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

1. The appellant is a Hindu undivided family carrying on business at Jaora. It was a branch of a larger joint Hindu family composed of two branches - one was Govindram and the members of his family and the other was Bachhulal and the members of his family. In the year 1942 there was a partition suit between the said two branches and under the decree made therein each item of the property was put up for sale by competitive bidding. One of the items of the said property, the sugar factory at Jaora, was knocked down in favour of Govindram for a sum of Rs.34 lakhs. After all the items of the property were sold to one or other of the parties, final adjustments were made by cash payment. After the said partition Govindram and the members of his branch of the family continued to run the factory. For the assessment year 1950-51 the Income-tax Officer, Ratlam, assessed the appellant in respect of the income from the said factory. The appellant contended that it was entitled to depreciation as provided under S. 10(2)(vi) of the Income-tax Act, 1922, hereinafter called the Act, on the said amount of Rs. 34 lakhs, being the amount for which it purchased the factory in the auction that was held pursuant to the partition decree. The Income-tax Officer and, on appeal the Appellant Assistant Commissioner rejected that contention and held that the value to be adopted for the purpose of depreciation would be the original cost of the said factory to the larger joint family. On a further appeal, the Income-tax Appellate Tribunal held that so far as the 10/16th share in the factory which belonged to the appellant was concerned the cost to the appellant was the original cost to the larger branch; and so far as the 6/16th share of Bachhulals branch in the said factory was concerned the original cost was the amount for which the appellants branch purchased the 6/16th share of the other branch, i.e., Rs.12,75,000. The following question was referred by the Tribunal to the High Court of Madhya Pradesh"Whether on the facts and in the circumstances of this case, the assessee Hindu Undivided Family is entitled to claim depreciation in respect of the assets of the old Hindu Undivided Family on the basis of the original cost to the family or on the basis of the valuation at which the assessee took over the assets."The High Court held that the depreciation allowance should be computed on the basis of the original cost to the larger joint family and not on the basis of the valuation at which the assessee took over the assets. The assessee, by certificate granted by the High Court, has preferred the present appeal to this Court against that order.

Reasoning: 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.