Commissioner of Income Tax vs Orkay Knitting Industries

Sugla, J.—In this Departmental reference relating to the assessee''s assessment for year 1970-71, the Income Tax Appellate Tribunal has referred to this Court the following two questions of law for opinion under s. 256(1) of the IT Act.

"Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that even when assets are sold during the year depreciation is to be allowed to the assessee and that the provisions of s. 34(2)(ii) cannot apply ?"

"Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that the goodwill valued at Rs. 1,87,860 should not be assessed as capital gains ?"

As regards the second question of law, the counsel are agreed that in view of the Supreme Court''s decision in the case of Commissioner of Income Tax, Bangalore Vs. B.C. Srinivasa Setty, , the question has to be answered in the affirmative and in favour of the assessee. The question is so answered.

Question No. 1, it appears to us, has not been framed properly, inasmuch as, the real controversy has been, as to whether when the depreciation is allowed under s. 32(1)(iii) and the asset on which depreciation is allowed, is sold during that year, the allowance of depreciation is hit by the provisions of s. 34(2)(ii). However, the question framed does not, as stated earlier, bring out the controversy. Accordingly, we reframe the question of law as under :

"Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that depreciation is to be allowed under s. 32 (1)(iii) even when the particular asset is sold during the year as the provisions of s. 34(2)(ii) cannot apply in such a case ?

It is not seriously disputed by Shri Jetly that Tribunal has given a finding in this case that depreciation is allowed on the particular asset under s. 32(i)(iii) as the assessee''s business as a going concern was taken over by the limited company. That being so, the only question that require consideration is, whether the provisions of s. 34(2)(ii) apply to such a case, Sec. 34(2)(ii) reads as under :

"(ii) nothing in cl. (i) or cl. (iv) or cl. (v) or cl. (vi) of sub-s. (1) of s. 32 shall be deemed to authorise the allowance for any previous year of any sum in respect of any building, machinery, plant or furniture sold, discarded, demolished or destroyed in that year;"

It is evident that s. 34(2)(ii) is though non-obstante, it is so vis-a-vis clauses other than cl. 32(1)(iii). In other words, it does not override depreciation allowable under s. 32(1)(iii). This is the obvious position. Accordingly, we are in agreement with the Tribunal and answer the first reframed question in the affirmative and in favour of the assessee.

There will be no order as to costs.