HIGH COURT OF MADRAS
Kali Aerated Water Works
Commissioner of Income Tax
R. JAYASIMHA BABU AND N.V BALASUBRAMANIAN JJ.
TAX CASE NOS. 1546 AND 1547 OF 1984
FEBRUARY 11, 1998
R. Jayasimha Babu, J.—Two questions have been referred to us at the instance of the assessee arising out of the assessment for the year 1979-80. At the instance of the Revenue a question which is interconnected with the questions raised by the assessee has also been referred.
The questions referred at the instance of the assessee are:
“(1) Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that in computing the capital gains arising to the assessee by sale of machinery in question the cost of acquisition should be the revalued amount in the hands of the new firm, viz., Rs. 8 lakhs, and not the original cost in the hands of the predecessor-firm, viz., Rs. 10,68,017?
(2) Whether, on the facts and in the circumstances of the case, the Tribunal was right in upholding the dis allowance of advertisement expenditure under section 37(3A) of the Income-tax Act?”
The question referred at the instance of the Revenue is:
“Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in holding that the capital gain on the sale of the asset should be computed with reference to the cost, which is to be determined under section 48 of the Income-tax Act, 1961, as Rs. 8,00,000 and not with reference to the written down value of that asset under section 50(1) of that Act?”
The question as to what was the cost of acquisition of the asset in respect of which the assessee had obtained capital gain, is the real issue in all the questions referred to us at the instance of the Revenue as also in the first question referred at the instance of the assessee.
The undisputed facts relevant for the purposes of this case are that the assessee-firm which consists of two partners was formed on June 16, 1977. It consisted of two partners who had brought in the bottling machinery in respect of which the firm received a capital gain, as their contribution to the partnership firm. In the books of the firm these assets were valued at Rs. 8 lakhs. These two partners had received the bottling machinery in the distribution of the assets of another firm known as P.V.S.K. Palaniappa Nadar and Sons in which they were partners and which firm was dissolved with effect from April 1, 1977. That deed of dissolution had been amended on April 7, 1977, to record that the assets of the Madras branch of that firm then known as Kali Aerated Water Works was taken over by Sakthivel and Singaravel who were partners of that firm, and who subsequently formed a new firm which is the assessee herein. The assessee thus did not receive the asset as a consequence of a dissolution of another firm of which the assessee was a partner. The assets were received by the partners as individuals, who thereafter made that asset the asset of the new partnership firm constituted under the deed dated June 16, 1977. One of the items that was thus brought into the new firm was a bottling machine of German origin, which was shown in the assessee’s books of account at the revalued figure of Rs. 8 lakhs, although that machine had been acquired by the firm in which the partners of the assessee had been partners at a cost of Rs. 10,68,017. The dissolved firm, at the time of dissolution of the firm had been allowed depreciation on the machine, and the written down value of the bottling machine was Rs. 3,16,599 as on the date of dissolution.
The assessee claimed that the original cost of acquisition by the dissolved firm was required to be adopted for the purpose of calculating capital gain while it was the case of the Revenue that the written down value as on the date of dissolution of the firm should be adopted. The Tribunal has negatived the claim so made by the Revenue as also by the assessee, and has held that the capital gains is to be computed in accordance with section 48 of the Act.
Learned counsel for the Revenue submitted that the capital gains has to be calculated in accordance with section 50 of the Act as depreciation had been claimed and allowed after the asset was acquired by the dissolved firm. This argument is clearly untenable, as section 50 of the Act will only apply to cases where the depreciation had been obtained by “the assessee”. Admittedly, the assessee had not obtained any depreciation after the asset became an asset of the partnership firm constituted under the deed dated June 16, 1977. In this context reference may usefully be made to the decision of the Calcutta High Court in the case of CIT v. Bhupender Singh Atwal  140 ITR 928, delivered by Sabyasachi Mukharji J., as he then was, who, speaking for the Bench, held that after an asset has become the property of a new firm the cost of acquisition by the firm is to be taken into account for computing the capital gains, and not the written down value of the asset on the date of dissolution of the old firm. Section 50 would only apply to the cases where the “assessee” had obtained the depreciation.
Having regard to the statutory provision, namely, section 50 of the Act, the answer to the question referred at the instance of the Revenue must be in the affirmative.
As regards the related question raised by the assessee, the answer to that question also has to be in the affirmative. The Tribunal was right in holding that section 48 of the Act is to be applied and in rejecting the assessee’s contention under section 49(1)(iii)(b) of the Act. The facts set out above clearly show that the assessee-firm did not receive the asset at the dissolution of the old firm but it had been received by the erstwhile partners of the old firm, who thereafter revalued the assets of the new firm which they constituted under a deed dated June 16, 1977. Section 49(1)(iii)(b) of the Act would apply only to cases where the capital asset became the property of the assessee on any distribution of assets on the dissolution of a firm,
The Tribunal was right in holding that the mode of computation of the income chargeable under the head “Capital gain” of this asset was required to be calculated in accordance with section 48 of the Act, we do not find any error in the order of the Tribunal. The first question referred to us at the instance of the assessee must be answered in the affirmative.
The question which remains for our consideration is the one relating to the dis allowance of advertisement expenditure under section 37(3A) of the Act. The Tribunal disallowed the expenditure. The Commissioner had disallowed the same on the ground that section 37(3A) of the Act came into force with effect from April 1, 1979, though after the close of the relevant previous year. It is the law applicable on the date of commencement of the assessment year that would govern irrespective of as to when the expenditure had been incurred, is a proposition of law which is too well settled to require any further detailed consideration. Accordingly, we hold that the Tribunal was right in upholding the dis allowance of advertisement expenditure.
All the questions referred for our consideration, are, therefore, answered in the affirmative. Having regard to the circumstances of the case, the parties shall bear their respective costs.
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