Case Note & Summary
The dispute arose from the dissolution of a partnership consisting of two individuals, each of whom owned a cinematograph theatre. With effect from March 1, 1947, they formed a partnership to carry on business as exhibitors of cinematograph films, and each partner brought his theatre into the partnership as an asset of the firm. For the assessment years 1950-51 to 1952-53, the Income-tax Officer allowed depreciation aggregating Rs. 44,380 in respect of the two theatres. The partnership was dissolved on September 30, 1951. Upon dissolution, the partners agreed that the theatres should be returned to their original owners. In the partnership books, the assets were shown as taken over on October 1, 1951, at the original price less the depreciation allowed, with the depreciation being equally divided between the two partners. The respondent-firm was treated as a registered firm for the assessment year 1952-53. The Revenue contended that the transfer of the theatres from the partnership to the original owners attracted the second proviso to Section 10(2)(vii) of the Indian Income-tax Act, 1922. That proviso states that where an asset in respect of which depreciation has been allowed is sold, discarded, demolished or destroyed, and the sale, insurance, salvage or compensation moneys exceed the written down value, the excess up to the amount of depreciation allowed shall be deemed to be profits of the previous year. The Appellate Tribunal held that by restoring the two theatres to the original owners there was a transfer by the firm, and the entries adjusting depreciation and writing off the assets at the original value amounted to total recoupment of the entire depreciation by the partnership, thus attracting the second proviso. The High Court, on reference, held in favour of the assessee, taking the view that the transaction did not involve a sale and therefore the proviso was not applicable. The Supreme Court reversed the High Court. It held that the second proviso is not confined to cases of sale; it applies to any transfer of an asset where the consideration received exceeds the written down value. The return of the theatres to the partners on dissolution constituted a transfer, and the adjustment in the books showed that the firm recouped the full depreciation. Therefore, the excess was chargeable to tax. The appeal was allowed, and the decision of the Appellate Tribunal was restored.
Headnote
A) Income Tax - Depreciation Recoupment - Second Proviso to Section 10(2)(vii) - Indian Income-tax Act, 1922, Section 10(2)(vii) second proviso - Two partners each contributed a cinema theatre to the partnership; depreciation was allowed over assessment years 1950-51 to 1952-53. On dissolution on September 30, 1951, the theatres were returned to the original owners at book value after adjusting depreciation. The Appellate Tribunal held that the transfer attracted the second proviso and recouped depreciation; the High Court reversed. The Supreme Court held that the second proviso applies whenever an asset in respect of which depreciation was allowed is transferred for a price exceeding its written down value, regardless of whether the transaction is a sale. The return of theatres to partners on dissolution, with depreciation adjustment, amounted to recoupment of depreciation, making the excess taxable. Revenue's appeal was allowed.
Issue of Consideration
Whether return of cinema theatres by a partnership to the original owners on dissolution amounts to a transfer attracting the second proviso to Section 10(2)(vii) of the Indian Income-tax Act, 1922, so as to tax the excess depreciation recouped.
Final Decision
Appeal allowed; second proviso applied; transfer of theatres to partners on dissolution resulted in recoupment of depreciation, making excess taxable under the proviso; High Court reversed.
Law Points
- partnership dissolution
- second proviso to section 10(2)(vii)
- depreciation recoupment
- transfer of assets
- excess depreciation
- written down value
- not a sale
- total recoupment
- income tax
