the I.T. Act. The Tribunal held that after dissolution of the said firm the assets were taken over by the company and thereafter it owned and used the assets. According to amended Rule 5 of the Income Tax Rules, 1962 (the Rules) depreciation at full prescribed rate is allowable in respect of the assets owned and used at any time even for a day. That there is no provision for splitting up depreciation allowable on the basis of number of months of its user and accordingly, held that the assessee is entitled to claim depreciation allowance under Section 32 for the full year.
8. Mr. Ketan Parikh, learned Standing Counsel for the applicant-revenue submitted that the taking over of the entire business of the assessee firm by the partner Himalaya Machinery (P) Ltd., which was a separate legal entity, amounted to a transfer. That there was a change in the ownership and control of the assets during the relevant accounting year, hence, depreciation was not allowable. That the assessee was not eligible to claim depreciation allowance in respect of assets owned and used by it for a part period during the relevant accounting period.
9. Though served, there is no appearance on behalf of the respondent assessee.
10. Sections 32 and 34 of the Act, as are relevant for the purpose of the present case, as they stood at the relevant time read as under :
“32(1) In respect of depreciation of buildings, machinery, plant or furniture owned by the assessee and used for the purposes of the business or profession, the following deductions shall, subject to the provisions of section 34, be allowed –
(i) xxx xxx xxx xxx
(ii) in the case of buildings, machinery, plant or furniture, other than ships covered by clause (i), such percentage on the written down value thereof as may in any case or class of cases be prescribed;
34. (1) The deductions referred to in sub-section (1)[or sub-section (1-A)] of section 32 shall be allowed only if the prescribed particulars have been furnished; and the deduction referred to in section 33 shall be allowed only if the particulars prescribed for the purpose of clause (i) and clause (ii) of sub-section (1) of section 32 have been furnished by the assessee in respect of the ship or machinery or plant.
(2) For the purposes of section 32 –
(i) the aggregate of all deductions in respect of depreciation made under sub-section (1) [or sub-section (1A)] of section 32 or under the Indian Income-tax Act,1922 (11 of 1922), or under any Act repealed by that Act or under the Indian Income-tax Act,1886 (2 of 1886), shall in no case, exceed the actual cost to the assessee of the building, machinery, [plant, furniture, structure or work], as the case may be;
(i) xxx xxx xxx xxx
[ii] nothing in clause (i) or clause (ii) [or clause (iia)] or clause (iv)[or clause (v) or clause (vi)] of sub-section (1) of section 32 shall be deemed to authorise the allowance for any previous year of any sum in respect of any building, machinery, plant or furniture sold, discarded , demolished or destroyed in that year;”
A plain reading of the aforesaid provisions makes it clear that an assessee would be entitled to claim deduction in respect of depreciation of the buildings, machinery, plant or furniture, which are owned and used by the assessee for the purpose of his business or profession, which would be such percentage on the written down value thereof as may be prescribed. Such deduction would be subject to the provisions of section 34 namely that (i) the assessee would be required to furnish the prescribed particulars and (ii) such building, machinery, plant or furniture should not have been sold, discarded, demolished or destroyed in the previous year.
11. As can be seen, Section 32 of the Act makes provision for deduction that can be allowed in respect of depreciation of buildings, machinery, plant or furniture owned by the assessee and used for the purposes of the business or profession. In clause (ii) sub-section (1) of Section 32, as it stood at the relevant time, it was provided that in the case of buildings, machinery, plant or furniture, depreciation was eligible at such percentage on the written down value thereof as may in any case or class of cases be prescribed. The mode of computation of depreciation that is allowable is prescribed in the Rules. Rule 5(1) of the Rules, as it stood at the relevant time, provided as under :
“DEPRECIATION.
5.(1) Subject to the provisions of sub-rules (2) and (3), the allowance under clause (i) or clause (ii) of sub-section (1) of section 32 in respect of depreciation of buildings, machinery, plant or furniture or the allowance under clause (i) of sub-section (1A) of section 32 in respect of depreciation of any structure or work referred to in that sub-section shall be calculated at the percentages specified in the second column of the Table in Part I of Appendix I to these rules on the actual cost or, as the case may be, the written down value of such of the assets aforesaid as are used for the purposes of the business or profession of the assessee at any time during the previous year:” Part-I of Appendix I to the Rules, contained the table of rates at which depreciation was admissible on various classes of assets including buildings, machinery, plant or furniture. Column 1 of the table provided for the class of asset, Column 2 provided for the depreciation allowance as a percentage of (i) actual cost in the case of ocean-going ships; (ii) written down value in case of any other asset.
12. A perusal of Rule 5(1) shows that normally depreciation allowance under Section 32 in respect of depreciation of buildings, machinery, plant or furniture has to be calculated at the percentages specified in the second column of Part I of Appendix I to the Rules on the actual cost or, as the case may be, the written down value of such assets, as are used for the purposes of the business or profession of the assessee at any time during the previous year.
13. Upon an overall view of the aforesaid provisions it is apparent that in respect of assets which have been owned and used by the assessee at any time during the previous year, the assessee would be entitled to depreciation allowance as percentage of written down value prescribed in respect of the assets as provided in part-I of Appendix-I of the Rules. The provisions do not circumscribe the rates of depreciation allowance in case the asset has been owned and used for the purpose of business or profession for a part of the previous year. Once the conditions laid down in Section 32 and Section 34 of the Act are satisfied for any part of the previous year, the assessee is entitled to full depreciation allowance on the assets.
14. Under Section 32(1) of the Act, the depreciation is allowable on buildings, machinery, plant or furniture owned by the assessee and used for the purpose of business or profession and under Rule 5 it is laid down that depreciation shall be calculated on the written down value of the assets as are owned by the assessee and used for the purpose of business or profession of the assessee at any time during the previous year. This means that depreciation allowance shall be allowable on buildings, machinery etc. i.e. owned by the assessee and used for the purpose of business or profession of the assessee at any time during the relevant previous year. Though the term “owned by the assessee ” is used in Section 32(1), there is nothing to show that the assessee should have remained the owner of the asset in question for the entire previous year in question. Admittedly, the assessee, in the previous year was the owner of the assets in question, that is from 1st January,1982 to 31st July, 1982. In fact, since the business of the assessee firm came to an end upon its dissolution on 31st July, 1982, the assessee had been using the assets in question during the entire accounting period of the year ending on 31st July, 1982.
15. The object of the legislature in granting depreciation allowance under Section 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 the total income is duly arrived at. Further the provisions of Section 32 of the Act, read with Rule 5 of the Rules, as it existed at the relevant point of time, goes to the extent of granting such allowance even when the asset in question was used for the purpose of business at any time “during the previous year”. In other words, at the relevant point of time, even if the asset had been used for a single day, in the business of the assessee, the assessee was entitled to full depreciation allowance under Section 32(1) of the Act. When such is the case, it cannot be said that the assessee is not entitled to claim depreciation allowance in respect of assets owned and used by him for a part period of the previous year.
16. Under the provisions of clause (ii) of sub-section (2) of Section 34 of the Act, an assessee would not be entitled to depreciation allowance for any previous year in respect of any buildings, machinery, plant or furniture sold, discarded, demolished or destroyed in that year. Thus, in case the assets, in respect of which depreciation allowance is claimed, have been sold in the previous year, the assessee would not be entitled to any deduction in respect thereof.
17. In the facts of the present case, as can be seen the assessee firm was dissolved and after dissolution a partner viz. Himalaya Machinery (P) Ltd. took over the business of the dissolved firm from 1/8/1982. The Supreme Court in the case of I.T. Commissioner v. Dewas Cine Corporation, reported in (1968) 68 ITR 240 = AIR 1968 SC 676 has held that the distribution of surplus is for the purpose of adjustment of rights of partners in the assets of the partnership, it does not amount to transfer of assets. It was further observed that :
“The expressions ‘sale’ and ‘sold’ are not defined in the Income-tax Act : those expressions are used in Section 10(2)(vii) in their ordinary meaning. Sale according to its ordinary meaning is a transfer of property for a price, and adjustment of rights of the partners in a dissolved firm is not a transfer, nor it is for a price”.
This law laid down under the Indian Income Tax Act, 1922 has been reiterated and applied by the Supreme Court in cases arising under the Act, e.g. Malabar Fisheries Co. v. Commissioner of Income Tax, (1979) 120 ITR 49 (S.C.)
18. Thus, as per law laid down by Apex Court in the decision cited above, the adjustment of rights of the partners in a dissolved firm does not amount to a transfer, and nor is it for a price, hence the question of there being any sale of the assets of the partnership firm does not arise. Accordingly, the provisions of Section 34(2)(ii) would not come into play to disentitle the assessee from claiming depreciation allowance as prescribed under the Rules.
19. The assessee firm had remained the owner of the assets and had used the same for the purpose of its business during the previous year till its dissolution , hence, the assessee was entitled to claim full depreciation in respect of the said assets notwithstanding the fact that M/s. Himalaya Machinery (P) Ltd. had also claimed full depreciation in respect of the said assets. The contention of Revenue that on same assets for the same year depreciation cannot be allowed twice loses sight of the fact that two different assessees are making a claim after satisfying the conditions prescribed by the Act and the Rules. If the statute does not prohibit the Revenue cannot be permitted to go beyond the statute. The learned Counsel for Revenue is not in a position to indicate any such provision.
20. In the result, it is held that the Tribunal was right in law and on facts in holding that the assessee is entitled to claim full depreciation allowance under Section 32. Accordingly the question referred to this Court is answered in the affirmative i.e. in favour of the assessee and against revenue.
21. The reference is disposed of accordingly, with no order as to costs.