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1943 Supreme(SC) 16
PRIVY COUNCIL [ON APPEAL FROM THEEAST INDIES]
LORD ATKIN, LORD RUSSELL OF KILLOWEN, AND LORD PORTER.
INDIAN IRON AND STEEL COMPANY, LIMITED - Appellant
Versus
COMMISSIONER OF INCOME-TAX, BENGAL - Respondents
On appeal from the High Court at Calcutta.
Decided On : Mar. 25. 1943.
Solicitors for appellant:Linklaters & Paines. Solicitor for respondent: Solicitor, India Office.
A successor in business is not entitled to the predecessor's unabsorbed depreciation allowance. Depreciation must be calculated based on the cost to the successor upon acquisition, as succession provisions determine the person liable for tax, not the method for computing depreciation allowances.
Headnote:(A) Indian Income-tax Act, 1922 - Sections 10(2)(vi) and 26(2) - Depreciation allowance - Succession in business - Unabsorbed depreciation - Whether a successor in business is entitled to the unabsorbed depreciation allowance of the predecessor - Section 26(2) is concerned with the person on whom the liability to pay tax is imposed and not with the computation of the tax - Once the person to pay has been ascertained, the terms of Section 10 are used to compute the amount - Depreciation under Section 10(2)(vi) is allowable in respect of buildings, machinery, plant, or furniture being the property of the assessee and is calculated on the original cost to the assessee - Once property passes to a successor, the successor becomes the assessee and depreciation must be calculated on the cost to the successor, not the predecessor.
(B) Interpretation of "Assessee" - The term "assessee" in the proviso to Section 10(2)(vi) does not include the predecessor for the purpose of carrying forward unabsorbed depreciation to a successor - Unabsorbed depreciation allowance does not transfer to a purchaser upon the acquisition of a business.
Facts of the case:
A company acquired the whole of the property and assets of another company carrying on a similar business. Both companies had accumulated unabsorbed depreciation allowances. The acquiring company sought to set off the predecessor's unabsorbed depreciation allowance against its own profits for the assessment year, contending that under the provisions governing succession in business, it should be assessed as if it had carried on the business throughout the previous year and was therefore entitled to the predecessor's allowances.
Findings of Court:
The court found that the provision regarding succession in business determines the person liable for the tax on the profits of the previous year but does not alter the statutory method for computing depreciation. The benefit of unabsorbed depreciation is tied to the ownership of the assets and the identity of the assessee.
Issues: Whether a successor in business is entitled to the benefit of the predecessor's unabsorbed depreciation allowance and whether depreciation on acquired assets should be computed based on the original cost to the predecessor or the cost to the successor.
Ratio Decidendi: The court ruled that Section 26(2) only identifies the person liable for tax. The computation of depreciation under Section 10(2)(vi) requires the assets to be the property of the assessee and is based on the cost to that specific assessee. Consequently, once assets are transferred, the successor cannot claim depreciation based on the predecessor's cost, nor can they inherit the predecessor's unabsorbed depreciation allowance, as such allowances are not assignable and do not transfer with the business.
Result: Appeal dismissed.
Legal Category Hierarchy
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taxation
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income tax
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business profits
- depreciation allowance
- business succession
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business profits
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income tax
Judgement
Appeal (No. 7 of 1942) from a judgment of the High Court (March 10, 1941) on a reference under s. 66, sub-s. 2, of the Indian Income-tax Act, 1922.
The appellant, the Indian Iron and Steel Co., Ld., on December 2, 1936, pursuant to an agreement to that intent, acquired the whole of the property and assets of the Bengal Iron Co., Ld., which carried on a business similar to that of the appellant—steel-maker. At the end of the fiscal year 1935- 1936 both companies were entitled to unabsorbed depreciation allowances under s. 10, sub-s. 2 (vi.), of the Income-tax Act, 1922, and in this appeal, which was against an assessment on the appellant for the year 1937- 1938 on business profits, the question was whether a sum of Rs.85,45,150, representing unabsorbed depreciation allowance in respect of the assets of the Bengal Iron Co., Ld., could be set against the profits of the appellant for the year under appeal.
The questions referred were (1.) whether, in assessing under the provisions of s. 26, sub-s. 2, of the Act in the circumstances of the present case a person succeeding to the business of another, the income of the business of the latter up to the date of succession should be assessed to tax separately, or whether the assessment should be made in respect of such business as if it had throughout the year of succession been carried on by the successor ; (2.) whether, in the circumstances of this case, the Indian company was entitled in law, in its assessment for 1937- 1938, to have the whole of the depreciation allowance on the buildings, machinery, and other assets, which it had acquired from the Bengal company, computed on the original cost of such assets to the Bengal company; and (3.) whether, on the facts and in the circumstances of this case the assessee company, in its assessment for 1937- 1938 and subsequent years, is entitled in law to the benefit of the unabsorbed depreciation allowance of Rs.85,45,150 of the Bengal company.
The facts, the relevant statutory provisions and the argument appear from the judgment of the Judicial Committee.
The High Court (Derbyshire C.J. and Panckridge J.) in separate judgments, answered the second and third questions in the negative. With regard to the first question, the Chief Justice was of opinion that the best answer to it was that the assessment of the Assistant Commissioner was correctly made; while Panckridge J. thought that it did not require a separate answer.
1943. Feb. 9, 10. Roland Burrows K.C., Reginald Hills and W. W. K. Page for the appellant.
J. M. Tucker K.C., U. Sen Gupta and N. E. Mustoe for the respondent.
Mar. 25. The judgment of their Lordships was delivered by Lord Porter. The appellant is a company incorporated and registered under the Indian Companies Act in the year 1918. It carried on the business of an iron-founder and shell maker at Hirapur in the Province of Bengal. By an agreement dated September 8, 1936, made between the appellant and a company named the Bengal Iron Co., Ld., the former agreed to acquire and take over the whole of the property and assets of the latter as existing on the date of transfer. This second company was incorporated and registered in England, and
Law. Rep. 70 Ind. App. 100 ( 1942- 1943) Indian Iron and Steel Company v. Commissioner of I.T.
37
had carried on at Kulti, in the same Province, a business similar to that of the appellant. On December 2, 1936, in pursuance of this agreement, and after it had been sanctioned by the High Court in England, the Bengal company transferred to the appellant the whole of its undertaking and assets, and from December 3 (1.) the appellant carried on the business previously carried on by that company as part of, and in combination with, its own existing business, and (2.) the Bengal company ceased to carry on business and went into voluntary liquidation.
In addition to the provisions already set out, the agreement of September 8 contained (inter alia) a further clause assigning, " so far as c
