Find a Lawyer

Civil Reference No. 6 of 1961, decided on 8th December 1965.

Ss.6(iv), 10(1), (2)(vi) & 23 (5)-"Business"-Partnership-Share income of individual partner-Assessment to tax-Firm using machinery and plant belonging to one partner-Partner-assessee, held, entitled to deduct depreciation on his machinery and plant in computing his total income.

Commissioner of Income-tax, Central Provinces and Berar v. Sir S. M. Chitnavis (1932) 59 1 A 290 and P. M. Muthuraman Chettiar v. Commissioner of Income-tax, Madras (1957) 31 I T R 61 ref.

Sh. Abdul Haque for Applicant.

Mian H. A. Taib for Respondents.

Date of hearing: 8th December 1965.

-The assessee, an individual partner in two firms, Muzaffar Din & Co., Lodhran and Muzaffar Din Oil Mills, Multan, purchased the machinery and plant of the first Mill in November 1949, for Rs. 3,40,000 from Pakistan Industries Limited, Karachi, and in lieu of it he held 40 per cent. share in the firm while the remaining 60 per cent. was allotted. to two other persons Muhammad Farooq and Ghulam Subhani in equal shares. The second mill of Multan was constructed in 1952-53 cotton season at a cost of Rs. 64,000 and in this firm he held 60 per cent. share and one Mian Hassan Din became a partner in the remaining 40 per cent. For the assess ment years 1950-51 to 1953-54, the respondent, as an indi vidual, was allowed depreciation for his assets used by the Lodhran firm but the assessment was reopened subsequently under section 34 of the Income-tax Act and in the supple mentary assessment his claim to depreciation was refused. On appeal, the Appellate Assistant Commissioner set aside the order of the Income-tax Officer and allowed depreciation to the assessee by holding that the share income was assessable under section 10(1) of Income-tax Act and the assessee was entitled to be allowed depreciation under section 10(2) of Income-tax Act of 1922. For the second mill at Multan which was con structed in cotton season of 1953-54, the assessee claimed depreciation for the assessment year 1954-55 on the similar grounds but his request was refused. Once again the Appellate Assistant Commissioner came to his rescue and the claim of depreciation was allowed in appeal. The relevant years for the purposes of this reference are 1955-56, 1956-57 and it is pertinent to mention here that for the next following year 1957-58 the Appellate Assistant Commissioner allowed depreciation to the assessee and the Department felt satisfied with the decision and did not take the matter any further. For the assessment years 1955-56 and 1956-57, an appeal was preferred by the Commissioner of Income-tax before the Tribunal, which was rejected on the ground that it is imperative for the Income-tax Officer to concede the allowance enumerated in subsection (2) of section 10, when ever found to be admissible in order to compute the profits or gains under subsection (1) of section 10 of the Income-tax Act. On the application of the Commissioner of Income-tax, Lahore, the Tribunal has referred the following question of law for opinion to this Court:-

"Whether in the circumstances of the case the Appellate Tribunal was justified in holding that depreciation on plant and machinery belonging to the assessee but used in the two firms in which he was a partner should be set off against his share of profits in the two firms "

2. Some material facts which appear from the statement of the case are; that the machinery and plant used by these firms are the exclusive property of the assessee and the firm are not the owners of the machinery and plant, therefore, no depreciation was claimed or allowed in determining the total income of the two firms. The firms were registered under section 26A of the Income-tax Act and no tax was levied on both of them, but the shares of the profits of the partner on the basis of the assessment made against the firm was included in the total income of the respondent assessee. Besides having his share income from the two firms, the assessee was also carrying on commission agent business in hides and skins and in his personal assessment for the relevant two years he included the share income in his return but claimed depreciation on the machinery and plant which were owned by him but were used by the above mentioned two firms. The depreciation was disallowed by the Income-tax Officer on the ground that the share income in the hands of the assessee was not assess able under section 10 but under section 12 of the Income-tax Act.

3. According to section 23 (5) of the Income-tax Act, 1922, when the profits of a registered firm are ascertained, the assessee for the purposes of paying the tax is not the registered firm but each one of its partners. The share of the profits coming to a partner on the basis of assessment made against the firm is to be included by the partner in total income and then the assessment of the partners proceeds because he is the assessee and is liable to tax. The total income of a partner thus assessed may consist of various sources of income also. Besides being a partner in the above named two firms the assessee had his individual commission agency business in hides and skins and both types of income were included by him in his personal assessment for the two years under review.

4. In this context it will be necessary to reproduce certain provisions of the Income-tax Act of 1922.

"Section 6-Save as otherwise provided by this Act, the following heads of income, profits and gains, shall be chargeable to income-tax in the manner hereinafter appearing namely:

(iv) Profits and gains of business, profession or vocation.

Then we find section 10 (1) in the following words:-

"The tax shall be payable by an assessee under the head profits and gains of business, profession or vocation in respect of the profits or gains of any business, profession or vocation carried on by him."

The assessee claims allowance under clause (vi) of sub section (2) of section 10 of the Income-tax Act which is as follows:-

"(2) Such profits or gains shall be computed after making the following allowance, namely,

(vi) in respect of depreciation of such buildings, machinery, plant, or furniture being the property of the assessee a sum equivalent (where the assets are ships other than the ships ordinarily playing on inland waters,) to such percentage on the original cost thereof to the assessee as may in any case or class of cases be prescribed

"

5. Under section 10 profits and gains are to be ascertained after giving due -allowance to the assessee under subsection (2) where admissible. The word "business" in section 6 and section 10 clearly denotes the business whose profits are being assessed in the year under consideration. In this case the assessee claimed the depreciation of his machinery and plant for which he had charged no rent from the two firms but the Income-tax Officer considered his income from the partnership as an income from other source under section 12 of the Act, although, the assessee claimed no other allowance on the basis of this machinery and plant from the firm nor he claimed to have invested anything else in the business of the firm except this machinery and plant. The Privy Council, in Commissioner of Income-tax, Central Provinces and Berar v. Sir S. M. Chitnavis ((1932) 59 1 A 290(1932) 59 1 A 290) considered whether bad debt was an admissible deduction at a time when there was no provision in section 10 (2) with regard to the bad debt, and it was held that "although the Act no where in terms authorises the deduction of bad debts of a business, such a deduction is necessarily allowable. What are chargeable to income-tax in respect of a business are the profits and gains of a year; and in assessing the amount of the profits and gains of a year account must necessarily be taken of all losses incurred, otherwise you would not arrive at the true profits and gains". These observations apply with equal force to the facts of the present case. In P. M. Muthuraman Chettiar v. Commissioner of Income-tax, Madras ((1957) 31 1 T R 61(1957) 31 1 T R 61) the assessee who was carrying business in the taxable territories and also was a partner in the firm outside the taxable terri tories was considered to be entitled to the loss incurred by him as a partner of the firm deducted from his income under the head "business" in taxable territories in computing his total income under the head "business" even though the firm was a non-resident and the income of the firm was not considered liable to tax under the Indian Income-tax Act. It was held that the share income of a partner falls under the head "profits and gains of business" as referred to under subsection (2) of section 10 of the Act and is not an income from other sources, falling under section 12 and a loss incurred by the assessee as partner of the firm was deducted under the head "business" under section 10 (2) of the Income-tax Act. In the presen case also it is quite clear that the share income of the individual assessee as a partner of Muzaffar Din & Co., Lodhran and Muzaffar Din Oil Mills, Multan, falls under the head profits and gains of "business" within the meaning of section 6(iv) and section 10(1) of the Income-tax Act and the assessee is h entitled to deduct the depreciation permissible to him upon his machinery and plant under clause (vi) of section 10(2) in computing his total income under the head "business". Our answer to the question is, therefore, in the affirmative and as the view point of the assessing authority was quite unreason able in this case, we order the Commissioner to bear the cost of these proceedings also.

S. Q.

Find a Lawyer Near You

Dealing with a matter like this? Connect with a verified advocate in your city — free on SJP Lawyers Directory.