DAURAN KHAN VS NAZIR AHMAD, 1993 PTD-LAHORE-HIGH-COURT-LAHORE 386 (1993)

Income-tax Act (XI of 1922)---

----S.10(2)(vi)---Income Tax Rules, 1922, R.9---Assessee a registered firm, closed its accounts on 30-6-1972 and the firm was dissolved on 2-11-1972 and reconstituted on 4-11-1972 by five out of ten old partners and three new comers---Newly constituted firm closed its accounts on 30-6-1973 and for the charge year 1973-74 two separate returns were filed for 1-7-1972 to 2-11-1972 and 4-11-1972 to 30-6-1973, which resulted in two separate assessments for the said periods in the status of a registered firm---Firm in question claimed depreciation of machinery, building and copper roller---Assessing Officer treated both the periods as a single unit and apportioned the admissible depreciation in the two periods in the ratio of 1/3 and 2/3 proportionate to the each period--Held, firm should be treated as a separate entity in respect of each period and thus same was entitled to full depreciation accordingly.

Rivoli Theatres, Karachi v. Commissioner of Income Tax, South Zone, Karachi and another 1971 SCMR 621; Commissioner of Income Tax, Karachi East, Karachi v. Amsons Dairies Ltd., Karachi (1975) 31 Tax 62 (SC); Commissioner of Income Tax, B & O. v. S.K. Sahana & Sons, Kodarma AIR 1946 Pat. 414; Commissioner of Income Tax, Madras v. Motors and General Stores Ltd., Bobbili AIR 1946 Mad. 327; Commissioner of Income Tax, B & O v. Dalmia Cement Ltd., Dalmianagar AIR 1946 Pat. 39; Income Tax, Madras v. Motors and General Stores, Ltd., Bobbili AIR and Commissioner of Income Tax, Madras v. Massey & Co. Ltd., Madras AIR 1929 Madras 453 ref.

Muhammad Ilyas Khan for Appellant.

Syed Zameer Tirmizey for Respondent.

Ch. Ijaz Ahmed, Deputy Attorney-General on Court's call.

Date of hearing: 19th January, 1993.

JUDGMENT

IRSHAD HASAN KHAN, J.---This is a Reference under section 66(1) of the Income-tax Act (No.XI of 1922), hereinafter called the Act by the Commissioner of Income Tax, Lahore Zone Lahore, now Multan.

2. The facts in brief are that M/s. Five Star Calico Printing Works, Lyallpur (now Faisalabad), respondent herein, deal in printing and dyeing of cloth. It closed its accounts on 30-6-1972. The firm was, however, dissolved on 2-11-1972 and reconstituted on 4-11-1972 by five out of ten old partners and three new-comers. The new firm closed its accounts on the 30th of June, 1973. For the charge year 1973-74 two separate returns were filed for 1-7-1972 to 2-11-1972 and 4-11-1972 to 30-6-1973. This resulted in two separate assessments for the said periods in the status of a registered firm. The firm had claimed depreciation of machinery, building and copper roller. The assessing officer treated both the periods as a single unit and apportioned the admissible depreciation in the two periods in the ratio of 1/3 and 2/3, proportionate to the length of each period. Feeling aggrieved with the assessment the firm filed two appeals before the Income Tax Appellate Tribunal which bore Nos. ITA No.2576 of 1973-74 and ITA No.2577 of 1973-74, respectively. The claim of the appellant in the appeals was that they should have been treated as a separate entity for each period and the firm was entitled to full depreciation in each period. The Tribunal accepted the plea of the assessee in its judgment, dated 26-1-1976 on the basis of the decision of the Supreme Court of Pakistan in the case reported as Rivoli Theatres, Karachi v. Commissioner of Income Tax, South Zone, Karachi and another 1971 SCMR 621. It was observed that the question whether or not the firm as reconstituted on 4-11-1972 was an entity separate from the firm which stood dissolved on 2-11-1972 was dealt with by the Tribunal as under:

"3 The matter already stands concluded by the decision of the Supreme Court of Pakistan in Revoli Theatres case reported as 1971 SCMR 621. In that case, as is the position in the case before us, there was a change in the constitution of the firm with. partners going out and others coming in. It was held that the reconstituted firm was an entirely different assessable entity. The Supreme Court in its order has referred with approval to the following observations of the Calcutta High Court in the case Gouri Sankar Sheroff and others AIR 1958 Cal. 262 ---

Whenever the constitution of the firm changes by the addition of new members as partners there is a break in the identity of the firm whether or not the name continues to be the same. After the change in the constitution of the firm by the addition of new partners what formally was the property of the old firm does not continue to be the property of the old firm.'

There is, thus, no doubt that the firm which stood dissolved on 2-11-1972 and the firm which came into existence on 4-11-1972 were two separate assessable entities. In fact the assessing officer has proceeded on this basis in making two separate assessments. That being so, there can hardly be any dispute about the proposition that both the firms were entitled to all such allowances as are admissible in law. The allowance in respect of depreciation of building, machinery etc. has to be computed in accordance with the following prescribed rule:---

9. (1) The allowance under clause (vi) of subsection (2) of section 10 in respect of depreciation of buildings, machinery, plant or furniture shall be at percentages of the written down value or original cost, as the case may be, equal to the number shown in the corresponding entry in the second column of the following statements.'

The language employed in the above rule is plain and admits of no ambiguity. It provides that the allowance for depreciation to be deducted in computing the profits of an assessee shall be at the percentages equal to the number shown in the statement. In no way does it restrict the allowance proportionately if the machinery etc. is used in the previous year for a period less than 12 months. It was under the old rule that the amount of depreciation used to be worked out with reference to the number of months the assets were used for business purposes. The relevant rule 8(1) as it then stood was as under---

8. (1) The allowance under section 10(2)(vi) of the Act in respect of depreciation of buildings, machinery, plant for furniture shall be at percentages of the written down value or original cost, as the case may be, equal to one-twelfth of the number shown in the corresponding entry in the second column of the following statements: ---

`Provided that if the building, machinery, plant of furniture have been used by the assessee in his business for not less than two months during the previous year the percentage shall be increased proportionately according to-the number of complete months of user by the assessee:

This was replaced by the existing rule 9(1) referred to above and has now no applicability to the year before us."

The plea raised on behalf of the department that in view of the ratio of Supreme Court's decision in Commissioner of Income Tax, Karachi East, Karachi v. Amsons Dairies Ltd., Karachi (1975) 31 Tax 62 (SC) also reported as 1971 SCMR 589, the treatment meted out by the assessing officer is correct, was repelled by the Tribunal holding that the precedent case does not advance the department's case because the facts of the case before the Supreme Court were distinguishable from those of the instant case. After detailing the points of distinction between the facts of the precedent case and the case of the assessee it was observed by the Tribunal as follows:

"5 ..... It is not disputed by the learned Department Representative that when firm Y of Lahore purchases in the course of the accounting period some machinery from firm X of Gujranwala, both would be entitled to allowance at the prescribed rate if they use it in that year. That being so, we see no reason why a different interpretation should be placed on the rule simply because the machinery has not been moved though its ownership has passed on to a different assessable entity. In that view of the matter, we direct that full depreciation on the written down value of the machinery and building be allowed in both the periods."

The Income Tax Department made two applications under section 66(1) of the Act before the Income Tax Appellate Tribunal praying for referring the following questions of law by it to the High Court:

"Whether on the facts and in the circumstances of the case, the Appellate Tribunal was justified in holding that the assessee-firm was entitled to full depreciation for the period 1-7-1972 to 2-11-1972 under Rule 9(1) of the Income Tax Rules when the assets remain the same"?

"Whether on the facts and in the circumstances of the case, the Appellate Tribunal was justified in holding that the assessee-firm was entitled to full depreciation for the period 4-11-1972 to 30-6-1973 under Rule 9(1) of the Income Tax Rules when assets remain the same"?

Vide its order, dated 9-12-1978 the Tribunal allowed RA. Nos. 10 and 11 of 1976-77 and referred the above questions to this Court for its opinion.

3. Mr. Muhammad Ilyas Khan, learned counsel for the referring authority argued that the depreciation is a yearly allowance admissible according to section 10(2)(iv) of the Act, read with the rules which essentially operate on the principle that it is an allowance in respect of each year of assessment and it does not sound reasonable proposition that it would be so construed as to multiply, enhance or increase the claim depending upon the number of reconstitution of the firm so that if there is one change of constitution, the depreciation will be double and if there are two changes in the constitution the allowance will be triple the amount of the allowance. Mr. Muhammad Ilyas Khan further argued that the interpretation placed by the Tribunal is inconsistent with the letter and spirit of section 26(2) of the Act which does not contemplate two assessments but only one assessment against the firm as constituted at the time of making the assessment. It was argued that the proviso lays down that the profits and gains of the previous year shall for the purpose of inclusion in the total income of the partners be apportioned between the partners who in such previous year were entitled to receive the same.

4. Syed Zameer Tirmizey, learned counsel for the assessee has controverted the arguments of the learned counsel for the Department and took the plea that there is no provision in the Act as would justify that if the, machinery etc. is not the property of the assessee throughout the year, then the period for which it was the property of the assessee would be calculated and depreciation should be allowed in proportion to such period. His submission was that even though the firm was running its business for a part of the year, the members of the newly constituted firm were entitled to claim full depreciation and not proportionate to the period of working of the firm. In support of his contention, reliance was placed on the Commissioner of Income Tax, B & O. v: S.K. Sahana and Sons, Kodarma AIR 1946 Patna 414, and Commissioner of Income Tax, Madras v. Motors and General Stores Ltd., Bobbili AIR 1946 Madras 327.

5. We have heard the learned counsel for the parties as well as the learned Deputy Attorney-General and perused the judgments cited at the bar. In the case of Commissioner of Income Tax, B & O v. Dalmia Cement Ltd., Dalmianagar (AIR 1946 Patna 39), the scope of section 10, cl. (3) of the Act came up for consideration. This provision reads thus: ----

"Where any building, machinery, plant or furniture in respect of which any allowance is due under cl. (iv), cl.(v), cl. (vi) or cl. (vii) of subsection (2) is not wholly used for the purposes of the business, profession or vocation, the allowance shall be restricted to the fair proportional part of the amount which would be allowable if such building, machinery, plant or furniture was wholly so used."

It was held that:

"The words `not wholly used for the purposes of the business profession' etc., do not mean not used throughout the year or during the whole of the year in question. They mean that the building, machinery, etc. have not been used exclusively for the purpose of the profession or vocation, that is to say, they have been used for other purposes also. There is no such provision in the Act as would justify the view that if the machinery is not used throughout the year, then the period for which it has worked should be calculated and depreciation should be allowed in proportion to each period."

In S.K. Sahana and Sons Kodarma (supra) the view taken in Dalmia Cement (supra) was followed and it was held that the assessee therein was entitled to the full amount of depreciation under section 10(2)(vi) of the Act, irrespective of the period of the user. The following observation may be quoted with advantage:

"I do not

see any provision in the Act which authorises an apportionment of depreciation on the assessee having sold the machinery or plant during the accounting period. The Legislature was aware that a machinery or plant might be sold or discarded during the accounting year and in such event it is provided by section 10(2)(vii) that the amount by which the written down value of the machinery or plant exceeds the amount for which the machinery or plant is actually sold or its scrap value is a deductible allowance and also that where the amount for which the machinery or plant is sold exceeds the written down value, the excess is to be deemed to be the profits of the previous year in which the sale took place."

In the precedent case, the assessee transferred his business alongwith the machinery and building on first January of the accounting year. The Income Tax Department allowed depreciation only for 8-1/2 months. The Patna High Court took the view that the assessee was entitled to full depreciation. In the case of Commissioner of Income Tax, Madras v. Motors and General Stores Ltd., Bobbili (AIR 1946 Madras 327), it was held that:

"An assessee, owner of an oil mill who has actually used the plant and machinery of the mill for the purposes of his business in the previous year only for a period of two months and some days can be granted a depreciation allowance. under section 10(2)(vi) for the whole period of the previous year and not proportionate to the period of actual working: section 10(3)."

In the case of Commissioner of Income Tax, Madras v. Massey & Co. Ltd., Madras A I R 1929 Madras 453 (Full Bench), it was held in terms of section 10(2)(vi) of the Act that where:

"One trading company, succeeding to the business of another, is entitled to carry forward depreciation to which full effect could not be given in years previous to succession, calculation must be made on original cost to the company to which it succeeded and not on value at which assets were taken over by succeeding company."

6. We are in respectful agreement with the views expressed in the precedent cases. In addition, the Income Tax Appellate Tribunal rightly upheld the plea of the assessee that the firm should be treated as a separate entity in respect of each period and thus entitled to full depreciation accordingly. Their reliance upon the case of Rivoli Theatres, Karachi (supra) as also Gouri Sankar Sheroff and others (supra) has not been shown to be suffering from any infirmity whatsoever.

7. The interpretation put on the relevant provisions of the Act and the Rules has the support of the law declared by the Supreme Court in the case of Rivoli Theatres, Karachi (supra) and no question of law was in the field at the time of making the reference to this Court. .

8. As to the plea of Mr. Muhammad Ilyas Khan, Advocate, that in case the firm is treated as separate entity and allowed full depreciation for each period, this would tantamount to multiply/enhancement of the claim of the assessee if and when there is change in the constitution of the firm, suffice it to say that this proposition is too wide and startling and no basis has been laid down to successfully canvass the same.

In view of the foregoing discussion the Reference is dismissed leaving the parties to bear their own respective costs.

M.BA./C-14/L Reference dismissed.