COMMISSIONER OF INCOME-TAX VS AYYANARAPPAN & CO., 2000 PTD-MADRAS-HIGH-COURT-INDIA 2328 (1996)

Income-tax---

----Business---Business income---Balancing charge---Firm---Death of partner and reconstitution of firm---Depreciation allowed to firm prior to its reconstitution cannot be taken into account while computing profits under S.41(2)---Indian Income Tax Act, 1961, S. 41.

The assessee was a firm. One of the partners died on May 28, 1976, and immediately thereafter the firm was reconstituted. In the previous year ended March 31, 1978, the assessee had transferred five assets in favour of four partners and a stranger. In computing the profits under section 41(2) of the Income Tax Act, 1961, the Income-tax officer took into account the depreciation deducted in the assessment made on the firm prior to the reconstitution. On appeal, the Appellate Assistant Commissioner held that, in computing the profits under section 41(2) of the Act, only the deductions granted to the assessee-firm could be taken into account and not deductions granted to the dissolved firm. The Tribunal confirmed this order. On a reference:'

Held, that the Tribunal was correct in holding that while computing the profits under section 41(2) of the Act, the depreciation allowed to the firm prior to the reconstitution on May 28, 1976, should not be taken into account.

CIT v. Empire Estate (1996) 218 ITR 355 (SC) applied.

C. V. Rajan for the Commissioner.

Nemo for the Assessee.

JUDGMENT

K. A. THANIKKACHALAM, J.---At the instance of the Revenue, the Tribunal referred the following question for the opinion of this Court; under section 256(1) of the Income Tax Act, 1961, hereinafter referred to as the "Act":

"Whether, on the facts and in the circumstances of the case, while computing the profits under section 41(2) for the assessment year 1978-79 the depreciation allowed to the firm prior to the reconstitution on May 28, 1976, should also be taken into account?"

The assessee is a firm. One of the partners died on May 28, 1976, and immediately thereafter the firm was reconstituted. In the previous year ended on March 31, 1978 the assessee had transferred five assets in favour of four partners and a stranger. In computing the profits under section 41(2) of the Act, the Income-tax Officer took into account the depreciation deducted in the assessment made on the firm prior to the reconstitution also, in the view that the death of the partner led only to a change in the constitution and there was no succession of one firm by another. On appeal, the Appellate Assistant Commissioner held that in computing the profits under section 41(2) of the Act only the deductions granted to the assessee-firm could be taken into account and not deductions granted to the dissolved firm. On further appeal also, the Tribunal confirmed the order of the Appellate Assistant Commissioner.

After the death of a partner, the firm would get dissolved, unless there is a contract to the contrary. In CIT v. Empire Estate (1996) 218 ITR 355, the Supreme Court held that the firm was dissolved on the death of a partner and the surviving partners did not continue the business. While so, the depreciation granted in the hands of the erstwhile firm cannot be included under section 41(2) of the Act along-with the deduction granted to the newly constituted firm. Therefore, the Tribunal was correct in holding that while computing the profits under section 41(2) of the Act, the depreciation allowed to the firm prior to the reconstitution on May 28, 1976, should not be taken into account. Accordingly, we answer the question referred to us in the negative and against the Department. No costs.

M.B.A./4137/FC Reference answered.