Supreme Court Allows Assessee to Claim Depreciation on Auction Price of Sugar Factory Received in Hindu Joint Family Partition. Depreciation Under Section 10(2)(vi) of Indian Income-tax Act, 1922 Computed on Actual Cost to Assessee, Not Original Cost to Larger Joint Family.

Case Note & Summary

This appeal concerned depreciation allowance under the Indian Income-tax Act, 1922 following the partition of a Hindu joint family. The appellant was a Hindu undivided family carrying on business at Jaora, being a branch of a larger joint Hindu family consisting of two branches, Govindram and Bachhulal. The dispute centred on whether the cost base for depreciation on a sugar factory should be the auction price paid at partition or the original cost to the larger joint family. In 1942, a partition suit was filed between the two branches, and each item of the joint family property, including the sugar factory at Jaora, was put up for sale by competitive bidding. The sugar factory was knocked down in favour of the appellant branch for a sum of Rs.34 lakhs. After all items were sold, final adjustments were made by cash payment. The appellant branch continued to run the factory. For the assessment year 1950-51, the Income-tax Officer assessed the appellant in respect of income from the factory, and the appellant claimed depreciation under Section 10(2)(vi) of the Act on the amount of Rs.34 lakhs, being the amount for which the factory was purchased at auction. The Income-tax Officer and the Appellate Assistant Commissioner rejected the claim, holding that depreciation should be computed on the original cost of the factory to the larger joint family. The Income-tax Appellate Tribunal partly allowed the claim, holding that the 6/16th share purchased from the other branch should be valued at auction price, but the 10/16th share belonging to the appellant should be valued at original cost. On reference, the Madhya Pradesh High Court held that depreciation should be computed on the original cost to the larger joint family for both shares. The appellant obtained a certificate and appealed to the Supreme Court. The main legal issue was whether the depreciation allowance should be computed on the original cost to the larger joint family or on the valuation at which the assessee took over the assets after partition. The appellant contended that partition, though not a formal transfer, conferred absolute title to the specific property and that the auction price was the actual cost to the assessee, relying on the principle that cost to an assessee in cases of purchase, gift, succession, or partition is the actual cost to him, not the original cost to a predecessor. The Revenue argued that partition did not involve a transfer and that the appellant already had a pre-existing title to its 10/16th share, so depreciation should be on the original cost to the larger family. The majority judgment of Subba Rao and Sikri JJ. held that a coparcener has only an interest in the entire joint family property until partition, and partition confers absolute title to a specific property. The auction was a real transaction and the price fetched entered into the scheme of partition. The phrase 'original cost thereof to the assessee' in Section 10(2)(vi) and the definition of written down value in Section 10(5)(a) supported actual cost to the assessee. Precedents established that in cases of purchase, gift, bequest, or succession, the cost was the actual cost to the assessee, not the predecessor's original cost. The decision in Commissioner of Income-tax, U.P. & C.P. v. Seth Mathuradas Mohta was disapproved. Shah J., in a dissenting opinion, held that the appellant already owned a 10/16th share and could not purchase its own share; hence depreciation on that share should be computed on the original cost to the larger family, while the purchased 6/16th share should take auction price. The majority allowed the appeal and held that depreciation should be computed on the auction price of Rs.34 lakhs for the entire sugar factory, setting aside the High Court order.

Headnote

Issue of Consideration

Final Decision

The Supreme Court (Subba Rao and Sikri JJ., Shah J. dissenting) allowed the appeal, holding that depreciation under Section 10(2)(vi) of Indian Income-tax Act, 1922 should be computed on the auction price of Rs.34 lakhs for the sugar factory, including the 10/16th share, as the auction was a real transaction and the assessee acquired absolute title. The High Court order was set aside.

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