ORDER
F.C. Rustagi, Judicial Member
1. The sum and substance of all the grounds raised by the assessee in this appeal is that on the assets acquired by the assessee-firm after the dissolution of earlier firm from whom the assets were taken over by one of the partners who after some time entered into a new partnership, i.e., the assessee-firm, with his two sons, was entitled to depreciation on the value of assets assigned on dissolution or earlier written down value of the said assets.
2. The issue is squarely covered, as per submissions of the learned counsel for the assessee, Mr. D.K. Gupta, by earlier decision of the Tribunal in the case of Bharat Cold Storage v. ITO [1983] 14 TLR 311, (Chd.), as, according to him, absolutely similar are the facts, similar is the deed of dissolution and similar is the partnership deed.
3. But the learned departmental representative, Mr. M.P. Singh, did not agree that the issue is covered. He submitted that there is another decision of the Tribunal which goes against the assessee and he would like to rely on the same. He submitted that earlier firm had not only machinery and building but had land also. It was a firm constituted of close relations and the value of the land was not revalued. He submitted that the instant case clearly falls under the mischief of Explanation 3 to Section 43(l) of the Income-tax Act, 1961 (‘the Act’). He also submitted that the valuation has been appreciated only by book entries and in that respect, he relied on the cases of CIT v. Dalmia Dadri Cement Ltd. [1980] 125 ITR 510 (Delhi) and CIT v. Alagappa Cotton Mills [1984] 149 ITR 640 (Mad.).
4. After taking into consideration the rival submissions and going thoroughly through the case law relied upon by both the parties, specially the two decisions of the Chandigarh Bench one in the case of Bharat Cold Storage (supra) and the other in Markanda Rice Mills [IT Appeal No. 675 (Chd.) of 1983 dated 18-9-1984] relied upon by the learned departmental representative, we are of the view that the issue is clearly covered by our earlier decision in the case of Bharat Cold Storage (supra) in favour of the assessee and, therefore, the action of the AAC is to be reversed. Reliance of the learned departmental representative on our earlier decision in the case of Markanda Rice Mills (supra) is absolutely misplaced. That was a case where one assessment was framed of two periods and there was no dissolution of the earlier firm. Moreover, that was a case of reconstitution of the firm, as is apparent from the submissions of the learned departmental representative available in paragraph 5 of the said order, which reads as under :
… He also urged that the ITO had made one assessment for both the periods, the firm as reconstituted, and the assessee has not challenged the same by way of appeals. It was, therefore, urged that the conduct of the assessee showed that it was not a case of dissolution but a case of change in the constitution of the firm as contemplated under Section 187 of the Income-tax Act. He also urged that assuming for a moment that it was not a case of dissolution of the firm, as contended by the learned counsel for the assessee, even then, one assessment had to be made for both the periods, taking it as change in the constitution of the firm, in view of the special provisions contained in Section 187. He, therefore, urged that this being the position, depreciation was to be allowed on the WDV in the case of the old firm, taking into consideration the provisions contained in Explanation 4 below Section 43 of the Income-tax Act.
With the above submissions of the learned departmental representative, the Tribunal, after recording the submissions of the learned counsel for the assessee in paragraph 7, gave its finding against the assessee and in favour of the revenue in paragraph 8 of its order, which are extracted and placed below :
7. The second ground of appeal is regarding actual allowance of depreciation. The learned counsel for the assessee contended that it was a case of dissolution of the firm and, therefore, the depreciation was rightly allowed by the ITO at the time of original assessment on the appreciated value. He was, therefore, not justified in curtailing the depreciation with reference to the reduced value. The learned departmental representative addressed the same arguments as we have referred a.gainst ground No. 1 above.
8. We have carefully considered the rival submissions. In our opinion, taking into consideration the provisions of Section 187 it is a case of change in the constitution of firm, as held by their Lordships of the Hon’ble Punjab and Haryana High Court in the case of Nandlal Sohanlal v. CIT [1977] 110 ITR 170 (FB). The position has also been accepted inasmuch as only one assessment has been made for both the periods for the assessment year 1974-75. Allowance for depreciation is essentially a part of the assessment. Once it is accepted to he a case of the firm before reconstitution and, therefore, the depreciation has to be adopted as in the case of the firm before reconstitution and, therefore, the depreciation has to be allowed at the WDV as in the case of the firm, taking into consideration Explanation 4 below Section 43 of Income-tax Act.
5. Before we deal with the two High Courts decisions, on which reliance was placed by the learned departmental representative, it is better, we give a brief background of the facts which would also indicate as to how close is the instant case with that of the case of Bharat Cold Storage (supra) in which our decision has gone in favour of the assessee and which also supports the contention of the learned counsel for the assessee in the appeal under consideration. There was a firm styled as Daryadittamal Bhagwandass which constituted of four partners, Daryadittamal, Bhagwandass, Lekh Raj and Raj Kumar. The said firm was dissolved on which the entire business, after dissolution, was taken over by Lekh Raj. The assets were taken over by Lekh Raj on dessolution by a mode of common deed amongst the partners, as indicated in the dissolution deed unequivocally. Undoubtedly, the land was taken at the same value but building and machinery were taken at enhanced value against the written down value as per record of the old firm. Subsequently, Lekh Raj formed another firm with two of his sons, i.e., Dev Raj and Narinder Kumar, and the assets taken over by Lekh Raj on dissolution from the old firm, were brought into new firm on the same value. Their capital accounts were accordingly, credited by enhanced value. In the original assessment of the assessee-firm, depreciation was allowed on the written down value as per record of the old firm. The assessee-firm went in appeal before the AAC who set aside the assessment and directed the ITO to look into whether Explanation 3 to Section 43(1) was applicable. Subsequently, fresh assessment was framed and the ITO allowed the depreciation on enhanced value as claimed by the assessee. In proceedings by the Commissioner under Section 263 of the Act, the matter was looked into and assessment set aside with a direction to the ITO that he will make the same afresh after working out the depreciation under the provisions of the Act and, if necessary, after making reference to the IAC as required in Explanation 3 to Section 43(1). In spite of the fact that the Tribunal’s decision in that of Bharat Cold Storage’s case (supra), on which reliance is placed by the learned counsel for the assessee now, was placed before the ITO, but the ITO observing that the actual cost of the assets has to be what was in the hands of the previous firm, after referring the matter, got approval of the IAC and rejected the claim of the assessee on enhanced value. When the assessee felt aggrieved by the said decision of the ITO, he came before the AAC who, in a very flowery language, contested the said assessment and quoted a number of other decisions, in some of which the Tribunal and in others the revenue itself had accepted the contentions as identical to those of the assessee. The learned AAC confirmed the order of the ITO. He even observed that in fact no actual consideration has been passed on to the partners of the dissolved firm. Only book entries have been passed to make these adjustments. It was this action of the AAC which was contested.
6. Then we go through the earlier order of the Tribunal in the case of Bharat Cold Storage (supra), we find that it is absolutely in support of the assessee’s contentions. In that firm, there was an old partnership which was dissolved and four partners had taken over the running business. In the instant case, there was an old partnership which was dissolved and only one partner took over the running business. Absolutely similar are the clauses of the dissolution deed in the case of Bharat Cold Storage (supra), and similar is the preamble of the dissolution deed. It seems, draftsman of the dissolution deeds in the case of Bharat Cold Storage (supra) and the instant case is one and the same. It is mentioned in the preamble that :
… Whereas the business be wound up with lock, stock and barrel consisting of factory, land, building, machinery and other assets, after division of profit and loss, as the case may be, to the satisfaction of the parties. And whereas the parties readily agreed for its dissolution from 24-8-1974 by taking over the assets and liabilities on the value fixed in auction between the partners by open bid system to avoid any litigation and setback to the reputation of the business and partners.
The first three clauses of the aid dissolution deed, read as under :
1. That the firm as now constituted is dissolved from today for all intents and purposes and no one partner shall be lawful to run any business in future in this name and style of the firm.
2. That the accounts of the firm were scrutinised and checked and net profit as revealed at Rs. 1,389 was found correct and accepted by the parties to this deed.
3. That all lock, stock and barrel of the firm consisting of factory, machinery, equipped with tubewell, engines and complete husking and shelling machinery, factory, land and building comprising of sheller room, godowns, barracks, shops, staff and store rooms, machinery and office rooms, old and new attached portions were taken lover by Shri Lekh Raj partner for the money value of Rs. 21/2 lakh (c/o land Rs. 40,000 : c/o building Rs. 12,000 : and c/o machinery Rs. 90,000 : fixed in auction in open bid between the partners today at the time of dissolution of the firm) And the remaining partners got their investments by adjustments to their accounts in the successor-firm.
These are identical to clauses of dissolution deed in the case of Bharat Cold Storage (supra), extracted and placed in paragraph 2 of the said order. Like Bharat Cold Storage’s case (supra), it was subsequently that the continuing partner Lekh Raj entered into a new partnership and the two new incoming partners like in the said case joined the firm accepting the very same valuation assigned to building, machinery and other assets which was adopted at the time of dissolution. Then even in the new partnership deed, similar mention regarding assets is there, We have at length dealt with the definition of ‘written down value’, difference between dissolution of firm and change in the constitution, etc., and for the very same reasons given in the case of Bharat Cold Storage (supra), which we intentionally avoid repeating here, we accept the contention of the assessee. Instant is a case of dissolution of firm wherein by internal bid and method of auction, values were assigned. The learned counsel for the assessee submitted at Bar that not only credit entries were passed but outgoing partners were subsequently also paid of in cash, and he was prepared to produce the accounts of such payments. It was at length that we had dealt with the Punjab and Haryana High Court decision in the case of Nandlal Sohanlal v. CIT [1977] 110 ITR 170 (FB) and in the case of Bharat Cold Storage (supra) and had observed that observations, extracted and placed in the said order, support the contentions of the assessee and not of the revenue. According to us, it was very incorrect on the part of the learned departmental representative to have said that on identical issue of depreciation, this Bench had taken a separate view in the case of Markanda Rice Mills (supra). Unfortunately, though decision in the case of Bharat Cold Storage (supra) was not cited by the learned counsel for the assessee in that case but even then it was due to difference in facts that the assessee’s appeal in the case of Markanda Rice Mills (supra) was dismissed. The difference can be appreciated by anyone who independently goes through the said orders carefully.
7. Reliance of the learned departmental representative on the case of Dalmia Dadri Cement Ltd. (supra) is also misplaced. In that case, their Lordships of the Delhi High Court held :
… that when the Legislature had prefixed the word ‘actual’ to the word ‘cost’ in Section 43(l) of the Income-tax Act, 1961, it was to lay emphasis on the reality and genuineness of the cost and to exclude collusive, inflated, deflated or fictitious cost ; (p. 510)
This, in other words, supports the contention of the assessee. On dissolution by internal bid system, values were taken and respective credits were given and those who got the credits were paid of also subsequently. Similarly reliance of the learned departmental representative on the case of Alagappa Cotton Mills (supra) is misplaced because that was also a case of reconstitution of the firm as it was observed therein as under :
… The conduct of the assessee also indicated that they had proceeded on the basis that there was a reconstitution of the old firm on October 1, 1964 inasmuch as they had claimed a consolidated loss treating the old firm to be continuing as reconstituted. Further, for the purpose of grant of registration, the parties had applied in Form No. 11A and this was only consistent with the stand of the assessee that there was a change in the constitution. There was no dissolution of the firm and as the same assessable entity continued after September 30, 1964, the assessee could claim depreciation only on the written down value of Rs. 14,61,621. (p. 641)
This is a case which supports our decision in the case of Markanda Rice Milk (supra) and is not opposed to our decision in the case of Bharat Cold Storage (supra), on the basis of reasoning of which and on the basis of similar facts there being in the background, we accept the contention of the assessee. The action of the AAC is, therefore, reversed.
8. In the result, the appeal is allowed.
