Case: Kalooram Govindram Vs. Commissioner Of Incometax, Madhya Pradesh

ignore the valuation placed by the parties in the deed of partition in ascertaining the true value for the purpose of such computation. 18. Death or birth of coparceners does not alter the identity of the Hindu undivided family which utilizes as asset for earning income or profit. Death of a coparcener merely extinguishes an existing interest, but there is no devolution of that interest. But where the joint family status is severed and the rights of the parties are crystallised and a member acquires the interest of the other in any item of property through arbitration agreement, decree of the Court or a private auction, there is a transfer of interest from one to the other in that property and the value paid or taken into account for acquisition of that interest would normally be regarded qua that share as the actual cost to the acquirer for the purpose of S. 10(2)(vi), but the value of his own share is determined by the actual cost to the family. 19. Counsel for the appellant placed strong reliance upon Commr. of Income-tax v. Bai Shirinbai K. Kooka, (1962) 46 ITR 86 : (AIR 1963 SC 477 ) which belongs to a different branch of the law of Income-tax. Where an assessee brings his investments into his business, the question arises whether in assessing income-tax payable on income earned by sale or disposition of such investment the original value at which they were acquired or the market value as at the date on which they were brought into the business has to be taken into account. In Shirinbais case, (1962) 46 ITR 86 : (AIR 1963 SC 477 ) the assessee who held by way of investment several shares in different companies commenced a business in shares by converting the shares into stock-in-trade of the business. The assessee subsequently sold those shares in the course of the business at a profit. A majority of this Court held that the assessees assessable profits on the sale of the shares was the difference between the sale price of the shares and the market price of the shares prevailing on the date when the shares were converted into stock-in-trade of the business, and not the difference between the sale price and the price at which the shares were originally purchased by the assessee. The Court in that case distinguished in earlier case decided by this Court Kikabhai Premchand v. Commr. of Income-tax, (1953) 24 ITR 506 : (AIR 1953 SC 509 ) in which it was held that the assessee was entitled to value at cost price, certain business assets which were after withdrawal from the business settled upon trust. But neither of these cases has bearing on the computation of depreciation allowance which is qua building, machinery, plant (not being ships) or furniture to be a percentage of the written down value. A person who transfers his investments which are not part of his business into the stream of his business may value the investments at the prevailing market rate on the date on which they are brought into the business. In Shirinbais case, (1962) 46 ITR 86 : (AIR 1963 SC 477 ) the Court was called upon to ascertain commercial profits earned by sale of stock-in-trade and in so doing regarded the owner as investor and as businessman as two different entities. S. K. Das, J., speaking for the majority observed that normally the commercial profits out of a transaction of sale of an article must be the difference between what the article cost the business and what it fetched on sale. But it is difficult to appreciate how that principle would apply in the computation of depreciation allowance. The asset viz. the sugar factory at all material times remained a business asset. It was at one time owned by Govindram and Bachhulal, and if the Income-tax Act, 1922 had then applied, depreciation allowance would have been computed on the basis of the value to the family. Acquisition of the interest of Bachhulal by Govindram did not alter the character or use of the assets nor did it make any fundamental alteration in its value to the appellant so as wholly to displace its original value even in respect of the share which Govindram continued to own. Superficial analogies are often misleading and more so in taxation laws. In computing profits assets brought into the business and subsequently sold be regarded as inducted at the prevailing market rates, for the taxing authority is concerned to deal with the business profits arising out of a transaction of sale to the business.When depreciation allowance is to be computed, the taxing authorities have to consider what the original cost to the assessee was and valuation of a business asset adopted for the purpose of valuing the share of one of the owners from whom his share was purchased cannot be regarded by any principle of commercial accounting as notionally altering the original cost of his own share in the asset to the acquirer. The assessee does not purchase his own share at the valuation put by him at the private auction; he merely purchases the share of the other sharer at a valuation made on the bid offered by him. I am unable therefore to agree with counsel for the appellant that for the purpose of valuing 10/16th share of Govindram the basis should be the valuation of Rs. 34 lakhs which was adopted for valuing Bachhulals share. 20. I therefore answer the question as follows: That depreciation allowance should be computed on the basis of 10/16th share of the original cost to the joint family of the assets which are admissible to depreciation allowance plus an appropriate amount attributable to the assets admissible to depreciation allowance on the footing that the value of 6/16th share of Bachhulal in the factory was Rs. 12,75,000. 21. The order passed by the High Court will accordingly be modified. There will be no order as to costs. ORDER

Decision (1 = appeal accepted, 0 = rejected): 1

Explanation:
1[ds]6. Analogy drawn from comparable cases may also throw some light on the question. In the case of an assessee acquiring a property by purchase, gift, bequest or succession, courts have held that the cost of the property to the assessee was not the original cost of it to his predecessor but its actual cost to him at the time of the purchase, gift, bequest or succession, as the case may be: see Commr. of, Madras v. Buckingham and Carnatic Co. Ltd., Madras, (1935) 3 ITR 384 (AIR 1936 PC 5)  , and Jogta Coal Co. Ltd. v. Commr. of, West Bengal, (1959) 36 ITR 521  : (AIR 1959 SC 1232  )purchase; Indian Iron and Steel Co. Ltd. v. Commr. of, Bengal, (1943) 11 ITR 328: (AIR 1943 PC 124  ) and Francis Vallaberayar v. Commr. ofx Madras, (1960) 40 ITR 426 (Mad)succession; and Commr. of, Burma v. Solomon and Sons, (1933) 1 ITR 324: (AIR 1933 Rang 348)bequest. A Division Bench of the Nagpur High Court in Commr. of, U. P. and C. P. v. Mathuradas Mohta, (1939) 7 ITR 160 (Nag) dealt with a case of partition. Therein, it held that the cost to the property was the cost of it to the original joint Hindu family at the time it was acquired. The learned Judges gave various illustrations in support of their conclusion. It is true that, if the valuation of the properties was given notionally as a mode of choosing property, there will be some plausibility in the contention that there is no change in the valuation between the date the property was purchased and the date when it was allotted to one of the members of the family. But, if the valuation of a property was not notional but was real and that was the basis for allocating properties to different shares, we do not see how the cost of a property allocated to a member would be that at which it purchased in the remote past. We cannot agree with the view expressed by the Nagpur High Court7. In substance we do not see any difference in the matter of ascertaining the cost of an asset to an assessee whether he is a donee, purchaser legatee successor or a divided member of a joint Hindu family. It may be that in strick legal theory partition may not involve transfer, but the substance of the transaction is that an erstwhile member of a joint Hindu family, who has only an interest in the entire joint family property acquires an absolute title to a specific property. The cost of the property to the member at the date of partition would be the value given to it for the purpose of allotment, provided it was real, or the price at which he purchased it in auction or the value of it ascertained otherwise8. It is nobodys case in the present appeal that the valuation given to the property was notional and not a real one; indeed, the property was sold in open auction between the members of the larger joint family and the value fetched thereunder entered into the scheme of the partitionWe, therefore, answer the question as follows:That depreciation allowance should be computed on the basis of the valuation at which the assessee took over the assets.