Case Note & Summary
The case involves a reference under Section 256(1) of the Income Tax Act, 1961 by the Income Tax Appellate Tribunal, Mumbai, for the opinion of the Bombay High Court. The assessment year is 1980-81. The assessee, P.H. Hamid, was a partner of the firm M/s. Publicity Printers along with his wife. The firm was dissolved by a dissolution deed dated 26.12.1978 with effect from 15.12.1978. On dissolution, certain assets of the firm, including three machines, were allotted to the assessee. The firm had claimed depreciation on these machines prior to dissolution. The assessee sold the three machines immediately after dissolution to three different parties for a total consideration. The Income Tax Officer treated the profits on sale as taxable under Section 41(2) of the Act, holding that since the assessee had claimed depreciation (though actually claimed by the firm), he was liable. The Tribunal upheld this. The High Court framed two questions: (1) whether the Tribunal was right in holding that the assessee had claimed depreciation and thus liable under Section 41(2); (2) whether the assessee is liable even though depreciation was claimed by the firm and not by the assessee. The Court analyzed Section 41(2) and noted that it applies only to the person who claimed the depreciation. Since the assessee did not claim depreciation, the profits on sale are not taxable under Section 41(2). The Court answered both questions in the negative, in favor of the assessee.
Headnote
A) Income Tax - Section 41(2) - Depreciation - Succession - The assessee, a partner of a dissolved firm, sold machinery allotted to him on dissolution. The firm had claimed depreciation on the machinery. The Tribunal held the assessee liable under Section 41(2) for profits on sale. The High Court held that Section 41(2) applies only to the person who claimed depreciation, not to a successor who did not claim depreciation. The assessee did not claim depreciation, so the profits are not taxable under Section 41(2). (Paras 1-3)
Issue of Consideration
Whether the assessee is liable to tax on profits under Section 41(2) of the Income Tax Act, 1961 on sale of machinery which was allotted to him on dissolution of a partnership firm, where depreciation was claimed by the firm and not by the assessee
Final Decision
Both questions answered in the negative, in favor of the assessee. The assessee is not liable to tax on profits under Section 41(2) of the Income Tax Act, 1961.
Law Points
- Section 41(2) of Income Tax Act
- 1961 applies only to the person who claimed depreciation
- not to a successor who did not claim depreciation
