# KALOORAM GOVINDRAM v. COMMISSIONER OF INCOMETAX, MADHYA PRADESH, NAGPUR Ap;il 5, 1965

- **Citation:** [1965] 3 S.C.R. 641
- **Court:** Supreme Court of India
- **Decided:** 1965
- **Case number:** Civil Appeal No. 41 of 1964
- **Bench:** K. SUBBA RAo, J. c. SHAH, s·. M. SIKRI
- **Source:** https://unisonlegal.in/judgment/supreme-court-of-india/kalooram-govindram-v-commissioner-of-incometax-madhya-pradesh-nagpur-ap-il-5-3444
- **Pages:** 14

## Headnote

Indian Income-tax Act, 1922 (11 of 1922), s. 10(2! '.'i-P""1titioo,
of Hindu joint fami!y-Asset auctioned between dividing branc~es
-Value on which depre(!iation to be allowed-Whether on auction
price or on original cost to the erstwroile larger family.
On partition being effected through a suit, a Hindu joint family who has only an interest in the entire joint family property_ ae>-
family. The preliminary decree passed by the Court determmed
10/16 as the share of the appellant family and 6/16 as that of the
other branch. Those assets of the erstwhile larger joint family which
could not be physka!ly divided were auctioned between the two
branches and in this manner a sugar mill was purchased for 34 lacs
by the appellant family. In Income-tax proceedings depreciation
under s. 10(2) (vi) of the Indian Income-tax Act, 1922 was claimed
on the above valuation Qf 34 lacs. The claim was rejected by the Income-tax Officer as well as the Appellate Assistant Commissioner.
on the ground that the value for th,e purpose of depreciation was
not the price determined at the family auction, but the original cost
to erstwhile larger joint family. The Tribunal held that the 6/16
share of the other branch was purchased at the auction and its value
had to be taken as the basis of the price determined at the auction,
but the appellant family's own share of 10/16 was not purchased at
the auction and therefore had to be valued at the original cost to the
larger joint family. In reference, the High Court held that the distinction made by the Tribunal was wrong and that the shares cxf both
branches had to be valued on the basis of the original cost to the
l<trger family. Appeal was filed before this Court with certificate.
HELD: Per Subba Rao and Sikri, JJ. It may be that in strict legal
theory partition may not involve a 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 otherwise. [64'7A-C]
In the case of assessees 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 bu1
its actual cost to him at the time of the purchase, gift, bequest or
succession. In substance there is no difference in the matter of ascertaining the cost of an asset to an asses.see whether he is a donee, pur ...
chaser, legatee, successor, or a divided member of" a joint Hindu
family. [646D; 647A]
Gil
6-12
SUPH.F.ME COUR'r
REPORTS
[1965] 3 s.c.n.
Commissioner of Income-tax, Madras v. The Buckingham & Carnatic Company, Ltd., Madras (1935) 3 I.T.R. 384(P.C.), Jagata Coal
Co. Ltd. v. Commissioner of Income-tax, West Bengal (1959) 36 I.T.R.
A
521 (S.C.), Indian fron & Steel Co. Ltd. v. Commissioner of Incometa.~. Bengal, (1943) 11 I.T.R. 328 (P.C.), Francis Vallabaravar v. Commissioner of Income-tax, Madras (1960) 40 I.T.R. 426 and Commissioner of Income-tax, Bombay v. Solomon & Sons (1933) 1.I.T.R.
B
324, referred to.
Commissioner of Income-tax, U.P. & C.P. v.
Seth Mathuradas
Mohta, (1939)7 I.T.R. 160, disapproved.
In the present case the valuation given to the property was not
notional but a real one; indeed the property was sold in the open
auction between the members of the larger joint family and the
value fetched thereunder entered into the scheme of partition.
[647 C-DJ
Therefore, even in respect of the appellant's own share of 10/16,
the valuation for the purposes of s. 10(2) (vi) had to be on the basis
of the price which the appellant bid at the auction.
Per Shah, J. (dissenting). By the preliminary decree the appellant
family became entitled to a 10/16th share in every i

## Text

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KALOORAM GOVINDRAM
v
COMMISSIONER OF INCOMETAX, MADHYA PRADESH,
NAGPUR
Ap;il 5, 1965
[K. SUBBA RAo, J. c. SHAH AND s·. M. SIKRI, JJ.]
Indian Income-tax Act, 1922 (11 of 1922), s. 10(2! '.'i-P""1titioo,
of Hindu joint fami!y-Asset auctioned between dividing branc~es
-Value on which depre(!iation to be allowed-Whether on auction
price or on original cost to the erstwroile larger family.
On partition being effected through a suit, a Hindu joint family who has only an interest in the entire joint family property_ ae>-
family. The preliminary decree passed by the Court determmed
10/16 as the share of the appellant family and 6/16 as that of the
other branch. Those assets of the erstwhile larger joint family which
could not be physka!ly divided were auctioned between the two
branches and in this manner a sugar mill was purchased for 34 lacs
by the appellant family. In Income-tax proceedings depreciation
under s. 10(2) (vi) of the Indian Income-tax Act, 1922 was claimed
on the above valuation Qf 34 lacs. The claim was rejected by the Income-tax Officer as well as the Appellate Assistant Commissioner.
on the ground that the value for th,e purpose of depreciation was
not the price determined at the family auction, but the original cost
to erstwhile larger joint family. The Tribunal held that the 6/16
share of the other branch was purchased at the auction and its value
had to be taken as the basis of the price determined at the auction,
but the appellant family's own share of 10/16 was not purchased at
the auction and therefore had to be valued at the original cost to the
larger joint family. In reference, the High Court held that the distinction made by the Tribunal was wrong and that the shares cxf both
branches had to be valued on the basis of the original cost to the
l<trger family. Appeal was filed before this Court with certificate.
HELD: Per Subba Rao and Sikri, JJ. It may be that in strict legal
theory partition may not involve a 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 otherwise. [64'7A-C]
In the case of assessees 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 bu1
its actual cost to him at the time of the purchase, gift, bequest or
succession. In substance there is no difference in the matter of ascertaining the cost of an asset to an asses.see whether he is a donee, pur ...
chaser, legatee, successor, or a divided member of" a joint Hindu
family. [646D; 647A]
Gil
6-12
SUPH.F.ME COUR'r
REPORTS
[1965] 3 s.c.n.
Commissioner of Income-tax, Madras v. The Buckingham & Carnatic Company, Ltd., Madras (1935) 3 I.T.R. 384(P.C.), Jagata Coal
Co. Ltd. v. Commissioner of Income-tax, West Bengal (1959) 36 I.T.R.
A
521 (S.C.), Indian fron & Steel Co. Ltd. v. Commissioner of Incometa.~. Bengal, (1943) 11 I.T.R. 328 (P.C.), Francis Vallabaravar v. Commissioner of Income-tax, Madras (1960) 40 I.T.R. 426 and Commissioner of Income-tax, Bombay v. Solomon & Sons (1933) 1.I.T.R.
B
324, referred to.
Commissioner of Income-tax, U.P. & C.P. v.
Seth Mathuradas
Mohta, (1939)7 I.T.R. 160, disapproved.
In the present case the valuation given to the property was not
notional but a real one; indeed the property was sold in the open
auction between the members of the larger joint family and the
value fetched thereunder entered into the scheme of partition.
[647 C-DJ
Therefore, even in respect of the appellant's own share of 10/16,
the valuation for the purposes of s. 10(2) (vi) had to be on the basis
of the price which the appellant bid at the auction.
Per Shah, J. (dissenting). By the preliminary decree the appellant
family became entitled to a 10/16th share in every item of the property of the larger joint family; the other branch tecame entitle to
the remaining i.e. 6/16th share in each item. The appellant being already owner of 10/16th share could not purchase the same at the
auction. In substance the appellant purchased, by beinii
declared
the highest bidder, the remaining 6/16th share belonging to
the
other branch. [650 C-E]
The asset in question, viz, the sugar factory,
at
all material
times remained a business asset. Acquisition of 'the interest of the
other branch by the appellant did not alter the character or use of
the as.set; nor did it make any fundamental alteration in its value
to the appellant so as wholly to displace its original value even in
respect of its share which it continued to own. [654 B-D]
The '.l'ribunal therefore, had rightly held that in respect of the
6/16th share of the other branch, depreciation had to be allowed to
the appellant on the basis Qf the auction price. The High Court
wrongly interfered with this finding the Revenue not having appealed against it.
On the appellant's 10/16th share, which the appellant could not
be said to have purchased, depreciation had to be calculated on the
basis of original cost to the larger family. (654 E-G]
Case law discussed.
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CIVIL APPELLATE JURISDICTION: Civil Appeal No. 41
of 1964.
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Appeal from the judgment and order dated April 10, 1961 of
the Madhya Pradesh High Court in Misc. Civil Case No. 154 of
1959.
N. D. Karkhanis, Rameshwar Nath, S. N. Andley and P. L.
Vohra, for the appellant.
C. K. Daphtary, Attorney-General, R. Ganapathy Iyer and
R. N. Sachthey, for the respondent.
A
Mjs. KALOORAM v. C.I.T. (Subba .Rao, J.)
6~3
The Judgment of Subba Rao and Sikri, JJ. was delivered by
Subba Rao, J. Shah, J. delivered a dissenting Opinion.
Subba Rao, J. The appellant is a Hindu undivided family
carrying on business at Jaora. It was a branch· of a larger joint
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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
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bidding. One of the items of the said property, the sugar factory
at Jaora, was knocked down
ii:! 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, asD
sessed the appellant in respect of the income from the said factory. The appellant contended that it was entitled to depreciation
as provided under s. I 0(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
E and, on appeal, the Appellate 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 Incometax Appellate Tribunal held that so far as the 10 /16th share in
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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 / l 6th share of Bachhulal's branch in the said
factory was concerned the original cost was the amount for which
the appellant's 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 ~omputed on the basis of the original cost to the larger joint
family and not on the basis of the valuation at which the assessee
to?k over the assets. The assessee, by certificate granted by the
High Court, has preferred the present appear to this Court against
that order.
T~e .only question that arises in this appeal is whether the
deprectal!on
allowance should be computed in respect of the
644
SUPREME COUB'l' BEPOR1'S
[1965] 3 s.c.R.
10 / 16th share in the factory on the basis of the original cost to
the larger joint family or on the basis of the valuatio~ at wh_ich
the assessee took over the factory. The answer to this question
turns upon the relevant provisions of the Act and they read:
Section 10(2): Such profits or gains shall be computed after
making the following allowances, 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 ships ordinarily plying 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 and in any other case, to such percentage on
the written down value thereof as may in any case
or class of cases be prescribed :
Section 10(5) of the Act defines "written down value" thus:
"written down value" means-
(a) in the case of assets acquired in the previous year, the
actual co;t to the assessee :
(b) in the case of assets acquired before the previous year
the actual cost to the assessee less all • depreciation
actually allowed to him under this Act or any Act repealed thereby, or unde~ executive orders issued when
the Indian Income-tax Act, 1886 (II of 1886) was in
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force".
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It is not disputed that no previous depreciation was allowed
under any Act repealed by the Indian Income-tax Act, 1922, or
under any executive order issued under the Indian
Income-tax
Act, 1886. Therefore, the appellant would be entitled to depreciation allowance on the original cost to it of the factory. What is the
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original cost of the 10/ 16th share in the factory to ilie appellant?
Two expressions in cl. (vi) of sub-s. (2) of s. 10 give the clue to the
answer, and they are, (i) "being the property of the assessee", and
(ii) "the original cost thereof". Therefore, depreciation is given in
respect of property of an assessee on the original cost of the said
property to him. The factory is the property of the assessee. What H
was the original cost of the property to the assessee? Admittedly
Govindram purchased it in the auction for Rs. 34 lakhs. Ordinarily that would be the cost of the factory to the assessee. It was conceded. that it would be so if a third party had purchased it. But
as the auction was only a step in the partitioning of the property
of the .larger family among the branches composing it, Govindram did not purchase it but only got it in the partition. lt was then
M,:s. KALOORAM v. c.1:r. (Subba Rao, J.)
641>
A contended that partition did not involve a1.'y c?nveya~ce or transfer. but it was only a procesdn and by which iomt enioyment was
transformed into an enjoyment in severality and that, therefore, the
appellant did not get any new title to the factory or at any rate to
the 10/ 16th share therein, but its title was traceable to the ownership of the larger joint family. On the said reasoni1.'g. it was .argued
JI
that the original cost of the factory to t~e larger 1011.'t famil.Y. was
the cost to the assessee within the meaning of the said prov1s10ns.
The entire argument is based on a misapprehension of the
scope of partition under Hindu Law. Coparcenery is a creature of
Hindu law. The concept involves "community of interest, unity of
C possession and common enjoyment". Each coparcener's right ex-·
tends to the whole joint family property; though each one of them
has interest in the whole family property, he has no definite share
therein. Partitioning is the ascertainment of individual shares and
it can be brought about by an unambiguous declaration of their
intention to divide, ie., by a conscious alteration of their status.
D Such a declaration brings about a division in status. At that stage
the members of aii. erstwhile joint family become tenants-in-common. The next step is the division by metes and bounds whereunder separate properties are allotted towards the said definite·
shares of the individuals. Whether the said process involves
transfer or not within the meaning of the Tramfer of Property
E Act, it certainly confers on a divided member an absolute title to
a specified property, whereas before the partition he had only
some interest in the entire joint family property. Though in one
sense his interest in the property of the larger joint family has become crystallized into a specific property, in substance he acquires a title to a specific property. Even from a practical standpoint
F the legal fiction of "pre-existing title" cannot be stretched too far.
Take the following illustration: A and B were members of a joint ·
Hindu family in 1930 and continued to be so till 1960 when a
partition was effected between them. They had 4 houses in 4 villages; and the original cost of each of the houses was Rs. 100/-.
If a partition had taken place in 1930 or thereabout, each one of
G the two brothers would have got 2 houses each, and the partition
would have been equitable and fair. But during these 3'0 years one
village developed into a town and the value of the house therein
had increased to Rs. 500 /-. There was no appreciable rise in price
in regard to the other 3 houses and they together would fetch only
Rs. 500/- in the market. In the result at the partition that was effecR ted in 1960 the house in the town was given lo one of the brothers
and the other three houses together were given to the other brother.
What would be the cost of the house in the town to the brother to·
w~o!fi it was allotted? Clearly it would be Rs. 500 /-, though the
ongmal cost of the house at the time it was built or purchased was
only Rs. !00 /-. Because of 'the uneven rise in prices of the different
~ouses, instead of t~o houses he got only one house at the partition. The cost to him, therefore, would be the cost at which the
SlJPREJ4E COURT REPORTS
(1965] 3 S.C.I\.
property was valued at the partition or at which it was auctioned
for the purpose of partition. Take another illustration: Instead of
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partitioning the properties by evaluation thereof, the houses were
sold to a third party. So far as the third party was concerned the
.cost price would be the price at which he purchased them. If instead, the properties were sold by auction between the brothers and
.the difference in prices was adjusted by cash payment, it would be
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incongruous to say that in the former the cost of the houses would
be the cost actually paid by the third party purchaser and in the
latter the cost of the houses would not be the price for which they
were auctioned but the nominal price they bore in a remote past.
Other illustrations may be visualized. Barring the cases of fraud,
collusion and inflation and deflation of values for ulterior purposes, cost of an asset to a divided member must necessarily be its
cost to him at the time of partition, wl)ether mentioned in the partition deed or ascertained aliunde.
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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
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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
Commissioner of lncome-ta.t, Madras v. The Buckingham &
Carnatic Company, Ltd .. Madrav ('), and Jagla Coal Co. Ltd. v
Commissioner of Income-tax, West Benga/0-purchase; Indian
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Iron & Steel Co. Ltd. v. Commissioner of Income-tax, Bengal('),
and Francis Va/labarayar v. Commissioner of Income-tax, Madras(')-succession; and Commissioner of Income-tax, Burma v.
Solomon & Sons(')-bequest. A Division Bench of the Nagpur High
Court in Commissioner of Income-tax,
U. P. & C. P. v. Seth
Mathuradas Mohta(') dealt with a. case of partition. Therein, it
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held that the cost to the assessee, who was a divided member, of
a 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 chposing
properties, 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
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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 proB
perty allocated to a member would be that at which it was purchased in the remote past. We cannot agree with the· view expressed by the Nagpur High Court.
(') (1935) 3 I.T.R. 384 (P.C.)
(') (1959) 36 J.T.R. 521 (S.C.).
'.') 11943) 11 J.T.R. 328 (P.C.).
(') (1960) 4-0 J.T.R. '26.
(') (1933) 1 !.T.R. 324.
(') (1939) 7 I.T.R. 160.
'
MjS. KALOORAM V. C.I.T. (Shah, J.)
641
A
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 strict legal theory partwn
may not involve transfer, but the substance of the transact10n 1s
B 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 otherwise.
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It is nobody's 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 partition.
We, 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.
E
In the result. the appeal is allowed with costs here and in the High
Court.
Shah, J. A sugar factory in the forrncr lnd1:_u1 State of Jaora
belonged to a Hindu undivided family of Govi,,dram and his
nephew Bachhulal. In a suit filed by Bachhuial in 1942 in the Civil
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Court at Jaora against Govindram for partition of the properties
of the undivided family, Govindram was declared entitled to a
10 ! I 6th share in the property of the family and Bach hula! to the
remaining 6/ 16th share. A Commissioner was appointed for dividing the properties. Certain properties of the family were incapable
of division by metes and bounds. and by order of the Court in
G which the suit was instituted those properties were put up for sale
by "competitive bidding between the parties". A sugar factory at
Jaora-cailed 'the Govindram Sugar Factory'-~was put up for competitive bidding. and the bid of Govindram for Rs. 34 lakhs being
accepted, the sugar factory was allotted to his share. Other assets
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of the family were similarly allotted to Govindram or to Bachhulal
according as he offered the higher bid. Account was then made between Govindram and Bachhulal of properties allotted on the basis
of the bids accepted at the competitive bidding and Govindram
was found liable to pay Rs. I 1,26,200/- after taking into account
a debit item of Rs. 12,75.000/- being the value of the 6/16th
share of Bachhulai in the sugar factory. Govindram died in 1943,
and the appellant is the Hindu undivided family which represents
the branch of Govindram.
SUl'REllE COURT REPORTS
[1965] 3 s.c.11.
The Indian Income-tax Act 9 of 1922 was applied to Part A
'B' States hy the Finance Act 25 of 1950. In the assessment year
1950,51 which was the first year of assessment after the State of
Jaora became part of the Indian Union, the appellant Hindu undivided family claimed depreciation allowance under s. 1-0(2) (vi)
of the Indian Income-tax Act in respect of the sugar factory computed on a valuation of Rs. 34 lakhs. The Income-tax Officer reB
jected the claim of the appellant and allowed depreciation only
on the actual cost to the Hindu family of Govindram and Bachhulal before it was divided. The order of the Income-tax Officer was
<:onjirmed by the Appellate Assistant Commissioner in
appeal.
The Income-tax Appellate Tribunal held that the value for purposes of depreciawon should be I0/16th share of the original cost
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to the larger Hindu undivided family plus Rs. 12,75,000/- (paid
by Govindram on behalf of the assessee to Bachhulal for
the
latter's 6 /16th share in the sugar factory). At the instance of the
appellant, the Tribunal referred the following question to the
High Court of Madhya Pradesh under s. 66(1) of the Income-tax
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Act:
"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 Undivide'd Family on the basis of the original cost to the family or on the basis of the valuation
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at which the assessee took over the assets?"
The High Court of Madhya Pradesh recorded the following
answer:
"that the depreciation allowance should be computed on
the basis of the original cost to the joint family and not F
on the basis of the valuation at which the assessee took
over the assets".
In so answering the question, the High Court committed a
dear error of law. The Commissioner had acquiesced in the order
of the Tribunal and had nnt claimed that the original value to the
larger Hindu Undivided Family was the only amount on which
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depreciation allowance was to be computed. The Income-tax authorities had held that for the purpose of computing the depreciation allowance, the original cost to the joint family had to be the
basis, but the Tribunal did not accept that view and held that the
depreciation allowance in respect of the sugar factory was to be
computed on the basis of I0/16th of the original value plus
H
Rs. 12,75,000/-. The Commissioner having acquiesced
in
the
order of the Tribunal, the only question on which the High Court
was called upon to advise was whether in respect of the I0/16th
share which fell to the share of Govindram, depreciation
al!owance may be computed on the basis of the original cost to the
la~ undivided family or on the basis of Rs. 34 lakhs being the
value of the factory offered at the auction.
·
Mjs. KALOORAM v. C.I.T. (fJ/lali, J.)
649
A
In the computation of profits and gains of any business carried
on by an assessee, under the head "Profits and gains of business"
by s. 10 sub-s. (2) the assessee is entitled to an allowance for depreciation under cl. (vi). The material part of sub-s. (2) cl. \vi) pro,
vides:
B
"(2) Such profits or gains shall be computed after making
the following allowances, n~mely: -
(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
ships ordinarily plying on inland waters, to such perC
centage on the original cost thereof to the assessee as
may in any case or class of cases be prescribed and in
any other case, to such percentage on the written down
value thereof as may in any case or class of cases be
prescribed:
D
The assets in respect of which the depreciation allowance is
claimed being a factory, a percentage on the written down value as
may be prescribed in respect of the buildings, machinery, plant and
furniture therein is admissible as allowance. Sub-section \5) of s.
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10 defines "written down value''. It provided, insofar as it was
material at the relevant time:
" 'written down value' meansfa) in the case of assets acquired in the previous year, the
· actual cost to the assessee:
\
Provided
Provided further
(b) in the case of assets acquired before the previous year
the actual cost to the assessee less all depreciation
G
actually allowed to him under this _Act or any Act repealed thereby, or under executive orders issued when
the Indian Income-tax Act, 1886 (II of 1886), was in
force:"
The depreciation allowance under s. 10(2)(vi) in respect of 11
B factory has to be allowed in the manner prescribed on the actual
value to the assessee limited to the buildings, machinery, plant and
furniture. No previous depreciation has been allowed.under any Act
repealed by the Indian Income-tax Act, 1922 or under any executive order issued under the Indian Income-tax Act, 1886 and therefore the appellant is entitled to depreciation allowance under s. 10
(2) (vi) on the actual cost to the assessee of assets for which depreciation is admissible.
650
SUPREME COURT REPORTS
[1965) 3 S,C.R.
The factory originally belonged to a larger .Hindu undivided
family. In the scheme of partition devised under the preliminary A
decree the factory was allotted to Gbvindram, his bid of Rs. 34
lakhs having been accepted by the Court. The true effect of the
scheme under which the properties were put up for competitive
bidding under the order of the Court was that the interest of the
other member was to be conveyed at a value based on the offer
made by the higher bidder. In other words, each party was given
B
an option to purchase the share of the other, but the option was
exercisable only by the person who offered the higher bid for the
asset. By the preliminary decree, the share of Govindram was
defined at 10/ 16th and he became 'entitled to that share in every
item of property and Bachhulal became entitled tb the remaining 0
6 /16th share iri each such item. But some of the properties were
found incapable of physical division and a scheme was devised
under which one of the sharers was entitled to purchase the share
of the other on a valuation based on the bid offered by him, provided it was the higher ·of the twe> bids. Value of the bid was however taken into account only for making up accqunts. In substance D
the appellant purchased by being declared the higher bidder the
6/16th share belonging to Bachhu1al in the
sugar factory for
Rs. 12, 7 5,000 I-. He was, and remained the owner of the 10 /16th
share, and that share was neither sold nor conveyed to him: he
merely purchased the share of Bachhulal for Rs. 12,75,000/-. The
Tribunal was therefore right in hblding that in respect of the 6 I
E
16th share, Rs. 12,75,000/- paid by Govindram was the actual
cost to him. On this part of the case apparently no dispute was or
could be raised before the High Court. But the appellant contends
that even for the purpose of th.e 10/ 16th share, the depreciation
allowance sl\ould be computed bn the basis of a va1uation of
Rs. 34 lakhs bid by Govin<lram for the factory.
F
Our attention was invited to a large number of authorities ·in
support of the contention raised by the appellant that the price
of the sugar factory on the basis of which the share bf Bachhulal
was valued shquld be regarded as decisive of the value of the
asset on which depreciation allowance is admissible. The argument in substance is that the actu.al cost of the sugar factory is
Rs. 34 lakhs, that being the price at which the factory was acquired by Govindram.
An asset which is admissible to c'.epreciation allowance may
G
be bbtained by gift, inheritance ·or succession. In such a case the
person who acquires an interest in the asset pays no price for it,
H
but on that account it cannot be said that he is not entitled to
depreciation allowance. In respect of such an asset, in the absence
of any statutory provision, depreciation would be Cbmputed on
the market value on the date of acquisition of interest. An asset
may be acquired by purchase, in which case in the absence of evidence to show that the valuation was unduly inflated, the value
M./B. KALOORAM. v. c.r.T. (Shah, J.)
651
A paid by the assessee is th~ actual cost to him, and not th~ valll:e
paid by his vendor for acquiring it. Again
proper!~ .. which
1s
owned jointly by more persons than one, by the acqms1tton o~ the
interest of the other joint owners becomes the property of a smgle
owner.
,
B
In Francis Vallabarayar v. Commissioner of Income-tax, Madras(') a Division Bench of the Madras High Court held that an
assessee is entitled in assessment of tax under s. 10 of the Incometax Act, to depreciation allowance in respect of machinery or plant,
which he acquires by inheritance, on the market value of such
property at the elate of inheritance. The same principle would
I)' apply to cases of gift and succession. The Legislature has by adding cl. (c) in sub-s. (5) of s. 10 by s. 8 of the Indian Income-tax
(Amendment) Act 25 of 1953, defined 'written-down value' in the
case of assets acquired by the assessee by way of gift or inheritance
as being the written-down value as in the case of previous owner
. or the market value thereof whichever is less. In the case of purD chase, as we have already observed, in the absence of fraudulent
over-valuation with a view to obtain an unfair advantage, the price
paid by the purchaser would be regarded for the purpose of depreciation allowance as the actual cost to him, and not the original
cost to the vendor: Commissioner of Income-tax v. The Buckingham Carnatic Company Ltd,('): Jogta Coal Company Ltd. v. Comf!i missioner of Income-tax, West Bengal (').. Cases in which full
title to an asset, in respect of which depreciation is claimed, is obtained in consequence of partition of a Hindu undivided family
introduce a complication, which is a peculiar product of the rules
of Hindu law. Under the Mitakshara system the essence of a coparcenary is unity of ownership, and so long as the family remains
F joint no individual member can claim that he !las a definite share
in the joint property. Until partition takes place, there is community of interest and unity of possession between all the members:
it is only on partitipn that the interest of each member becomes definite. "Partition .................. is really a process in and by which
G
a joint. enjoyment is transferred into an enjoyment in severalty.
Each one of the sharers had an antecedent title and therefore
no conveyance is involved in the process . . .
. .. " Gutta Radhal:ristnayya v. Gutta Sarasamma(').
By the preliminary decree Govindram and Bachhulal acquired
definite interest in the sugar factory proportionate to the shares
H declared by the decree in the entirety of the estate, and the
scheme by which Govindram became owner of the sugar factory
was in truth one by which he purchased 6 /16th share of Bachhulal. He was by the decree, which recognised his pre-existing title,
entitled to IQ/16th share and he purchased the remainder. The
(') 40 I.T.R. 426,
(') 3 I.T.R. 385.
(') 36 I.T.R. 521.
(') I.L.R. [1951] Mad. 607.
LP(Dl5SCI-3
652
SUPllllllE COURT REPORTS
[1965] 3 s.o.a.
scheme of "competitive bidding" was adopted only for the purA
pose of valuing the interest of the other sharer at which the first
sharer was to purchase it. The highest bidder took the entire
asset and paid a share of the value bid by him equal to the share
of the other sharer in the family estate. Govindram was the owner
of IO /16th share: by offering the bid for Rs. 3.4 lakhs he did not
purchase the I0/ 16th share. He merely purchased the 6/ 16th share
B
of Bach):mlal at a price based on total valuation of the sugar factory
at Rs. 34 Iakhs.
The dicta to the contrary in Commissioner of Income-tax U.P.
& C.P. v. Seth Mathuradas Mohta (') on which the High Court relied do not, in my judgment, lay down the correct rule. In that case C
coparceners of a Hindu family consisting of two members owning
a Ginning Factory which was originally purchased for Rs. 23 lakhs
decided to separate, and as the Ginning Factory could not be divided it was put to auction and purchased by 'A' for Rs. 28 lakhs.
'A' was debited in taking account with half the amount-offered by
him. Subsequently 'A' claimed depreciation allowance on the basis
D
of Rs. 28 lakhs which he had paid. alleging that that was the original cost to him. The Income-tax authorities rejected the claim, and
adopted the original value to the joint family as the actual value
to 'A' for computing depreciation allowance under s. 10(2)(vi). In
dealing with a reference made by the Tribunal on the question
whether the Income-tax Officer had the power to ignore the valuaE
tion made by the parties in ascertaining the original cost of the
roachinery and building to the aiisessee, the High Court observed :
..
. . . the original cost is the cost of acquiring
title. The cost of acquiring title is to be ascertained at
the time when the property is acquired by the coparp
cenary. Thereafter one is not concerned with cost strictly so called but one is concerned with a mode of partition. As a result of the partition each
(fraud, overreaching and the like being put on one side) is to be
regarded as having got half by the mode of division
adopted whether that mode be through Court, arbitraG
tion, private auction or drawing lot~ or any other mode
agreed upon. The original cost of the property is not
increased though one side might in the result get what
a third person would regard as less than half though
what the person concerned (at least in the case of private auction) thought at the time was at least equal B
to half; otherwise he would not have bid so much".
These observations were not necessary for the purpose· of answering the question posed before the Court. The question posed
before the High Court related not to what the true value for computing the allowance for depreciation was, but to the power of the
-------·
(1) 7 I.T.R.!60.
'
I
11/s. KALOORAM V. C,J.'I'. (Shah, J.)
653
A
Income-tax Officer to ignore· the valuation placed by the parties in
the deed of partition in ascertaining the true value for the purpose
of such computation.
Death or .birth of coparceners does not alter the identity. of
the Hindu undivided family which utilizes an asset for earrung
B income or profit. Death of a coparcener merely extinguishes an
existing interest, but there is no devolution of t~at interest. But
where the joint family status is severed and the nghts of the parties are crystalised and a member acquires the interest of the other
in any item of property though arbitration, agreement, decree of
the Court or a private auction, there is a transfer of interest from
C one to the other in that property and the value paid br taken into
account for acquisition of that interest would normally be regarded
qua that share as the actual cost to the acquirer for the purpose of
s. 10(2)(vi), but the value of his own share is determined by the
actual cost to the family.
Counsel for the appellant piaced strong reliance upon ComD
missioner of Income-tax v. Bai Shirinbai K. Kooka (') which belongs to a different branch of the law of Income-tax. Where an
assessee brings his investments into his business, the question arises whether in assessing income-tax payable on income
earned
by sale or disposition of such investment the original value at
E
which they were acquired or the market value as at the date on
which they were brought into the business has to be taken into
account. In Shirinbai's case(') the assessee who held by way of
investment several shares in different companies commenced
a
business in shares by converting the shares into stock-in;trade of
the business. The assessee subsequently sold those shares in the
F
course of the business at a profit. A majority of this Court held
that the assessee's assessable profits on the sale of the shares was
the difference between the sale price of the shares and the market
price of the shares prevailing on the date when the shares were
converted into stock-in-trade of the business, and not the difference
between the sale price and the price at which the shares were origiG nally purchased by the assessee. The Court in that case distinguished the earlier case decided by this Court Sir Kikabhai Premchand
v. Commissioner of Income-tax(') in which it was held that the
assessee was entitled to value at cost price, certain business assets
which were after withdrawal from the business settled upon trust.
But neither of these cases has a bearing on the computation bf deH predation allowance which is qua building, machinery, plant (not
being ships) or furniture to be a percentage of the written-down
value. A person who transfers his investments which are not part
of his business into the stream of his business may value the investments at the prevailing market rate on the date on which they are
brought into the business. In Shirinbai's case(') the Court was
(') 46 I.T.R. 86.
(') 24 I.T.R. 506,
65-i
SUPREME COURT RllPORTS
[1965] 3 s.c.a.
\
called upon to ascertain commercial profits earned by sale of stockA
in-trade and in so doing regarded the ow11er as investor and as businessman as two different entities. S. K. Das. J., speaking for the
majority observed that normally the commercial profits out of a
transaction of sale of an article must be the difference between
what the article cost the business and what it fetched on sale. But
it is difficult to appreciate how that principle would apply in the B
computation of depreciation allowance. The asset viz. the sugar
factory at all material times remained a business asset. It was at
one time owned by Govin<lram and Bachhulal, and if the. Incometax Act, 1922 had then applied, depreciation allowance would
have been computed on the basis of the value to the family. Acquisition of the interest of Bachhulal by Govindram did not alter C
the character or use of the asset: nor did it make any fundamental alte~ation in its value to the appellant so as wholly to displace
its original value even in respect of the share which Govindram
continued to own. Superficial analogies are often misleading and
more so in taxation laws. In computing profits assets brought into
the. business and subsequently sold may be regarded as inducted D
at the prevailing market rates, for the taxing authority is concerned to deal with the business profits, arising out of a transaction
of sale to the business. When depreciation allowance is to be computed, the taxing authorities have to consider what the original
cost to the assessee was and valuation of a business asset adopted
for the purpose of valuing the share of one of the owners from
E
whom his share was purchased cannot be regarded by any principle of commercial accounting as notionally altering the original
cost of his own share in the asset to the acquirer. The assessee does
not p1m:hase his own share at the valuation put by him at the private auction: he merely purchases the share of the other sharer
at.a valuation mad.e on the bid offered by him. I am unable thereF
fore to agree with counsel for the appellant that for the purpose
of valuing I 0 / 16th share of Govindram the basis should be the
valuation of Rs.