SCIENTIFIC MACHINE WORKS vs. COMMISSIONER OF INCOME TAX

ITR/23/1987HC GujaratGJHC24011756198710 October 2001Author: HONOURABLE MR. JUSTICE MOHIT S. SHAH,HONOURABLE MR. JUSTICE D.A.MEHTA9 pages
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What did the High Court hold?

The High Court held that the Tribunal was right in law in holding that the assessee was not entitled to depreciation on the enhanced value of assets. The Court reframed the second question to: "Whether on the facts and in the circumstances of the case, the Tribunal was justified in law in holding that the assessee was not entitled to the actual cost as contemplated under the provisions of Section 43(1) of the Act and that the assessee would be governed by the provisions of Section 43(6)(b) of the Act?". The Court answered this reframed question in the affirmative, in favour of the revenue. The reasoning was that there was no transfer of assets by one entity to another; the firm remained the same assessee. The assets used by the firm continued to remain with the firm, and thus Explanation 3 to Section 43(1) was not applicable. The actual cost to the assessee remained the written-down value as no new asset was acquired. The Court found that partners settled accounts inter se without a transfer of assets. Consequently, it was not necessary to render an opinion on the first question. The reference was disposed of accordingly.

What were the facts?

The assessee, Scientific Machine Works, a partnership firm, is in appeal for assessment year 1984-85. The firm, constituted by ten partners since 1978, underwent a change in constitution on 1.11.1982, with seven partners retiring and three continuing with seven new partners. Assets were revalued, with machinery's enhanced value amounting to Rs. 9,23,170. This revaluation was credited to partners' capital accounts, and outgoing partners were paid based on this. The assessee claimed depreciation on the enhanced value, but the Income-tax Officer disallowed it, holding it was a change in constitution under Section 187(2) and depreciation should be on the written-down value. The CIT(A) ruled in favour of the assessee, but the revenue appealed to the Tribunal.

What were the issues?

1. Whether on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the case of the assessee was covered by provisions of Section 187 of the I.T. Act, 1961 and therefore, provisions of Section 188 of the Act would not apply? 2. Whether on the facts and in the circumstances of the case, the Tribunal was justified in law in not considering that the case of the assessee was only with regard to cost to the assessee as contemplated u/s. 43 of the Act and not with regard to either Section 187 or Section 188 of the Act? Assessee's contentions: The assessee argued that its claim was based on Section 43(1) (actual cost) and that a new association of persons had come into existence, requiring consideration of capital brought in by new partners for depreciation calculation. The revenue contended that the Commissioner of Income-tax (Appeals) erred in holding it was a succession under Section 188, arguing it was only a change in constitution, not a dissolution.

Which sections of the Income-tax Act were involved?

Section 256(1),Section 187,Section 188,Section 43,Section 43(1),Section 43(6)(b)

AI-generated summary — verify with the full judgment below

IN THE HIGH COURT OF GUJARAT AT AHMEDABAD

INCOME TAX REFERENCE No 23 of 1987

For Approval and Signature:

Hon'ble MR.JUSTICE M.S.SHAH and Hon'ble MR.JUSTICE D.A.MEHTA

============================================================ 1. Whether Reporters of Local Papers may be allowed : NO to see the judgements?

2.

To be referred to the Reporter or not? : NO 3. Whether Their Lordships wish to see the fair copy : NO of the judgement?

4.

Whether this case involves a substantial question : NO of law as to the interpretation of the Constitution of India, 1950 of any Order made thereunder?

5.

Whether it is to be circulated to the Civil Judge? : NO

The order continues below.

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