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PETITIONER: SETH BANARSI DASS GUPTA & ANR. ETC.

       Vs.

RESPONDENT: COMMISSIONER OF INCOME-TAX, DELHI.

DATE OF JUDGMENT29/04/1987

BENCH: MISRA RANGNATH BENCH: MISRA RANGNATH OZA, G.L. (J)

CITATION:  1987 AIR 1664            1987 SCR  (3) 101  1987 SCC  (3) 441        JT 1987 (2)   584  1987 SCALE  (1)949

ACT:     Income-tax  Act, 1922: s. 10(2)(vi),  s.  24---Deprecia- tion--Benefit of--Admissible only where assessee full  owner of    property--Assessee   alone   entitled   to    maintain claim--Carried forward loss--Claim for set off--When  admis- sible--Assessee surrendering lease of partnership share  for annuity--Nature of receipts--Whether profit for the interest held in business.

HEADNOTE:     ’A’, a partner in a firm running a sugar factory, insti- tuted a suit for its dissolution in 1948 and a Receiver  was appointed  by the Court. The arrangement arrived at for  the factory  was that it would be leased out for a term of  five years  to the highest bidder from amongst the six  partners. In July, 1948, ’A’ transferred his 1/6th share to the appel- lant for Rs.4,50,000. The appellant had taken a loan against shares  of that value held by him in another sugar mill  for purchase  of  the share. In May, 1950, another  partner  ’B’ leased  out  his 1/6th share to the appellant on  an  annual payment of Rs.50,000. In July, 1950 yet another partner  ’C’ leased  out his 1/6th share to the appellant for  a  similar sum.  In  1951 ’C’ sued for cancellation of  the  lease.  In April, 1954 the dispute was compromised and the lease termi- nated. ’C’ undertook to pay the appellant at the rate of Rs. 16,000  for  the first three years and at the  rate  of  Rs. I0,000  for the subsequent two years. ’B’s 1/6th  share  was also returned on mutual arrangement and he agreed to pay the appellant a sum of Rs.39,000 and odd annually.     During  the assessment proceedings for the year  1953-54 the  nature  of these receipts came to  be  considered.  The assessee-appellant maintained that these were in the  nature of capital receipts in lieu of the lease-hold interest.  The assessee also claimed depreciation on the 1/6th share in the sugar mill that he had acquired from ’A’. Similar  questions also arose for the assessment years 1954-55 and 1955-56. The assessee  had suffered a loss in the sugar business  in  the assessment  year  1953-54, a part of  which  remained  unab- sorbed, and claimed set off of that unabsorbed loss  against the  share of the rent received by him from the Receiver  in the assessment year 1954-55. Since the sugar mill was  being

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assessed  as an association of persons, for  the  assessment year 1960-61 102 the  Receiver  claimed  that for the  purpose  of  computing depreciation allowance, the written down value of the  busi- ness  assets  be  enhanced  so as  to  reflect  the  sum  of Rs.4,50,000 in place of 16th share representing the share of ’A’. The Revenue negatived the assessee’s contentions, which view was upheld by the High Court. Dismissing the appeals by certificate, the Court,     HELD:  1.  The amounts the assessee received  under  the compromise  or by amicable arrangement from  other  partners were in the nature of profits to be received by the assessee for  the interest held in the business and, therefore,  con- stituted taxable income. [106B]     2.  The benefit of s. 10(2)(vi) of the  Income-tax  Act, 1922  would  be admissible only where the  assessee  is  the owner  of the property. It too is not admissible in  respect of a fractional claim. [106A]     In the instant case, all that is claimed for the  asses- see is 1/6th share in the machinery. Such a fractional share does not suffice for granting an allowance for  depreciation under s. 10(2)(vi) of the Act. [105F]     3. Two conditions had to be fulfilled under s. 24 of the Incometax Act, 1922 before the claim for set off of  carried forward loss could be admitted, firstly, the income  against which  the  loss  has to be set off should  be  income  from business and secondly, the business should be same in  which the loss was suffered. [107C]     In  the instant case, the letting out of the sugar  mill was  not  the  business of the assessee.  The  Receiver  was appointed  for dissolution of the firm and the  main  reason for allowing the sugar factory to work was to dispose it  of as  a  running mill so that proper price could  be  fetched. [107DE]     4. Under the scheme of 1922 Act, it is the assessee  who alone is entitled to maintain claim of depreciation.  Within the  framework  of that scheme it is difficult  to  maintain separate value of a part of the asset to work out  deprecia- tion.  The  book-value, as shown must in the  instant  case, therefore,  be applicable to the entire assets of  the  firm including the 1/6th share which ’A’ had given to the  appel- lant.  The  claim of the Receiver for  depreciation  cannot, therefore, be sustained. [108B]  103

JUDGMENT:     CIVIL  APPELLATE JURISDICTION: Civil Appeal Nos. 850  of 1973 etc.     From  the  Judgment  and Order dated 3.9.  1970  of  the Allahabad High Court in Civil Miscellaneous (ITR) No. 461 of 1961. With CIVIL APPEAL No. 941 of 1975.     From  the  Judgment  and Order dated 5.5.  1972  of  the Allahabad High Court in I.T. Reference No. 236 of 1969. Raja Ram Agarwal and Mrs. Rani Chhabra for the Appellants. B.B. Ahuja and Ms. A Subhashini for the Respondents. The Judgment of the Court was delivered by     RANGANATH  MISRA, J. CA. No. 850 of 1973 This appeal  is by  certificate and is directed against the judgment of  the High  Court of Allahabad. Assessee and five of his  brothers constituted  a Hindu Joint Family. The  relevant  assessment

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year  is  1953-54  corresponding to  the  accounting  period ending  on  30th June, 1952. The Joint  Family  which  owned inter  alia  a sugar factory at Bijnore. In 1930  there  was partition  in  the family and the members of  the  erstwhile Joint Family constituted themselves into a partnership  firm which took over the sugar factory and operated the same.  In the  year ,1944, Sheo Prasad, one of the brothers who was  a partner  of  the firm instituted a suit in the  Lahore  High Court for dissolution of the firm. Partition of the  country followed and after the parties shifted over to India a fresh suit  was instituted at Bijnore for purposes  of  partition. The properties were put in charge of a receiver appointed by the  Court.  So far as the sugar factory is  concerned,  the arrangement  was that at five yearly rest an auction was  to be  held  confined to the partners and  the  highest  bidder would be given lease to operate the factory for that  period under  the receiver. On 16th July, 1948, Sheo Prasad  trans- ferred his 1/6th share to Banarsi Dass at a stated valuation of  Rs.4,50,000.  On 3rd May, 1950,  another  brother,  Devi Chand,  leased  out his 1/6th share to Banarsi  Dass  on  an annual payment of Rs.50,000. On 13th July, 1950, yet another brother, Kanshi Ram, similarly leased out his 1/6th share to Banarsi Dass for a similar sum. In 1951, Kanshi Ram sued for cancellation  of the lease. On 6th April, 1954, the  dispute was compromised and the lease was 104 terminated.  Kanshi Ram undertook to pay to Banarsi Dass  at the rate of Rs. 16,000 for the first three years and at  the rate  of  Rs.  10,000 for the  subsequent  two  years.  Devi Chand’s 1/6th share was also returned on mutual  arrangement and he agreed to pay a sum of Rs.39,000 and odd annually  to Banarsi  Dass  for the lease period. During  the  assessment proceedings, the nature of these receipts came to be  debat- ed-the assessee maintained that these were in the nature  of capital  receipt  lieu of the lease hold  interest  and  the Income-tax  Officer maintained that those were  revenue  re- ceipts.  In due course, the Tribunal ultimately  upheld  the view of the Revenue.     One more question that arose was the admissibility of  a claim  of  expenditure being payment of interest on  a  loan taken  for  purchase  of shares in the  sugar  factory.  The Income-tax  Officer had allowed the claim of Rs.75,211.  The Appellate Assistant Commissioner gave notice to the assessee and disallowed the same. The Appellate Tribunal reversed the finding of the Appellate Assistant Commissioner in regard to the  admissibility of the claim. Thus the assessee  as  also the Revenue applied to the Tribunal to refer the case to the High Court. As far as relevant, the following questions were referred  for  the opinion of the High Court  under  section 66(1) of the Act at the instance of the assessee.               1.  Whether  on the facts and in  the  circum-               stances  of the case, the sums of  Rs.  16,000               and  Rs.39,262  received from Kanshi  Ram  and               Devi  Chand  respectively were  assessable  as               income of the assessee?               2.  Whether  on the facts and in  the  circum-               stances of the case, depreciation is allowable               on  the 1/6th share in S.B. Sugar Mills,  Bij-               nore which the assessee had acquired from Seth               Sheo Prasad? So  far as the first question is concerned, the  High  Court referred  to the arrangement entered into by the parties  as also  the terms of compromise and referred to certain  deci- sions and came to the conclusion that the sum of Rs.  16,000 received as a part of the total sum of Rs.68,000 constituted

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an assessable receipt. On the same reasoning, the High Court held  that the amount of Rs.39,262 received from Devi  Chand was also liable to tax.               So far as the other question is concerned, the               High Court held:-               "The  question, however, remains  whether  the               assessee is               105               entitled  to claim depreciation on the  ground               that  it has acquired 1/6th share in the  S.B.               Sugar Mills. It is to be noted that the asses-               see  does  not claim to be full owner  of  the               property.  All  that the  assessee  claims  is               1/6th share in S.B. Sugar Mills."               "The  assessee claims allowance  under  clause               (vi)  of subsection (2) of section 10  of  the               Indian Income-tax Act of 1922. Clause (vi) is:               ’In respect of depreciation of such buildings,               machinery,   plant  or  furniture  being   the               property of the assessee     .........."               "In  order to qualify for an  allowance  under               clause (vi), the assessee has to make out that               the building, machinery, plant or furniture is               the  property  of  the  assessee.  Mr.  Shanti               Bhushan appearing for the assessee urged  that               clause (vi) is attracted even where an  asses-               see owns a fractional share in the  machinery.               On the other hand, Mr. Brij Lal Gupta  appear-               ing for the Department urged that ownership of               a  fractional  share  in  machinery  does  not               attract  clause  (vi). The point is  not  free               from difficulty."               The High Court ultimately came to hold:               "In  order to qualify for an  allowance  under               clause  (vi), the claimant must make out  that               the machinery is the property of the assessee.               That  test  is not satisfied  by  the  present               assessee.  The assessee does not claim  to  be               the  full owner of the machinery in  question.               All that is claimed for the assessee is  1/6th               share  in  the machinery.  Such  a  fractional               share will not suffice for granting an  allow-               ance for depreciation under section  10(2)(vi)               of the Act."     We have heard learned counsel for the assessee-appellant at length. He has referred to several authorities in support of  the assessee’s stand of admissibility of the  claim’  on both scores. According to him, the proper test to be adopted should have been to find out whether the arrangement consti- tuted  an apparatus to earn profit. whether the  arrangement was one in course of business activity, and whether what was received  constituted a part of the circulating  capital  or was  a part of the fixed asset. We have considered the  sub- missions of 106 the  learned  counsel  for the appellant but are  not  in  a position to accept the same. There is hardly scope to  doubt that  the benefit of section 10(2)(vi) of the Act  would  be admissible  only  where  the assessee is the  owner  of  the property. It too is not admissible in respect of a fraction- al  claim. Similarly, we are of the view, in agreement  with the High Court. that the amounts which the assessee received under  the compromise or by amicable arrangement was in  the nature  of  profits to be received by the assessee  for  the interest  held in the business and,  therefore,  constituted

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taxable income. No other point was canvassed before us. This appeal  has  to fail and is hereby  dismissed.  Parties  are directed to bear their own costs throughout. c.A. No. 233 of 1976     This  appeal between the parties is also by  certificate granted  by  the  Allahabad High Court and  relates  to  the assessment year 1955-56 for the accounting period ending  on 30th   June,   1954.  Leave  has  been   confined   to   two questions--as  would  appear  from the  order  granting  the certificate,  namely, as to whether one of  the  instalments received  by  the  assessee  out  of  the  said  amount   of Rs.68,000,  as referred to above, in respect of  an  earlier assessment  year constituted a taxable receipt.  The  second question  relates to acquisition of the 1,6th share under  a deed  of  exchange from Devi Chand under the  exchange  deed dated 16th July, 1948, which indicated that the valuation of that  interest was shown to be Rs.4,50,000 and  depreciation was claimed in regard to it. Both the questions raised  here are  covered  by our aforesaid judgment. The appeal  of  the assessee  has therefore to fail. The appeal  is  accordingly dismissed. Parties are directed to bear their own costs. C.A. No. 1101 of 1975.     The  relevant  assessment year in this case  is  1954-55 corresponding to the accounting period ending June 30, 1953. Three  questions survive for consideration: One relating  to the  receipt of Rs. 16,000 and Rs.42,957 in the same  manner as  already indicated, and the other depreciation in  regard to the 1/6th share, said to have been valued at Rs.4,50,000. Both the questions have to be answered against the  assessee for the reasons already indicated. In this case, there is  a third  question  which is relevant, namely, whether  in  the facts and circumstances of the case. the unabsorbed  carried forward  loss of Rs.78,084 was liable to be set off  against the  share  of the rent received by the  assessee  from  the Receiver.  Dealing  with this question, the High  Court  ob- served:. 107               "During  the  previous year  relevant  to  the               assessment  year  1953-54,  the  assessee  had               suffered  a  loss  in  sugar  business.  After               setting  off the loss against other  heads  of               income  there remained an unabsorbed  loss  of               Rs.78,084.  In the assessment year in  dispute               the assessee claimed that the unabsorbed  loss               of  the preceding year should be brought  for-               ward  and set off against its share  in  lease               money received from the Receiver in respect of               S.B.  Sugar Mills. This claim of the  assessee               has been disallowed and the question arises as               to whether the assessee was entitled to  carry               forward  and  set off the loss as  claimed  by               it." The High Court referred to section 24 of the Income-tax  Act of  1922  and indicated that two conditions had to  be  ful- filled  before the claim of set off of carried forward  loss could  be  admitted, firstly, the income against  which  the loss  has to be set off should be income from  business  and secondly, the business should be same in which the loss  was suffered.  The  High  Court referred  to  certain  decisions including the one of this Court in 26 ITR 765 and ultimately negatived  the  claim  of the assessee by  saying  that  the question  would  not arise because the letting  out  of  the sugar mill was not the business of the assessee. In fact the receiver  was appointed for dissolution of the firm and  the main  reason. as found by the High Court. for  allowing  the

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sugar factory to work was to dispose it of as a running mill so that proper price would be fetched. Having heard  learned counsel  for the parties, we are satisfied that there is  no merit  in  the assessee’s stand and the same has got  to  be dismissed. The appeal is accordingly dismissed. Parties  are directed to bear their own costs throughout. C.A. No. 941 of 1975     This  appeal is by certificate from the judgment of  the Allahabad  High Court. The assessee is the sugar mill  which during the relevant assessment year 1960-61 corresponding to the  accounting  period ending 30th June, 1959, was  in  the hands of a Court Receiver. The sugar mill was being assessed as  an Association of Persons. Banarsi Dass. a partner,  had 1/6th  share  therein. He had acquired under a deed  of  ex- change  dated 16th July, 1948 1/6th share of Sheo Prasad  in exchange  of  shares held by Banarsi Dass  in  Lord  Krishna Sugar Mills valued at Rs.4,50.000. In this assessment  year, the receiver claimed that for the purposes of computing  the depreciation allowance, the written down value of the  busi- ness  assets  be  enhanced  so as  to  reflect  the  sum  of Rs.4,50,000 in place of  1/6th share representing the  share of 108 Sheo  Prasad. Similar claim had been raised by Banarsi  Dass in  his own assessment. The Income-tax Officer rejected  the claim and such rejection has been upheld throughout. We have already  turned down the claim of Banarsi Dass.  This  claim has,  therefore, to be rejected. We may  additionally  point out that under the scheme of the Act, it is the assessee who alone is entitled to maintain such claim of depreciation and it  would indeed be difficult, within the framework  of  the scheme  contained  in the statute, to  maintain  a  separate value of the part of the asset to work out depreciation. The book-value as shown must be applicable to the entire  assets of the firm including the 1/6th share which Sheo Prasad  had given  to Banarsi Dass. The claim has rightly been  rejected in the forums below including the High Court. The appeal has no  merit  and  is dismissed. Parties will  bear  their  own costs. P.S.S.                                        Appeals   dis- missed. 109