Sundaram Spinning Mills (P) Ltd. Vs CIT (Madras High Court)
Conclusion: Depreciation claim under Section 32 was allowable on actual cost of assets which the assessee paid to the erstwhile partners for taking over from a dissolved firm. It did not matter if the partners were from the same family, as the Act did not make any such distinction.
Held: Assessee, was incorporated and became a partner in a firm, holding a 25% share. The other two partners held 37.5% each. On 31.03.1984, the firm was dissolved, and assessee took over all assets and liabilities as per the balance sheet. The deed also required assessee to pay compensation to the retiring partners within a year. From 01.04.1984, assessee continued the firm’s business. For the assessment year 1985-86, assessee filed its return and claimed depreciation on the asset value taken over from the firm, based on a valuation done in April 1982 when the firm was reconstituted. AO denied the depreciation claim by applying Explanation 1 to Section 43(6). The appeal was dismissed, and the Income Tax Appellate Tribunal (ITAT) upheld the order. On appeal. It was held that since the firm had dissolved on 31.03.1984, only the assessee had claimed depreciation for the assessment year 1985-86. It ruled that under Section 32 read with Rule 5, assessee was entitled to claim depreciation based on the actual cost paid to the retiring partners, as per the April 1982 valuation. The bench clarified that it did not matter if the partners were from the same family, as the Act did not make any such distinction. It relied on the Bombay High Court’s ruling in PCIT-5 v. Dharmanandan Diamonds Pvt. Ltd. to support its view.
