KALOORAM GOVINDRAM versus COMMISSIONER OF INCOMETAX, MADHYA PRADESH, NAGPUR

A

KALOORAM GOVINDRAM

v

B

COMMISSIONER OF INCOMETAX, MADHYA PRADESH, NAGPUR

Ap;il 5, 1965 [K. SUBBA RAo, J. c. SHAH AND s·. M. SIKRI, JJ.]

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Indian Income-tax Act, 1922 (11 of 1922), s. 10(2! '.'i-P""1titioo, of Hindu joint fami!y-Asset auctioned between dividing branc~es -Value on which depre(!iation to be allowed-Whether on auction price or on original cost to the erstwroile larger family.

On partition being effected through a suit, a Hindu joint fami ly who has only an interest in the entire joint family property_ ae> family. The preliminary decree passed by the Court determmed 10/16 as the share of the appellant family and 6/16 as that of the other branch. Those assets of the erstwhile larger joint family which could not be physka!ly divided were auctioned between the two branches and in this manner a sugar mill was purchased for 34 lacs by the appellant family. In Income-tax proceedings depreciation under s. 10(2) (vi) of the Indian Income-tax Act, 1922 was claimed on the above valuation Qf 34 lacs. The claim was rejected by the In come-tax Officer as well as the Appellate Assistant Commissioner. on the ground that the value for th,e purpose of depreciation was not the price determined at the family auction, but the original cost to erstwhile larger joint family. The Tribunal held that the 6/16 share of the other branch was purchased at the auction and its value had to be taken as the basis of the price determined at the auction, but the appellant family's own share of 10/16 was not purchased at the auction and therefore had to be valued at the original cost to the larger joint family. In reference, the High Court held that the distinc tion made by the Tribunal was wrong and that the shares cxf both branches had to be valued on the basis of the original cost to the l<trger family. Appeal was filed before this Court with certificate.

HELD: Per Subba Rao and Sikri, JJ. It may be that in strict legal theory partition may not involve a transfer, but the substance of the transaction is that an erstwhile member of a joint Hindu fami ly who has only an interest in the entire joint family property ac quires an absolute title to a specific property. The cost of the pro perty to the member at the date of partition would be the value given to it for the purpose of allotment, provided it was real, or the price at which he purchased it in auction, or the value of it ascer tained otherwise. [64'7A-C]

In the case of assessees acquiring a property by purchase, gift, bequest, or succession, courts have held that the cost of the property to the assessee was not the original cost of it to his predecessor bu1 its actual cost to him at the time of the purchase, gift, bequest or succession. In substance there is no difference in the matter of ascer taining the cost of an asset to an asses.see whether he is a donee, pur ... chaser, legatee, successor, or a divided member of" a joint Hindu family. [646D; 647A]

Gil

6-12

SUPH.F.ME COUR'r REPORTS

[1965] 3 s.c.n.

A

Commissioner of Income-tax, Madras v. The Buckingham & Car natic Company, Ltd., Madras (1935) 3 I.T.R. 384(P.C.), Jagata Coal Co. Ltd. v. Commissioner of Income-tax, West Bengal (1959) 36 I.T.R. 521 (S.C.), Indian fron & Steel Co. Ltd. v. Commissioner of Income ta.~. Bengal, (1943) 11 I.T.R. 328 (P.C.), Francis Vallabaravar v. Com missioner of Income-tax, Madras (1960) 40 I.T.R. 426 and Com missioner of Income-tax, Bombay v. Solomon & Sons (1933) 1.I.T.R. B 324, referred to.

Commissioner of Income-tax, U.P. & C.P. v. Seth Mathuradas

Mohta, (1939)7 I.T.R. 160, disapproved.

In the present case the valuation given to the property was not notional but a real one; indeed the property was sold in the open auction between the members of the larger joint family and the the scheme of partition. value fetched [647 C-DJ

thereunder entered into

Therefore, even in respect of the appellant's own share of 10/16, the valuation for the purposes of s. 10(2) (vi) had to be on the basis of the price which the appellant bid at the auction.

Per Shah, J. (dissenting). By the preliminary decree the appellant family became entitled to a 10/16th share in every item of the pro perty of the larger joint family; the other branch tecame entitle to the remaining i.e. 6/16th share in each item. The appellant being al ready owner of 10/16th share could not purchase the same at the auction. In substance the appellant purchased, by beinii declared the highest bidder, the remaining 6/16th share belonging the other branch. [650 C-E]

to

The asset in question, viz, the sugar factory, at all material times remained a business asset. Acquisition of 'the interest of the other branch by the appellant did not alter the character or use of the as.set; nor did it make any fundamental alteration in its value to the appellant so as wholly to displace its original value even in respect of its share which it continued to own. [654 B-D]

The '.l'ribunal therefore, had rightly held that in respect of the 6/16th share of the other branch, depreciation had to be allowed to the appellant on the basis Qf the auction price. The High Court wrongly interfered with this finding the Revenue not having ap pealed against it.

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On the appellant's 10/16th share, which the appellant could not be said to have purchased, depreciation had to be calculated on the basis of original cost to the larger family. (654 E-G]

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Case law discussed.

CIVIL APPELLATE JURISDICTION: Civil Appeal No. 41 of 1964. H

Appeal from the judgment and order dated April 10, 1961 of the Madhya Pradesh High Court in Misc. Civil Case No. 154 of 1959.

N. D. Karkhanis, Rameshwar Nath, S. N. Andley and P. L.

Vohra, for the appellant.

C. K. Daphtary, Attorney-General, R. Ganapathy Iyer and

R. N. Sachthey, for the respondent.

A

Mjs. KALOORAM v. C.I.T. (Subba .Rao, J.)

6~3

The Judgment of Subba Rao and Sikri, JJ. was delivered by

Subba Rao, J. Shah, J. delivered a dissenting Opinion.

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carrying on business at Jaora. It was a branch· of a larger

Subba Rao, J. The appellant is a Hindu undivided family joint B Hindu family composed of two branches-one was Govindram and the members of his family and the other was Bachhulal and the members of his family. In the year 1942 there was a partition suit between the said two branches and under the decree made there in each item of the property was put up for sale by competitive bidding. One of the items of the said property, the sugar factory favour of" Govindram for a at Jaora, was knocked down sum of Rs. 34 lakhs. After all the items of the property were sold to one or other of the parties, final adjustments were made by cash payment. After the said partition Govindram and the mem bers of his branch of the family continued to run the factory. For the assessment year 1950-51 the Income-tax Officer, Ratlam, as- sessed the appellant in respect of the income from the said fac tory. The appellant contended that it was entitled to depreciation as provided under s. I 0(2) (vi) of the Income-tax Act, 1922, here inafter called the Act, on the said amount of Rs. 34 lakhs, being the amount for which it purchased the factory in the auction that was held pursuant to the partition decree. The Income-tax Officer rejected that contention and held that the value to be adopted for the pur pose of depreciation would be the original cost of the said fac tory to the larger joint family. On a further appeal, the Income tax Appellate Tribunal held that so far as the 10 /16th share in the factory which belonged to the appellant was concerned the cost to the appellant was the original cost to the larger branch; and so far as the 6 / l 6th share of Bachhulal's branch in the said factory was concerned the original cost was the amount for which the appellant's branch purchased the 6/16th share of the other branch, i.e., Rs. 12,75,000/-. The following question was referred by the Tribunal to the High Court of Madhya Pradesh: '

E and, on appeal, the Appellate Assistant Commissioner

"Whether on the facts and in the circumstances of this case, the assessee Hindu Undivided Family is entitled to claim depreciation in respect of the assets of the old Hindu Undivided Family on the basis of the original cost to the family or on the basis of the valuation at which the assessee took over the assets" .

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· The High Court held that the depreciation allowance should be ~omputed on the basis of the original cost to the larger joint family and not on the basis of the valuation at which the assessee to?k over the assets. The assessee, by certificate granted by the High Court, has preferred the present appear to this Court against that order.

the T~e .only question that arises in this appeal is whether deprectal!on allowance should be computed in respect of the

644

SUPREME COUB'l' BEPOR1'S

[1965] 3 s.c.R.

10 / 16th share in the factory on the basis of the original cost to the larger joint family or on the basis of the valuatio~ at wh_ich the assessee took over the factory. The answer to this question turns upon the relevant provisions of the Act and they read:

Section 10(2): Such profits or gains shall be computed after

making the following allowances, namely: -

(vi) in respect of depreciation of such buildings, machi nery, plant or furniture being the property of the as sessee, a sum equivalent, where the assets are ships other than ships ordinarily plying on inland waters, to such percentage on the original cost thereof to the assessee as may in any case or class of cases be pres cribed and in any other case, to such percentage on the written down value thereof as may in any case or class of cases be prescribed :

Section 10(5) of the Act defines "written down value" thus: "written down value" means-

(a) in the case of assets acquired in the previous year, the

actual co;t to the assessee :

(b) in the case of assets acquired before the previous year the actual cost to the assessee less all • depreciation actually allowed to him under this Act or any Act re pealed thereby, or unde~ executive orders issued when the Indian Income-tax Act, 1886 (II of 1886) was in force".

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It is not disputed that no previous depreciation was allowed under any Act repealed by the Indian Income-tax Act, 1922, or under any executive order issued under the Indian Income-tax Act, 1886. Therefore, the appellant would be entitled to deprecia tion allowance on the original cost to it of the factory. What is the G original cost of the 10/ 16th share in the factory to ilie appellant? Two expressions in cl. (vi) of sub-s. (2) of s. 10 give the clue to the answer, and they are, (i) "being the property of the assessee", and (ii) "the original cost thereof". Therefore, depreciation is given in respect of property of an assessee on the original cost of the said property to him. The factory is the property of the assessee. What H was the original cost of the property to the assessee? Admittedly Govindram purchased it in the auction for Rs. 34 lakhs. Ordinari- ly that would be the cost of the factory to the assessee. It was con ceded. that it would be so if a third party had purchased it. But as the auction was only a step in the partitioning of the property of the .larger family among the branches composing it, Govind ram did not purchase it but only got it in the partition. lt was then

M,:s. KALOORAM v. c.1:r. (Subba Rao, J.)

641>

JI

the

A contended that partition did not involve a1.'y c?nveya~ce or trans fer. but it was only a procesdn and by which iomt enioyment was transformed into an enjoyment in severality and that, therefore, the appellant did not get any new title to the factory or at any rate to the 10/ 16th share therein, but its title was traceable to the owner ship of the larger joint family. On the said reasoni1.'g. it was .argued that the original cost of the factory to t~e larger 1011.'t famil.Y. was the cost to the assessee within the meaning of the said prov1s10ns. the The entire argument is based on a misapprehension of scope of partition under Hindu Law. Coparcenery is a creature of Hindu law. The concept involves "community of interest, unity of C possession and common enjoyment". Each coparcener's right ex-· tends to the whole joint family property; though each one of them has interest in the whole family property, he has no definite share therein. Partitioning is the ascertainment of individual shares and it can be brought about by an unambiguous declaration of their intention to divide, ie., by a conscious alteration of their status. D Such a declaration brings about a division in status. At that stage the members of aii. erstwhile joint family become tenants-in-com mon. The next step is the division by metes and bounds where under separate properties are allotted towards the said definite· shares of individuals. Whether the said process involves transfer or not within the meaning of the Tramfer of Property E Act, it certainly confers on a divided member an absolute title to a specified property, whereas before the partition he had only some interest in the entire joint family property. Though in one sense his interest in the property of the larger joint family has be come crystallized into a specific property, in substance he acquir es a title to a specific property. Even from a practical standpoint the legal fiction of "pre-existing title" cannot be stretched too far. Take the following illustration: A and B were members of a joint · Hindu family in 1930 and continued to be so till 1960 when a partition was effected between them. They had 4 houses in 4 vil lages; and the original cost of each of the houses was Rs. 100/-. If a partition had taken place in 1930 or thereabout, each one of the two brothers would have got 2 houses each, and the partition would have been equitable and fair. But during these 3'0 years one village developed into a town and the value of the house therein had increased to Rs. 500 /-. There was no appreciable rise in price in regard to the other 3 houses and they together would fetch only Rs. 500/- in the market. In the result at the partition that was effec- ted in 1960 the house in the town was given lo one of the brothers and the other three houses together were given to the other brother. What would be the cost of the house in the town to the brother to· w~o!fi it was allotted? Clearly it would be Rs. 500 /-, though the ongmal cost of the house at the time it was built or purchased was only Rs. !00 /-. Because of 'the uneven rise in prices of the different the parti ~ouses, instead of t~o houses he got only one house at the tion. The cost to him, therefore, would be the cost at which

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SlJPREJ4E COURT REPORTS

(1965] 3 S.C.I\.

property was valued at the partition or at which it was auctioned for the purpose of partition. Take another illustration: Instead of A partitioning the properties by evaluation thereof, the houses were sold to a third party. So far as the third party was concerned the .cost price would be the price at which he purchased them. If in stead, the properties were sold by auction between the brothers and .the difference in prices was adjusted by cash payment, it would be B incongruous to say that in the former the cost of the houses would be the cost actually paid by the third party purchaser and in the latter the cost of the houses would not be the price for which they were auctioned but the nominal price they bore in a remote past. Other illustrations may be visualized. Barring the cases of fraud, collusion and inflation and deflation of values for ulterior purpo ses, cost of an asset to a divided member must necessarily be its cost to him at the time of partition, wl)ether mentioned in the parti tion deed or ascertained aliunde.

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Analogy drawn from comparable cases may also throw some light on the question. In the case of an assessee acquiring a pro perty by purchase, gift, bequest or succession, courts have held D that the cost of the property to the assessee was not the original cost of it to his predecessor but its actual cost to him at the time of the purchase, gift, bequest or succession, as the case may be: see Commissioner of lncome-ta.t, Madras v. The Buckingham & Carnatic Company, Ltd .. Madrav ('), and Jagla Coal Co. Ltd. v Commissioner of Income-tax, West Benga/0-purchase; Indian E Iron & Steel Co. Ltd. v. Commissioner of Income-tax, Bengal('), and Francis Va/labarayar v. Commissioner of Income-tax, Mad ras(')-succession; and Commissioner of Income-tax, Burma v. Solomon & Sons(')-bequest. A Division Bench of the Nagpur High Court in Commissioner of Income-tax, U. P. & C. P. v. Seth Mathuradas Mohta(') dealt with a. case of partition. Therein, it F held that the cost to the assessee, who was a divided member, of a property was the cost of it to the original joint Hindu family at the time it was acquired. The learned Judges gave various illus trations in support of their conclusion. It is true that, if'the valua tion of the properties was given notionally as a mode of chposing properties, there will be some plausibility in the contention that there is no change in the valuation between the date the property was purchased and the date when it was allotted to one of the members of the family. But, if the valuation of a property was not notional but was real and that was the basis for allocating properties to different shares, we do not see how the cost of a pro- B perty allocated to a member would be that at which it was pur chased in the remote past. We cannot agree with the· view expres- sed by the Nagpur High Court.

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(') (1935) 3 I.T.R. 384 (P.C.) (') (1959) 36 J.T.R. 521 (S.C.). '.') 11943) 11 J.T.R. 328 (P.C.).

(') (1960) 4-0 J.T.R. '26. (') (1933) 1 !.T.R. 324. (') (1939) 7 I.T.R. 160.

MjS. KALOORAM V. C.I.T. (Shah, J.)

641

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B

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In substance we do not see any difference in the matter of ascertaining the cost of an asset to an assessee whether he is a donee, purchaser, legatee, successor or a divided member of a joint Hindu family. It may be that in strict legal theory partwn may not involve transfer, but the substance of the transact10n 1s that an erstwhile member of a joint Hindu family, who has only an interest in the entire joint family property acquires an absolute title to a specific property. The cost of the property to the mem ber at the date of partition would be the value given to it for the purpose of allotment. provided it was real, or the price at which he purchased it in auction or the value of it ascertained otherwise.

It is nobody's case in the present appeal that

the valuation given to the property was notional and not a real one: indeed. the property was sold in open auction between the members of the lar ger joint family and the value fetched thereunder entered into the scheme of the partition.

We, therefore. answer the question as follows:

That depreciation allowance should be computed on the basis of the valuation at which the assessee took over the assets.

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In the result. the appeal is allowed with costs here and in the High Court.

Shah, J. A sugar factory in the forrncr lnd1:_u1 State of Jaora belonged to a Hindu undivided family of Govi,,dram and his nephew Bachhulal. In a suit filed by Bachhuial in 1942 in the Civil F Court at Jaora against Govindram for partition of the properties of the undivided family, Govindram was declared entitled to a 10 ! I 6th share in the property of the family and Bach hula! to the remaining 6/ 16th share. A Commissioner was appointed for divid ing the properties. Certain properties of the family were incapable of division by metes and bounds. and by order of the Court in G which the suit was instituted those properties were put up for sale by "competitive bidding between the parties". A sugar factory at Jaora-cailed 'the Govindram Sugar Factory'-~was put up for com petitive bidding. and the bid of Govindram for Rs. 34 lakhs being accepted, the sugar factory was allotted to his share. Other assets H of the family were similarly allotted to Govindram or to Bachhulal according as he offered the higher bid. Account was then made bet ween Govindram and Bachhulal of properties allotted on the basis of the bids accepted at the competitive bidding and Govindram was found liable to pay Rs. I 1,26,200/- after taking into account a debit item of Rs. 12,75.000/- being the value of the 6/16th share of Bachhulai in the sugar factory. Govindram died in 1943, and the appellant is the Hindu undivided family which represents the branch of Govindram.

SUl'REllE COURT REPORTS

[1965] 3 s.c.11.

The Indian Income-tax Act 9 of 1922 was applied

to Part A

'B' States hy the Finance Act 25 of 1950. In the assessment year 1950,51 which was the first year of assessment after the State of Jaora became part of the Indian Union, the appellant Hindu un divided family claimed depreciation allowance under s. 1-0(2) (vi) of the Indian Income-tax Act in respect of the sugar factory com puted on a valuation of Rs. 34 lakhs. The Income-tax Officer re- B jected the claim of the appellant and allowed depreciation only on the actual cost to the Hindu family of Govindram and Bachhu- lal before it was divided. The order of the Income-tax Officer was <:onjirmed by the Appellate Assistant Commissioner in appeal. The Income-tax Appellate Tribunal held that the value for pur poses of depreciawon should be I0/16th share of the original cost C to the larger Hindu undivided family plus Rs. 12,75,000/- (paid by Govindram on behalf of the assessee to Bachhulal the latter's 6 /16th share in the sugar factory). At the instance of the the appellant, the Tribunal referred the following question High Court of Madhya Pradesh under s. 66(1) of the Income-tax D Act:

for

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"Whether on the facts and in the circumstances of

this case, the assessee Hindu Undivided Family is entitled to claim depreciation in respect of the assets of the old Hindu Undivide'd Family on the basis of the origi- nal cost to the family or on the basis of the valuation E at which the assessee took over the assets?"

The High Court of Madhya Pradesh answer:

recorded the following

"that the depreciation allowance should be computed on

the basis of the original cost to the joint family and not F on the basis of the valuation at which the assessee took over the assets".

In so answering the question, the High Court committed a dear error of law. The Commissioner had acquiesced in the order of the Tribunal and had nnt claimed that the original value to the larger Hindu Undivided Family was the only amount on which G depreciation allowance was to be computed. The Income-tax au thorities had held that for the purpose of computing the deprecia tion allowance, the original cost to the joint family had to be the basis, but the Tribunal did not accept that view and held that the depreciation allowance in respect of the sugar factory was to be computed on the basis of I0/16th of the original value plus H the Rs. 12,75,000/-. The Commissioner having acquiesced order of the Tribunal, the only question on which the High Court was called upon to advise was whether in respect of the I0/16th share which the share of Govindram, depreciation al!owance may be computed on the basis of the original cost to the la~ undivided family or on the basis of Rs. 34 lakhs being the value of the factory offered at the auction.

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Mjs. KALOORAM v. C.I.T. (fJ/lali, J.)

649

A

In the computation of profits and gains of any business carried on by an assessee, under the head "Profits and gains of business" by s. 10 sub-s. (2) the assessee is entitled to an allowance for de preciation under cl. (vi). The material part of sub-s. (2) cl. \vi) pro, vides:

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"(2) Such profits or gains shall be computed after making

the following allowances, n~mely: -

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(vi) in respect of depreciation of such buildings, machinery, plant or furniture being the property of the assessee, a sum equivalent, where the assets are ships other than ships ordinarily plying on inland waters, to such per- centage on the original cost thereof to the assessee as may in any case or class of cases be prescribed and in any other case, to such percentage on the written down value thereof as may in any case or class of cases be prescribed:

The assets in respect of which the depreciation allowance is claimed being a factory, a percentage on the written down value as may be prescribed in respect of the buildings, machinery, plant and furniture therein is admissible as allowance. Sub-section \5) of s. 10 defines "written down value''. It provided, insofar as it was material at the relevant time:

" 'written down value' means-

fa) in the case of assets acquired in the previous year,

the

· actual cost to the assessee:

\

Provided

Provided further

(b) in the case of assets acquired before the previous year the actual cost to the assessee less all depreciation actually allowed to him under this _Act or any Act re pealed thereby, or under executive orders issued when in the Indian Income-tax Act, 1886 (II of 1886), was force:"

The depreciation allowance under s. 10(2)(vi) in respect of 11 factory has to be allowed in the manner prescribed on the actual value to the assessee limited to the buildings, machinery, plant and furniture. No previous depreciation has been allowed.under any Act repealed by the Indian Income-tax Act, 1922 or under any execu tive order issued under the Indian Income-tax Act, 1886 and there fore the appellant is entitled to depreciation allowance under s. 10 (2) (vi) on the actual cost to the assessee of assets for which depre ciation is admissible.

650

SUPREME COURT REPORTS

[1965) 3 S,C.R.

The factory originally belonged to a larger .Hindu undivided family. In the scheme of partition devised under the preliminary A decree the factory was allotted to Gbvindram, his bid of Rs. 34 lakhs having been accepted by the Court. The true effect of the scheme under which the properties were put up for competitive bidding under the order of the Court was that the interest of the other member was to be conveyed at a value based on the offer made by the higher bidder. In other words, each party was given B an option to purchase the share of the other, but the option was exercisable only by the person who offered the higher bid for the asset. By the preliminary decree, the share of Govindram was defined at 10/ 16th and he became 'entitled to that share in every item of property and Bachhulal became entitled tb the remaining 6 /16th share iri each such item. But some of the properties were found incapable of physical division and a scheme was devised under which one of the sharers was entitled to purchase the share of the other on a valuation based on the bid offered by him, pro vided it was the higher ·of the twe> bids. Value of the bid was how ever taken into account only for making up accqunts. In substance D the appellant purchased by being declared the higher bidder the factory for 6/16th share belonging to Bachhu1al in the Rs. 12, 7 5,000 I-. He was, and remained the owner of the 10 /16th share, and that share was neither sold nor conveyed to him: he merely purchased the share of Bachhulal for Rs. 12,75,000/-. The Tribunal was therefore right in hblding that in respect of the 6 I E 16th share, Rs. 12,75,000/- paid by Govindram was the actual cost to him. On this part of the case apparently no dispute was or could be raised before the High Court. But the appellant contends that even for the purpose of th.e 10/ 16th share, the depreciation allowance sl\ould be computed bn the basis of a va1uation of Rs. 34 lakhs bid by Govin<lram for the factory.

sugar

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Our attention was invited to a large number of authorities ·in support of the contention raised by the appellant that the price of the sugar factory on the basis of which the share bf Bachhulal was valued shquld be regarded as decisive of the value of the asset on which depreciation allowance is admissible. The argu ment in substance is that the actu.al cost of the sugar factory is Rs. 34 lakhs, that being the price at which the factory was acquir- ed by Govindram.

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An asset which is admissible to c'.epreciation allowance may be bbtained by gift, inheritance ·or succession. In such a case the person who acquires an interest in the asset pays no price for it, H but on that account it cannot be said that he is not entitled to depreciation allowance. In respect of such an asset, in the absence of any statutory provision, depreciation would be Cbmputed on the market value on the date of acquisition of interest. An asset may be acquired by purchase, in which case in the absence of evi dence to show that the valuation was unduly inflated, the value

M./B. KALOORAM. v. c.r.T. (Shah, J.)

651

A paid by the assessee is th~ actual cost to him, and not th~ valll:e paid by his vendor for acquiring it. Again proper!~ .. which 1s owned jointly by more persons than one, by the acqms1tton o~ the interest of the other joint owners becomes the property of a smgle owner.

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B

In Francis Vallabarayar v. Commissioner of Income-tax, Mad- ras(') a Division Bench of the Madras High Court held that an assessee is entitled in assessment of tax under s. 10 of the Income tax Act, to depreciation allowance in respect of machinery or plant, which he acquires by inheritance, on the market value of such property at the elate of inheritance. The same principle would I)' apply to cases of gift and succession. The Legislature has by ad ding cl. (c) in sub-s. (5) of s. 10 by s. 8 of the Indian Income-tax (Amendment) Act 25 of 1953, defined 'written-down value' in the case of assets acquired by the assessee by way of gift or inheritance as being the written-down value as in the case of previous owner . or the market value thereof whichever is less. In the case of pur- D chase, as we have already observed, in the absence of fraudulent over-valuation with a view to obtain an unfair advantage, the price paid by the purchaser would be regarded for the purpose of depre ciation allowance as the actual cost to him, and not the original cost to the vendor: Commissioner of Income-tax v. The Bucking ham Carnatic Company Ltd,('): Jogta Coal Company Ltd. v. Com- in which full title to an asset, in respect of which depreciation is claimed, is ob tained in consequence of partition of a Hindu undivided family introduce a complication, which is a peculiar product of the rules of Hindu law. Under the Mitakshara system the essence of a co parcenary is unity of ownership, and so long as the family remains joint no individual member can claim that he !las a definite share in the joint property. Until partition takes place, there is commu nity of interest and unity of possession between all the members: it is only on partitipn that the interest of each member becomes de- finite. "Partition .................. is really a process in and by which a joint. enjoyment is transferred into an enjoyment in severalty. Each one of the sharers had an antecedent title and therefore no conveyance is involved in the process . . . . .. " Gutta Radha- l:ristnayya v. Gutta Sarasamma(').

f!i missioner of Income-tax, West Bengal (').. Cases

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H declared by the decree in the entirety of

By the preliminary decree Govindram and Bachhulal acquired definite interest in the sugar factory proportionate to the shares the scheme by which Govindram became owner of the sugar factory was in truth one by which he purchased 6 /16th share of Bachhu lal. He was by the decree, which recognised his pre-existing title, entitled to IQ/16th share and he purchased the remainder. The

the estate, and

(') 40 I.T.R. 426, (') 3 I.T.R. 385. (') 36 I.T.R. 521. (') I.L.R. [1951] Mad. 607.

LP(Dl5SCI-3

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652

SUPllllllE COURT REPORTS

[1965] 3 s.o.a.

scheme of "competitive bidding" was adopted only for the pur- A pose of valuing the interest of the other sharer at which the first sharer was to purchase it. The highest bidder took the entire asset and paid a share of the value bid by him equal to the share of the other sharer in the family estate. Govindram was the owner of IO /16th share: by offering the bid for Rs. 3.4 lakhs he did not purchase the I0/ 16th share. He merely purchased the 6/ 16th share B of Bach):mlal at a price based on total valuation of the sugar factory at Rs. 34 Iakhs.

The dicta to the contrary in Commissioner of Income-tax U.P. & C.P. v. Seth Mathuradas Mohta (') on which the High Court re lied do not, in my judgment, lay down the correct rule. In that case C coparceners of a Hindu family consisting of two members owning a Ginning Factory which was originally purchased for Rs. 23 lakhs decided to separate, and as the Ginning Factory could not be divi ded it was put to auction and purchased by 'A' for Rs. 28 lakhs. 'A' was debited in taking account with half the amount-offered by him. Subsequently 'A' claimed depreciation allowance on the basis D of Rs. 28 lakhs which he had paid. alleging that that was the origi- nal cost to him. The Income-tax authorities rejected the claim, and adopted the original value to the joint family as the actual value to 'A' for computing depreciation allowance under s. 10(2)(vi). In dealing with a reference made by the Tribunal on the question whether the Income-tax Officer had the power to ignore the valua- E tion made by the parties in ascertaining the original cost of the roachinery and building to the aiisessee, the High Court observed :

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p

. . . the original cost is the cost of acquiring title. The cost of acquiring title is to be ascertained at time when the property is acquired by the copar- the cenary. Thereafter one is not concerned with cost strict- ly so called but one is concerned with a mode of parti (fraud, over tion. As a result of the partition each to be reaching and the like being put on one side) is regarded as having got half by the mode of division adopted whether that mode be through Court, arbitra- G tion, private auction or drawing lot~ or any other mode agreed upon. The original cost of the property is not increased though one side might in the result get what a third person would regard as less than half though what the person concerned (at least in the case of pri vate auction) thought at the time was at least equal B to half; otherwise he would not have bid so much".

These observations were not necessary for the purpose· of answer ing the question posed before the Court. The question posed before the High Court related not to what the true value for com puting the allowance for depreciation was, but to the power of the

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(1) 7 I.T.R.!60.

'

11/s. KALOORAM V. C,J.'I'. (Shah, J.)

653

A

Income-tax Officer to ignore· the valuation placed by the parties in the deed of partition in ascertaining the true value for the purpose of such computation.

B

Death or .birth of coparceners does not alter the identity. of the Hindu undivided family which utilizes an asset for earrung income or profit. Death of a coparcener merely extinguishes an existing interest, but there is no devolution of t~at interest. But where the joint family status is severed and the nghts of the par ties are crystalised and a member acquires the interest of the other in any item of property though arbitration, agreement, decree of the Court or a private auction, there is a transfer of interest from C one to the other in that property and the value paid br taken into account for acquisition of that interest would normally be regarded qua that share as the actual cost to the acquirer for the purpose of s. 10(2)(vi), but the value of his own share is determined by the actual cost to the family.

Counsel for the appellant piaced strong reliance upon Com- D missioner of Income-tax v. Bai Shirinbai K. Kooka (') which be longs to a different branch of the law of Income-tax. Where an assessee brings his investments into his business, the question ari ses whether in assessing income-tax payable on income earned by sale or disposition of such investment the original value at E which they were acquired or the market value as at the date on which they were brought into the business has to be taken into account. In Shirinbai's case(') the assessee who held by way of investment several shares in different companies commenced a business in shares by converting the shares into stock-in;trade of the business. The assessee subsequently sold those shares in the F course of the business at a profit. A majority of this Court held that the assessee's assessable profits on the sale of the shares was the difference between the sale price of the shares and the market price of the shares prevailing on the date when the shares were converted into stock-in-trade of the business, and not the difference between the sale price and the price at which the shares were origi- G nally purchased by the assessee. The Court in that case distinguish ed the earlier case decided by this Court Sir Kikabhai Premchand v. Commissioner of Income-tax(') in which it was held that the assessee was entitled to value at cost price, certain business assets which were after withdrawal from the business settled upon trust. But neither of these cases has a bearing on the computation bf de- H predation allowance which is qua building, machinery, plant (not being ships) or furniture to be a percentage of the written-down value. A person who transfers his investments which are not part of his business into the stream of his business may value the invest ments at the prevailing market rate on the date on which they are brought into the business. In Shirinbai's case(') the Court was

(') 46 I.T.R. 86. (') 24 I.T.R. 506,

65-i

SUPREME COURT RllPORTS

[1965] 3 s.c.a.

\

called upon to ascertain commercial profits earned by sale of stock- A in-trade and in so doing regarded the ow11er as investor and as busi nessman as two different entities. S. K. Das. J., speaking for the majority observed that normally the commercial profits out of a transaction of sale of an article must be the difference between what the article cost the business and what it fetched on sale. But it is difficult to appreciate how that principle would apply in the B computation of depreciation allowance. The asset viz. the sugar factory at all material times remained a business asset. It was at one time owned by Govin<lram and Bachhulal, and if the. Income- tax Act, 1922 had then applied, depreciation allowance would have been computed on the basis of the value to the family. Ac quisition of the interest of Bachhulal by Govindram did not alter C the character or use of the asset: nor did it make any fundamen- tal alte~ation in its value to the appellant so as wholly to displace its original value even in respect of the share which Govindram continued to own. Superficial analogies are often misleading and more so in taxation laws. In computing profits assets brought into the. business and subsequently sold may be regarded as inducted D at the prevailing market rates, for the taxing authority is concern- ed to deal with the business profits, arising out of a transaction of sale to the business. When depreciation allowance is to be com puted, the taxing authorities have to consider what the original cost to the assessee was and valuation of a business asset adopted for the purpose of valuing the share of one of the owners from E whom his share was purchased cannot be regarded by any prin ciple of commercial accounting as notionally altering the original cost of his own share in the asset to the acquirer. The assessee does not p1m:hase his own share at the valuation put by him at the pri vate auction: he merely purchases the share of the other sharer at.a valuation mad.e on the bid offered by him. I am unable there- F fore to agree with counsel for the appellant that for the purpose of valuing I 0 / 16th share of Govindram the basis should be the valuation of Rs. 34 lakhs which was adopted for valuing Bachhu Ia!'s share.

I therefore answer the question as follows:

G

That depreciation allowance should be computed on the basis of JO /16th share of the original cost to the joint family of the assets which are admissible to deprecia tion allowance plus an appropriate amount attributable to the assets admissible to depreciation allowance on the footing that the value of 6/16th share of Bachhulal B in the factory was Rs. 12,75,000/-.

The order passed by the High Court will accordingly be mo

dified. There will be no order as to costs.

ORDER

In accordance with the majority judgment. the appeal is al

lowed with costs here and in the High Court.

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