ORDER
J.K. Verma, Accountant Member
1. In this appeal the assessee has objected to the decision of the lower authorities disallowing depreciation to the assessee firm in this assessment year on the ground that the business of the firm was discontinued this year and, as per the revenue authorities, the business assets of the firm were sold or otherwise transferred to a private limited company.
2. The brief facts, as can be gathered from the orders of the authorities below, are that the assessee’s previous year usually ended on 31st March. This year on 30-11-1980, the running business of the assessee firm was taken over with effect from 1-12-1980 by a private limited company titled N.M. Nagpal Pvt. Ltd. The three partners acquired equal shares in the new company. The assessee claimed depreciation on the business assets in the computation of income. The Assessing Officer disallowed depreciation holding that the assets have to be treated as “sold” as defined in Section “32(2)” which includes transfer by way of exchange also. He supported his decision with the rulings in the cases of Chittoor Motor Transport Co, (P) Ltd. v. ITO [1966] 59 ITR 238 (SC) and A.S. Krishna Setty & Sons v. Addl. CIT [1975] 100 ITR 587 (Kar.). The learned CIT (Appeals) confirmed the decision of the Assessing Officer.
3. It has been argued by the learned counsel for the assessee that the provisions in the Income-tax Act dealing with depreciation and development rebate are distinct, and different from each other. He submitted that he had claimed depreciation under provisions of Section 32(1)(i) of the Act. He pointed out that as per the provisions of Section 34(2)(ii) the allowance of depreciation under Section 32(1)(i) etc. was prohibited if any depreciable assets was “Sold, Discarded, Demolished or Destroyed in that year”. He emphasised that none of these expressions included the term “Otherwise transferred” which was the basis of the rejection of assessee’s claim by the authorities below. In contradistinction to this provision, he drew our attention to the provisions of Section 34(3)(b) where it was provided that the development rebate would be withdrawn if the assets mentioned therein were “sold or otherwise transferred” by the assessee. Regarding the reference of the Assessing Officer and the learned CIT(Appeals) to the provisions of Section “32(2)” to suggest that according to the definition given therein the word “Sold” includes a transfer by way of exchange etc., the learned counsel pointed out that this definition in fact found place in clause (2) to Explanation to clause (iii) to Section 32(1) of the Act and the Explanation started with “For the purposes of this clause”. In this way, according to the learned counsel, this definition of “sold” which was to include transfer by way of exchange etc. was not to be applied to the provisions of Section 34(2)(ii). The learned counsel thereafter referred to the decisions in the cases of Baldevji v. CIT [1985] 156 ITR 776 (Mad.), Rogers & Co. v. CIT[1958] 34 ITR 336 (Bom.), CIT v. Mugneeram Bangur & Co. [1963] 47 ITR 565 (Cal.) and CIT v. R.R. Ramakrishna Pillai [1967] 66 ITR 725 (SC).
He submitted that as per these decisions assessee’s case was not covered by the definition of “Sale” which was applicable for disallowing depreciation in the year in which the sale of an asset took place. He further pointed out that the decisions in the cases of Chittoor Motor Transport Co. (P.) Ltd. (supra) and A.S. Krishna Setty & Sons (supra) on which the lower authorities had relied were given in the context of claims of development rebate and were not applicable to the facts and circumstances of the assessee’s case.
4. The learned Departmental Representative on the other hand tried to explain the scheme of the provisions of depreciation and development rebate in the IT Act. He submitted that while depreciation was an invisible cost, development rebate was a specific concession given to the assessee. In these circumstances, according to the learned Departmental Representative, the depreciation had to be treated in three different ways according to the provisions of the IT Act. The first was regarding depreciation to be allowed in the first year where cost of the asset was to be considered. In subsequent years the WDV was to be considered. But in the third stage i.e., in the last year the question had to be decided with reference to the consideration which the assessee received in return for those assets. Thus where no consideration was receivable, the IT Act did not attack the assessee by making any disallowance. It was only when some consideration was received that a final reckoning of the actual cost suffered by the assessee by way of depreciation allowed in the past was done. If the depreciation which had been allowed in the past was less than what the assessee fetched on the sale of that asset, the assessee was allowed further deduction by way of balancing charge. On the other hand if the final consideration which the assessee received on such sale was more than the depreciation which had been allowed to the assessee, he would be charged to tax on that amount as profits of that year. It was in this background, according to the Id. Departmental Representative, that depreciation could not be allowed to the assessee in this year because the assessee had admittedly transferred the assets to a newly formed company for some consideration and that Company had claimed depreciation on those assets and if assessee’s contention is accepted then depreciation will be allowed on the same assets twice in one year. The learned Departmental Representative further argued that in fact the Supreme Court decision in the case of R.R. Ramakrishna Pillai (supra) relied upon by the learned counsel for the assessee was against the assessee. He argued that there were specific provisions in the IT Act dealing with situations where there was scheme of amalgamation between two companies and that could not be applied to the case of the assessee where there was no amalgamation. The learned Departmental Representative further tried to distinguish the cases relied upon by the learned counsel for the assessee and reiterated that as per the ratio of decisions relied upon by the learned lower authorities, it was a case of sale and hence depreciation could not be allowed to the assessee in view of the specific prohibition in Section 34(2)(ii) of the IT Act.
5. We have carefully considered the arguments from both the sides and have also perused the material on record. In the first instance we may point out that neither the lower authorities have brought sufficient material on record to decide this issue nor has the learned counsel for the assessee filed any paper book to let us know complete and relevant details about the facts and circumstances of this case. Thus we find that it is not known as to what was actually the amount of depreciation which was claimed and which was disallowed because as per the assessment order that disallowance would work out to Rs. 42,882 but the learned counsel for the assessee claimed that the disallowance was to the extent of Rs. 66,292. It was also submitted by the learned counsel for the assessee that the depreciation was being disallowed for the last many years but there is no material before us to substantiate this. Further, there is nothing to show what was the nature of agreement between the firm or the erestwhile partners of the firm and the newly formed private limited company on the basis of which it is claimed that the running business was taken over by the newly formed company with all its assets and liabilities. It is not even known as to what was the amount for which the assets were transferred to the company, what was their W.D.V. in the books of account of the assessee, what was the consideration in terms of money for which the shares of the limited company were allotted to the three partners. In this background we would now deal with the arguments advanced from both the sides.
6. In the first instance, we may mention that we are in. full agreement with the learned counsel for the assessee that there are separate provisions in the IT Act dealing with development rebate and depreciation. We may also mention that although the arguments of the learned Departmental Representative may be based on theory, yet we have to be guided by the specific provisions of the IT Act rather than the purposes for which various provisions were intended to be introduced in the IT Act. It may be observed that, under the IT Act in the first instance there are provisions in Section 32(1)(iii) which provide that if the assets which are “sold, discarded, demolished or destroyed in the previous year…” the amount of money which is payable in respect of those assets together with the amount of their scrap value if any falls short of the WDV thereof, it shall be allowed as deduction. It is followed by an Explanation which specifically provides “for the purposes of this clause” and clause (2) of that Explanation defines that “sold” includes a transfer by way of exchange or compulsory acquisition etc. Similarly this word “sold” has again been defined in Explanation (if) to Section 32(1A)(ii). There again it has been mentioned that the definition is relevant only for the purposes of that clause. On the other hand Section 34(2)(ii) provides that nothing in clause (0 or clause (it) or clause (iia) etc., of sub-Section (1) of Section 32 shall be deemed to authorise the allowance for any previous year of any sum in respect of the assets “sold, discarded, demolished or destroyed in that year”. It is thus obvious that the Legislature has not intended to extend the meaning of word “Sold” to cases where the assets are transferred by way of exchange. Further the provisions of Section 34(2)(ii) have specifically excluded clause (iii) of Section 32(1) while it has Included the clauses (i), (ii), (iia), (iv), (v) and (vi) of that Sub-section. This further shows that the meaning of “Sold” would not include transfer by way of exchange for the purposes of Section 34(2)(ii). We further agree with the arguments of the learned counsel for the assessee that the provisions in the IT Act are different for the purposes of allowing development rebate and for the purposes of development rebate the assessee loses the benefit not only when the asset is sold but even when it is otherwise transferred by the assessee to any person. If we examine the cases which have been cited before us by the two sides, we find that the ratio of decisions in the cases of Baldevji (supra), Chittoor Motor Transport Co. (P.) Ltd. (supra) and A.S. Krishna Setty & Sons (supra) are not applicable to the facts and circumstances of this case because they all deal with the questions of development rebate and not depreciation. The case of CIT v. Hind Construction Ltd. [1972] 83 ITR 211 (SC), which was referred to by the learned counsel for the assessee is also not relevant to the facts and circumstances of the case because in that case a limited company had transferred some machinery which it had acquired as its share in a joint venture, to a newly formed firm after writing up its value and the question was whether it was a sale and whether there was any income which resulted from that transaction. Obviously the ratio of that decision is not applicable to the case before us. Similarly in the case of Mugneeram Bangur & Co. (supra) relied upon by the Id. counsel for the assessee, the question was whether there could be any profit in the transaction by which the entire stock in trade and the business of the firm were transferred to the limited company. As is obvious, that is not the case before us. In the case of Rogers & Co. (supra) the main question to be decided was whether on the transfer of business conducted in partnership to a private limited company and transfer of assets of business to a company at original cost price, there was any sale and whether it gave rise to taxable income. It was decided that no profits had arisen on that transfer. It may be noticed that in the case before us the question involved is not regarding the profits having been made by the firm but it is whether in this year when the transfer has taken place, the transaction can be treated as sale and therefore, whether the depreciation in this year can be disallowed.
7. The only case which we find is squarely applicable to the facts and circumstances of the case before us is that of R.R. Ramakrishna Pillai’s case (supra) where exactly similar question was before their Lordships of the Hon’ble Supreme Court and the circumstances were also similar. In that case also the partners of a erstwhile firm had transferred the assets to a newly formed company and the partners were allotted shares of that company as in the instant case. In that case also sufficient details were not available as in the case before us which we have already discussed in the initial part of this order. The attention of the Hon’ble Supreme Court was also drawn to the decision in the case of Rogers & Co. (supra) which has been cited before us also and with which we have dealt in the preceding paragraph of this order. After considering the facts and circumstances of that case their Lordships had observed on pages 728-729 of that report as under:-
Where the person carrying on the business transfers the assets to a company in consideration of allotment of shares, it would be a case of exchange and not of sale, and the true nature of the transaction will not be altered, because for the purposes of stamp duty or other reasons the value of assets transferred is shown as equivalent to the face value of the shares allotted. A person carrying on business may agree with a company floated by him that the assets belonging to him shall be transferred to the company for a certain money consideration, and that in satisfaction of the liability to pay that money consideration, shares of certain face value shall be allotted to the transferor. In that case there are in truth two transactions- one a transaction of sale and the other a contract under which shares are accepted in satisfaction of the liability to pay the price.
The Hon’ble Supreme Court has also observed that the Tribunal did not attempt to ascertain the true nature of the transaction but assumed that there was no sale of the assets of the Society to the company, because “in identical circumstances” the Bombay High Court had held that there was no sale. This was obviously a reference to a decision of the Hon’ble Bombay High Court in the case of Rogers & Co. (supra). In these circumstances the reference of the learned counsel for the assessee to the case of Rogers & Co. (supra) will not carry much weight in the case before us. As observed by us in the instant case before us also the relevant details are not available and the question as to whether the case of the assessee can be treated as a sale in the light of the decision of the Hon’ble Supreme Court, would depend on the provisions of the agreement on the basis of which the assets were transferred to the Pvt. limited company by the firm. We, therefore, restore this matter to the file of the Assessing Officer with the direction that he shall examine the details of the agreement between the assessee firm and the private limited company in the light of the decision of the Hon’ble Supreme Court in the case of R.R. Ramakrishna Pillai (supra) and may collect any such material as he considers necessary to decide the issue bearing in mind that the provisions dealing with the development, rebate and depreciation are different and distinct. The assessee shall also be given a reasonable opportunity to adduce any evidence in support of its claim. The Assessing Officer shall also keep in mind that the definition of the word “Sold” as given in clause (2) to Explanation to clause (iii) of Section 32(1) is to be applied only for the purpose of that clause and not for the purpose of Section 34(2)(ii). In other words if after applying the tests laid down by the Hon’ble Supreme Court the Assessing Officer comes to the conclusion that a sale of the assets was effected in the transaction involved in this case, he shall be authorised to disallow depreciation. On the other hand if after applying these tests he finds that it was merely a case of transfer of assets, he shall not be entitled to disallow depreciation to the assessee firm.
8. Thus while the assessment order is set aside to be reframed on this point, the appeal filed by the assessee is treated as allowed for statistical purpose.