Madras H.C : Depreciation should be allowed on the assets taken over by the new partnership at the enhanced rates, which should be taken as cost of the assets in the hands of the new partnership

High Court Of Madras

CIT vs. Alagappa Cotton Mills

Sections 32(1), 33, Sch. IX, Item 21

Asst. year 1965-66, 1974-75, 1975-76

R. Jayasimha Babu & K. Gnanaprakasam, JJ.

TC Nos. 1193 to 1195 of 1984

22nd November, 2000

Counsel Appeared

C.V. Rajan, for the Revenue : None, for the Assessee

JUDGMENT

K. GNANAPRAKASAM, J. :

Three questions at the instance of the Revenue were referred to this Court for consideration. The first question is as to whether the Tribunal was justified in holding that it had valid materials to hold that depreciation should be allowed on the assets taken over by the new partnership at the enhanced rates, which should be taken as cost of the assets in the hands of the new partnership. In this case there was a firm of two partners constituted by a document dt. 26th Jan., 1962, and thereafter there were withdrawals, retirements and introduction of new partners. The last one was on 1st Nov., 1964. The assessee-firm claimed depreciation for the asst. yr. 1965-66 on the basis of the cost at which it took over the assets from the earlier firm on 1st Nov., 1964. The ITO took the view that this was a case of only a change in the constitution of the firm and hence the depreciation should be allowed only on the basis of the written down value arrived at in earlier years. But, however, the Appellate Tribunal took a different view holding that the depreciation should be allowed on the assets taken over by the new partnership at the enhanced rates which should be taken as the cost of the assets in the hands of the new partnership. In these circumstances, reference was made to this Court. A similar question in the assessee’s own case was considered by this Court in CIT vs. Alagappa Cotton Mills (1984) 41 CTR (Mad) 230 : (1984) 149 ITR 640 (Mad) : TC 34R.712 wherein it was held that “there was no dissolution of the partnership firm and as the same assessable entity continued after the dissolution the assessee can claim depreciation only on the written down value and not the notional value.” The facts of the said case are applicable to the present case and hence we answer the question in favour of the Revenue and against the assessee. The other two questions are : “(1) Whether, on the facts and in the circumstances of the case, the Tribunal is justified in holding that the assessee in entitled to allowance of development rebate at the higher rate of 25 per cent in respect of the plant and machinery even though the assessee is engaged in the production of yarn? and (2) Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that the assessee is entitled to initial depreciation in respect of plant and machinery even though the assessee is engaged in the manufacture of yarn?”

The ITO held that the assessee is manufacturing only yarn and it will not come within the meaning of “textiles” mentioned in item No. 21 in Sch. IX or under item No. 32 of Sch. V and hence allowed development rebate at the lower rate of 15 per cent for the asst. yrs. 1974-75 and 1975-76. On appeal the Tribunal had taken a different view thereby allowing rebate in favour of the assessee. Hence, the reference. In the case of CIT vs. Sundaram Spinning Mills (2000) 158 CTR (SC) 1 : (2000) 241 ITR 350 (SC), apex Court had considered the meaning of “textiles” and “yarn”. Item No. 21 of the Ninth Schedule states “textiles” (including those dyed, printed or otherwise processed) made wholly or mainly of cotton, including cotton yarn, hosiery and rope”. The Ninth Schedule was inserted by the Direct Tax Laws (Amendment) Act, 1974, w.e.f. 1st April, 1975, but has been omitted by the Taxation Laws (Amendment and Miscellaneous Provisions) Act, 1986, w.e.f. 1st April, 1988. It was not disputed by the Revenue that in case the item manufactured by the assessee, namely, “yarn”, falls under item No. 21, namely, “textiles”, the assessee would be entitled to a higher rate of depreciation. We find the word “textiles” in it is not used in isolation but is stretched by bringing in more in its company through the following words “including those dyed, printed or otherwise processed made wholly or mainly of cotton, including cotton yarn, hosiery and rope. Thus, we find “textiles” as is understood at common parlance or as is understood in its natural sense which is limited, is not indicated here. The legislature has deliberately widened its sphere for a purpose to give larger benefit to other items included in it by extending it to include even cotton yarn, hosiery and rope to be understood as “textiles”. It is always open to the legislature to stretch or shrink or to give an artificial projection or slicing to any word including one used for “goods” to make it more meaningful to subserve the objective it intends to achieve. That is why this inclusive clause brings in more goods, which may not strictly come within the field of such goods. This is in order to give item similar benefit or to make them equally treated. Similarly, “hosiery” and “rope” could not but for their inclusion under this item have been classified as “textiles”. Similarly, may be “cotton yarn”. It is true that manufacture of cotton yarn is a stage earlier than manufacture of “textiles” as understood commonly. In fact cotton is the first stage, next comes “cotton yarn” which finally produces “textiles”. But here we find that the legislature intended to give the higher rate of initial depreciation even to the manufacture of goods which as commonly understood could not have been included as “textiles”. So this entry has to be interpreted to subserve the intended objective of the legislature. It is significant that “textiles” is included under two items. One under item No. 21 with which we are concerned and also under item No. 22. This latter item No. 22 includes entirely different goods than what are under item No. 21. Item No. 22, reads as under : “textiles (including those dyed, printed or otherwise processed) made wholly or mainly of jute, including jute twine and jute rope.” This even includes jute twine and jute rope to be “textile”. The apex Court came to the conclusion that the higher rate of development rebate is allowable for yarn also. Applying the principles laid down in the above case and for the reasons stated therein we answer both the questions in favour of the assessee and against the Revenue.

[Citation : 253 ITR 100]

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