1. Partition of Hindu Undivided Family property — Auction of business asset — Claim for depreciation under Section 10(2)(vi), Income-tax Act, 1922 — Dispute over original cost. (Para 9 )
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1965 Supreme(SC) 116
SUPREME COURT OF INDIA
K. SUBBA RAO, J.C. SHAH AND S.M. SIKRI, JJ.
M/s. Kalooram Govindram, Appellant
Versus
Commissioner of Income-tax, Madhya Pradesh, Nagpur and Bhandara, Respondent.
Civil Appeal No. 41 of 1964.
Advocates appeared
Mr. N. D. Karkhanis, Advocate and M/s. Rameshwar Nath, S. N. Andley and P. L. Vohra, Advocates of M/s. Rajinder Narain and Co., for Appellant; Mr. C. K. Daphtary, Attorney General for India (M/s. R. Ganapathy Iyer and R. N. Sachthey, Advocates, with him), for Respondent.
Advocates:
C.K.DAFTARY, CO., N.D.Karkhanis, P.L.VOHRA, R.Ganapathy Iyer, R.N.SACH, RAJINDAR NARAIN, RAMESHWAR NATH ROY, S.N.ANDLEY
C.K.DAFTARY, CO., N.D.Karkhanis, P.L.VOHRA, R.Ganapathy Iyer, R.N.SACH, RAJINDAR NARAIN, RAMESHWAR NATH ROY, S.N.ANDLEY
In the partition of a Hindu Undivided Family, the "original cost" for depreciation purposes is the valuation of the asset at the time of partition (e.g., auction price), as the member acquires absolute title to a specific property, rather than the original cost to the larger joint family.
Headnote:(A) Income-tax Act, 1922 - Sections 10(2)(vi) and 10(5) - Depreciation allowance - Original cost to the assessee - Partition of Hindu Undivided Family - Cost of an asset to a divided member must be its cost to him at the time of partition, whether mentioned in the partition deed or ascertained otherwise, provided there is no fraud, collusion, or inflation of values for ulterior purposes. (Paras 5, 7)
(B) Partition under Hindu Law - Process by which joint enjoyment is transformed into enjoyment in severalty - Confers on a divided member an absolute title to a specified property - The legal fiction of pre-existing title cannot be stretched to ignore the actual value at which the property is acquired during partition. (Para 5)
(C) Comparison with other modes of acquisition - In cases of purchase, gift, bequest, or succession, the cost to the assessee is the actual cost at the time of acquisition, not the original cost to the predecessor. (Paras 6, 7)
Facts of the case:
A branch of a joint Hindu family acquired a factory through competitive bidding during a partition suit. The factory was allotted to the branch based on the highest bid. The assessee claimed depreciation on the auction value. The tax authorities and the High Court held that depreciation should be computed based on the original cost to the larger joint family.
Findings of Court:
The court held that the valuation in the auction was real and not notional. While partition may not involve a conveyance in strict legal theory, in substance, a member acquires absolute title to a specific property.
Issues: Whether the depreciation allowance in respect of assets of a former joint Hindu family should be computed 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.
Ratio Decidendi: The "original cost to the assessee" for the purpose of depreciation allowance, when an asset is acquired through partition, is the value given to it for the purpose of allotment or the price at which it was auctioned, as this represents the actual cost to the member at the time they acquired absolute title to the specific property. (Paras 5, 7)
Result: Appeal allowed.
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2. Whether depreciation allowance should be computed based on the original cost to the larger joint family or the valuation at which the asset was taken over during partition. (Para 10 , 13 )
3. Partition confers absolute title to specific property; cost to a divided member is the value at partition, analogous to assets acquired via gift, bequest, or succession. (Para 5 , 6 , 7 , 14 , 15 , 17 , 18 )
4. Cost of an asset to a divided member of a joint Hindu family for depreciation is its value at partition, whether by deed, auction, or other means. (Para 5 , 7 )
5. Appeal allowed — Depreciation allowance to be computed on the basis of the valuation at which the assessee took over the assets. (Para 8 , 22 )
6. How is the original cost of an asset determined for depreciation purposes when it is acquired through the partition of a Hindu Undivided Family?
The cost is the value given to the property for allotment at the time of partition, the price fetched at auction, or the value ascertained otherwise, provided the valuation is real and not notional. (Para 5 , 7 )
7. Does a partition of a joint Hindu family property involve a transfer of title or a crystallization of pre-existing interest?
While partition may not be a transfer under the Transfer of Property Act, it transforms joint enjoyment into enjoyment in severalty, conferring an absolute title to a specific property upon the divided member. (Para 5 , 7 )
8. Is the determination of cost for a divided HUF member similar to that for assets acquired by gift, bequest, or succession?
Yes, the court held that there is no substantial difference; in cases of purchase, gift, bequest, or succession, the cost is the actual cost or market value at the time of acquisition, not the cost to the predecessor. (Para 6 , 7 , 14 , 15 )
Judgement
SUBBA RAO, J. (With SIKRI J.) : The appellant is a Hindu undivided family carrying on business at Jaora. It was a branch of a larger joint 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 therein each item of the property was put up for sale by competitive bidding. One of the items of the said property, the sugar factory at Jaora, was knocked down in favour of Govindram for a 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 members of his branch of the family continued to run the factory. For the assessment year 1950-51 the Income-tax Officer, Ratlam, assessed the appellant in respect of the income from the said factory. The appellant contended that it was entitled to depreciation as provided under S. 10(2)(vi) of the Income-tax Act, 1922, hereinafter 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 and, on appeal the Appellant Assistant Commissioner rejected that contention and held that the value to be adopted for the purpose of depreciation would be the original cost of the said factory 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 6/16th 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.
"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."
The High Court held that the depreciation allowance should be computed on the basis of the original cost to the larger joint family and not on the basis of the valuation at which the assessee took over the assets. The assessee, by certificate granted by the High Court, has preferred the present appeal to this Court against that order.
2-4. The only question that arises in this appeal is whether the depreciation allowance should be computed in respect of the 10/16th share in the factory on the basis of the original cost to the larger joint family or on the basis of the valuation at which the assessee took over the factory. The answer to this question turns upon the relevant provisions of the Act and then 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, 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 percentage 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:
x x x x x x
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 cost to the assessee;
x x x x x
(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
