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PETITIONER: D. S. BIST & SONS, NAINITAL

       Vs.

RESPONDENT: COMMISSIONER OF INCOME TAX, DELHI CENTRAL, NEWDELHI

DATE OF JUDGMENT03/11/1978

BENCH: PATHAK, R.S. BENCH: PATHAK, R.S. BHAGWATI, P.N. TULZAPURKAR, V.D.

CITATION:  1979 AIR  379            1979 SCR  (2) 224  1979 SCC  (3) 613

ACT:      Income Tax  Act  1922.  3,  10(2)(vii)-Firm  whether  a separate taxable  entity-Whether same  as partners-Balancing charge-Whether depreciation  allowed to  a disrupted HUF, to be taken  into consideration  in determining  the  balancing charge of  a firm  which takes  over the  HUF business  as a going concern.

HEADNOTE:      A Hindu Undivided Family consisting of Thakur Dan Singh and  his son, Thakur Mohan Singh was carrying on business as forest contractors.  There was  a total  disruption  of  the family in  March, 1956.  On that day, the written down value of three  trucks owned by the Hindu Undivided Family was nil on account  of  depreciation  allowance  granted  under  the Income Tax  Act, 1922. On the same day when the joint family was disrupted,  Thakur Dan  Singh and  his son  Thakur Mohan Singh constituted  a partnership firm. The business of Hindu Undivided Family  was taken over as a running concern by the firm. The  firm sold  the three trucks for Rs. 24,252/-. The Income Tax officer held that the entire sale proceeds should be deemed  to be profits of the firm by virtue of the second proviso to  s. 10(2)(vii) of the Income Tax Act, 1922 and 1: he  included   that  amount  in  the  total  income  of  the appellant. The  decision  of  the  Income  Tax  officer  was confirmed  by  the  Appellate  Assistant  Commissioner,  the Income Tax  Appellate Tribunal  and the High Court. The High Court took  the view  that inasmuch  as the  partners of the appellants were the same individuals who were the members of the Hindu  Undivided Family  and as  the business  was taken over as a running concern by the appellants from the family, there was  merely a  change in  the style  and nature of the Hindu Undivided  Family. According  to the  High Court,  the original cost  of the  trucks to  the appellant would be the same as it was to the Hindu Undivided Family.      Allowing the appeal by the assessee, ^      HELD: The second proviso to section 10(2)(vii) seeks to recover back from the assessee the benefit allowed to him by way  of  depreciation  allowance  earlier.  It  does  so  by imposing a  balancing charge on the excess of the sale price

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over the  written down  value to  the extent  of  the  total depreciation allowance  granted to the assessee in the past. In the  present case,  the appellant  could  not  have  been allowed any  depreciation allowance for the reason that from the outset  when the  three trucks  became his  property the written down  value was  nil.  No  question  of  imposing  a balancing charge,  therefore, can  arise in this case. It is immaterial that  the business  was taken  over as  a running concern. It is also immaterial that the partners of the firm are the  same as  the members of the Hindu Undivided Family. Under s.2  of the  Income Tax  Act, a  firm  is  a  distinct assessable entity. [226G-H, 227A, B-C] 225      Commissioner of  Income Tax,  Bengal v. A. W. Figgics & Co. and  Ors., [1953]  24 ITR  405 S.C.I.  Raja Bejoy  Singh Dudhuria v. Commissioner of Income Tax, Bengal, [1933] 1 ITR 135 (P.C.); relied upon.      When depreciation  allowance was  allowed to  the Hindu Undivided Family  in its  assessment proceedings,  it was  a step taken  in determining the taxable Income of the family. The depreciation  allowance allowed  to the family cannot be regarded as  depreciation allowed  to  the  appellant  firm. [227GH, 228A]

JUDGMENT:      CIVIL APPELLATE  JURISDICTION: Civil Appeal No. 1727 of 1972.      (Appeal from  the Judgment and order dt. 8.12.71 of the Delhi High Court in Income Tax Reference No. 30/67).      T. A. Ramachandran for the appellant.      B. B. Ahuja and Miss A. Subhashini for the respondent.      The Judgment of the Court was delivered by      PATHAK, J.-This  appeal by  special leave  is  directed against the judgment of the High Court of Delhi disposing of a reference made to its by the Income Tax Appellate Tribunal on the following question:-           "Whether on  the facts and in the circumstances of      the case  the sum of Rs. 24,252/- is an item taxable in      the previous year under the Provisions of section 10(2)      (vii), The appellant  is a partnership firm carrying on business as forest contractors.  The partners  are Thakur  Dan Singh and his son,  Thakur Mohan  Singh. The  appeal  relates  to  the assessment year  1958-59, for which the previous year is the financial year  ending March  31,  1958.  The  business  was originally carried on by a Hindu undivided family consisting of  the   aforesaid  father  and  son.  There  was  a  total disruption of  the family  on March 22, 1956 and on the same day the  separated  members  of  the  family  constituted  a partnership firm  under the  name and style of Messrs. D. S. Bist &  Sons. The  business was  taken  over  as  a  running concern by the firm. At the time when the business was owned by the  family, it  included three  trucks.  On  account  of depreciation allowed in earlier years the written down value of two trucks came to nil in the assessment year 1952-53. As regards the  third truck, according to what is stated in the judgment of  the High  Court the  written down  value  stood reduced to  nil by  the date  of  disruption  of  the  Hindu undivided family.  During the previous year ending March 31, 1958, relevant  to the  assessment year  1958-59, two trucks were sold  for a total of Rs. 12,000/- while the third truck was sold for Rs. 12,252/-.      During the  assessment proceeding  for  the  assessment

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year 1958-59,  the Income  Tax Officer  held that the entire sum of  Rs. 24,252/-,  representing the sale proceeds of the three trucks, should be deemed to be 226 Profits of the previous year ending March 31, 1958 by virtue of the  second proviso  to section 10(2) (vii) of the Indian Income Tax  Act, 1922,  and he  included that  amount in the total  income   of  the   appellant.  Before  the  Appellate Assistant Commissioner  the appellant  contended’ that as no depreciation was  allowed to the appellant in respect of the three trucks  no question  arose of  computing any profit in its hands,  but the  contention was  rejected. The appellant was unsuccessful  before the  Income Tax  Appellate Tribunal also. At the instance of the appellant, a reference was made to the  High Court  of Delhi.  The High  Court took the view that inasmuch as the partners of the appellant were the same individuals who  were members  of the Hindu undivided family and as  the business  was taken over as a running concern by the appellant  from the family "there was merely a change in the style  and nature of the Hindu undivided family on March 22, 1956".  In the  opinion of  the High  Court the original cost of  the trucks to the appellant would be the same as it was to  the Hindu  undivided  family  and  it  rejected  the contention that the original cost of the three trucks in the hands of  the appellant must be taken as nil. In the result, the High  Court affirmed’  that the  sum of Rs. 24,252/- was taxable in  the hands  of the  appellant by  virtue  of  the second proviso to section 10(2) (vii).      It appears from the judgment of the High Court that the written down  value of the three trucks exhausted while they were  still   the  assets  of  the  Hindu  undivided  family business, the  written down  value of two trucks having been exhausted in  the assessment  year 1952-53  and that  of the third truck  having been  exhausted in  the assessment  year 1956-57. Accordingly,  when the  business was  taken over by the appellant the written down value of the three trucks was nil. In defining the expression "written down value" section 10(5) (b)  declares that  in the  case  of  assets  acquired before the  previous year the written down value means ‘ the actual cost  of the  assessee less all depreciation actually allowed to  him under the Act." It is urged on behalf of the appellant that the actual cost to the appellant of the three trucks was  nil inasmuch  as  the  written  down  value  had already been  exhausted when  the business was taken over by the appellant.  It is  urged that  as no  depreciation could possibly have  been allowed  to the  appellant, no  question arises of  applying the  second  proviso  to  section  10(2) (vii). Now,  in enacting the second proviso to section 10(2) (vii) the  Legislature  sought  to  recover  back  from  the assessee the  benefit allowed  to him by way of depreciation allowance earlier,  and it  did so  by imposing  a balancing charge on the excess of the sale price over the written down value to  the extent  of the  total  depreciation  allowance granted to  the assessee  in the  past. In the present case, the appellant could not have been allowed any depre 227 ciation allowance  for the  reason that from the outset when the three trucks became its property, the written down value was nil. No question can arise of imposing  balancing charge under the second proviso to section 10(2)(vii).      It is  contended by  the Revenue  that the business was taken over  as a  running  concern  by  the  appellant  and" therefore, account  should  be  taken  of  the  depreciation allowed in  the hands  of the Hindu undivided family. In our opinion, it  is immaterial  that the business was taken over

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as a  running concern.  Where a  business is taken over as a running concern by an assessee, the cost to it of the assets must ordinarily  turn on  the value  of the assets as on the date  of   acquisition.  There  is  no  material  before  us evidencing an  intention  to  the  contrary.  It  cannot  be disputed that  the actual cost to the appellant of the three trucks must  be regarded  as  nil,  and  that  being  so  no depreciation can  be said to have been ever actually allowed to the appellant.      It is  pointed out  by the Revenue that the partners of the appellant  are the  same two individuals who constituted the Hindu  undivided family, and reliance has been placed on the observation  of the  High Court that in the constitution of the  firm "there  was merely  a change  in the  style and nature of  the Hindu undivided family". Now we must remember that we are dealing with a case under the Income Tax Act. We are concerned  with provisions for the computation of income of an  assessee   for the  purpose of determining its income tax liability.  It may  be, as  is quite  often said, that a firm is  merely a compendious description of the individuals who carry  on the partnership business. But under the Income Tax Act,  a firm  is a distinct assessable entity. Section 3 of the  Indian Income  Tax Act,  1922 treats it as such, and the entire  process of  computation of  the income of a firm proceeds on  the basis  that it  is  a  distinct  assessable entity. In  that  respect  it  is  distinct  even  from  its partners. Commissioner  of Income  Tax, West Bengal v. A. W. Figgies and Company and others(1) As an assessable entity it is also  distinct from  a Hindu  undivided family,  which in itself is  regarded as  a separate  unit of assessment under Section 3.  Raja Bejoy  Singh Dudhuria  v.  Commissioner  of Income Tax,  Bengal(D). For  the purposes  of  the  question before us  it recks  little that  the very  individuals  who constituted the  Hindu undivided  family now  constitute the appellant firm.  When depreciation  allowance was allowed to the Hindu undivided family in its assessment proceedings, it was a  step taken  in determining  the taxable income of the family. The depreciation allowed to the family      (1) (1953) 24 I.T.R. 405 (S.C.)      (2) (1933) 1 I.T.R. 135 (P.C.) 228 cannot be regarded as depreciation allowed to the appellant. We must  ignore entirely  the circumstance that depreciation has been allowed to the Hindu undivided family in the past.      On these  considerations it is not possible to say that the second proviso to section 10(2) (vii) is attracted.      Accordingly, we  hold that  the sum  of Rs. 24,252/- is not taxable in the hands of the appellant for the assessment year 1957-58  by virtue  of the  second proviso  to  section 10(2) (vii)  of the  Indian Income  Tax Act,  1922"  and  we answer the  question referred in favour of the appellant and against the Revenue.      It was  strenuously contended on behalf; of the Revenue that the  sum of Rs. 24252/- should be considered as capital gains under  section 12B  of the  Act, and  that it could be brought to tax under that head. There was some debate before us whether  that point  can be  regarded as an aspect of the question specifically  referred  by  the  Tribunal  for  the opinion of  the High  Court. We  consider it  unnecessary to enter into the matter, because it is open to the Tribunal to consider whether  the assessment  should be confirmed on any other ground,  now that the case will be before it again for disposal conformably  to this  judgment.  The  appellant  is entitled to its costs of this appeal. P.H.P.                      Appeal allowed. & Case remitted.

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