Holding

Receipts from the lease of a fractional share are taxable income, depreciation is not allowable for a fractional share, and loss set‑off is barred as the lease activity is not the assessee’s business.

Summary

Banarsi Das, a partner who acquired a one‑sixth share in a sugar mill, received periodic payments from other partners under lease arrangements after the firm was placed under a court‑appointed receiver. The assessee claimed that these receipts were capital in nature and that depreciation could be claimed on the one‑sixth share under section 10(2)(vi) of the Income‑Tax Act, 1922, and also sought to set off an unabsorbed loss against the receipts under section 24. The Revenue contended that the payments were revenue receipts, that depreciation was not permissible for a fractional share, and that the loss could not be set off because the letting of the mill was not the assessee’s business. The Supreme Court held that the receipts were taxable income, depreciation could not be claimed for a fractional share, and the loss could not be set off as the activity was not the assessee’s business. Consequently, the appeals were dismissed.

Issues considered

The nature of the receipts from the lease of a one‑sixth share: capital receipt or assessable income.
Whether depreciation allowance under s.10(2)(vi) of the Income‑Tax Act, 1922 is available for a fractional share in machinery.
Whether unabsorbed loss can be carried forward and set off against the lease receipts under s.24 of the Act.
Whether the receiver is entitled to claim depreciation on the one‑sixth share.

Legislation cited

Income Tax Act, 1922s. 10(2)(vi), s. 24, s. 66(1)

Subjects

Income TaxDepreciationFractional ownershipCapital vs revenue receiptSet off of lossSection 10(2)(vi)Section 24Partnership dissolutionReceiver

Judgment

SETH BANARSI DASS GUPTA & ANR. ETC.
A
v.
COMMISSIONER OF INCOME-TAX, DELHI.

APRIL 29. 1987

[RANGANATH MISRA AND G.L. OZA, JJ.] B

Income-tax Acr, 1922: s. 10(2)(vi), s. 24-Depreciation-Benefir
} of-Admissible only where assessee full owner of property-Assessee
alone entit/,R:(i to maintain claim-Carried forward loss-Claim for ser
'I off-When admissible-Assessee surrendering lease of partnership
share for annuity-Nature of receipts-Whether profit for the inreresr C
held in business.

'A', a partner in a firm running a sugar factory, instituted a suit
~ _ for its dissolution in I948 and a Rereiver was appointed by the Court.
The arrangement arrived at for the factory was that it would be leased
out for a term of five years to the highest bidder from amongst the six D
partners. In July, I948, 'A' transferred his I/6th share to the appellant
for Rs.4,50,000. The appellant had taken a loan against shares of that
value held by him in another sugar mill for purchase of the share. In
>-- May, 19541, another partner 'B' leased out his I/6th share to the appel-
lant on an annual payment of Rs.50,000. In July, 1950 yet another
partner 'C' leased out his I/6th share to the appellant for a similar sum. E
In 195I 'C' sued for cancellation of the lease. In April, 1954 the dispute
was compromised and the lease terminated. 'C' undertook to pay the
appellant a.t the rate of Rs.16,000 for the first three years and at the rate
- of Rs.I0,000 for the subsequent two years. 'B's I/6th share was also
. returned on mutual arrangement and he agreed to pay the appellant a
sum of Rs.39,000 and odd annually. F

During the assessment proceedings for the year I953-54 the
nature of these receipts came to be considered. The assessee-appellant
maintained that these were in the nature of capital receipts in lieu of the
lease-hold interest. The assessee also claimed depreciation on the I/6th
share in the sugar mill that he had acquired from 'A'. Similar questions G
also arose for the assessment years 1954-55 and I955-56. The assessee
had suffered a loss in the sugar business in the assessment year 1953-54,
a part of which remained unabsorbed, and claimed set off of that un-
absorbed loss against the share of the rent received by him from the
Receiver in the assessment year 1954-55. Since the sugar mill was being
assessed as an association of persoas, for the usessmeat year 1964HiI H
10!

-·
Hl2 SUPREME COURT REPORTS [1987] 3 S.C.R.

A the Receiver claimed that for the purpose of computing depreciation
allowance, the written down value of the business assets be enhanced so
as to reflect the sum of Rs.4,50,000 in place of I/6th share representing
the share of 'A'. The Revenue negatived the assessee 's contentions,
which view was upheld by the High Court.
B
Dismissing the appeals by certificate, the Court,

HELD: 1. The amounts the assessee received under the com-
promise or by amicable arrangement from other partners were in the
nature of profits to be received by the assessee for the interest held in
the business and, therefore, constituted taxable income. [I06BJ
c
2. The benefit of s. l0(2)(vi) of the Income-tax Act, 1922 would be
admissible only where the assessee is the owner of the property. It too is
not admissible in respect of a fractional claim. [106A]

D In the instant case, all that is claimed for the assessee is 1/6th
share in the machinery. Such a fractional share does not suffice
for granting an allowance for depreciation under s. 10(2)(vi) of the
Act. [105F)

3. Two conditions had to be fulfilled under s. 24 of the Income-
E tax Act, 1922 before the claim for set off of carried forward loss could
be admitted, firstly, the income against which the loss has to be set off
should be income from business and secondly, the business should be
same in which the loss was suffered. [107C]

In the instant case, the letting out of the suga· mill was not the
business of the assessee. The Receiver was appointed for dissolution of
~
F
the firm aud the main reason for allowing the sugar factory to work
was to dispose it of as a running mill so that proper price could be
fetched. [107DE]

4. Under the scheme of 1922 Act, it is the assessee who aloue is
G entitled to maintain claim of depreciation. Within the framework of
that scheme it is difficult to maintain separate value of a part of the _ J.
asset to work out depreciation. The book-value, as shown must in the -,
instant case, therefore, be applicable to the entire assets of the firm
including the l/6th share which 'A' had given to the appellant.
The claim of the Receiver for depreciation cannot, therefore, be
H sustained. [108B]
BANARSI DAS v. C.I.T. DELHI (MISRA, J.] 103

CIVIL APPELLATE JURISDICTION: Civil Appeal Nos. 850 A
of 1973 etc.

From the Judgment and Order dated 3.9.1970 of the Allahabad
High Court in Civil Miscellaneous (ITR) No. 461of1961.

With B

CIVIL APPEAL No . 941 of 1975.

From the Judgment and Order dated 5.5.1972 of the Allahabad
High Court in I.T. Reference No . 236 of 1969.

Raja Ram Agarwal and Mrs. Rani Chhabra for the Appellants.
c
B.B. Ahuja and Ms. A Subhashini for the Respondents.

The Judgment of the Court was delivered by
D
RANGANATH MISRA, J. C.A . No. 850 of 1973 This appeal is by
certificate and is directed against the judgment of the High Court of
Allahabad. Assessee and five of his brothers constituted a Hindu Joint
Family. The relevant assessment year is 1953-54 corresponding to the
accounting period ending on 30th June, 1952. The Joint Family which
Qwned inter alia a sugar factory at Bijnore. In 1930 there was partition in E
the family and the members of the erstwhile Joint Family constituted
themselves into a partnership firm which took over the sugar factory and
operated the same. In the year 1944, Sheo Prasad, one of the brothers
who was a partner of the firm instituted a suit in the Lahore High Court
for dissolution of the firm . Partition of the country followed and after the
parties shifted over to India a fresh suit was instituted at Bijnore for F
purposes of partition. The properties were put in charge of a receiver
appointed by ~he Court. So far as the sugar factory is concerned, the
arrangement was tqat at five yearly rest an auction was to be held
confined to the partners and the highest bidder would be given lease to
operate the factory for that period under the receiver. On 16th July,
1948, Sheo Prasad transferred his 1/6th share to Banarsi Dass at a G
stated valuation of Rs.4,50,000. On 3rd May, 1950, another brother,
Devi Chand , leased out his 1/6th share to Banarsi Dass on an annual
payment of Rs.50 ,000. On 13th July, 1950, yet another brother.
Kanshi Ram, similarly leased out his 1/6th share to Banarsi Dass for a
similar sum. In 1951, Kanshi Ram sued for cancellation of the lease .
On 6th April, 1954, the dispute was compromised and the lease was H

--
104 SUPREME COURT REPORTS [1987) 3 S.C.R.

A terminated. Kanshi Ram undertook to pay to Banarsi Dass at the rate
of Rs. ]6,000 for the first three years and at the rate of Rs. 10,000 for
the subsequent two years. Devi Chand's I/6th share was also returned
on mutual arrangement and he agreed to pay a sum of Rs.39,000 and
odd annually to Banarsi Dass for the lease period. During the assess-
B ment proceedings, the nature of these receipts came to be debated-
the assessee maintained that these were in the nature of capital receipt
in lieu of the lease hold interest and the Income-tax Officer maintained
that those were revenue receipts. In due course, the Tribunal ulti-
mately upheld the view of the Revenue.

One more question that arose was the admissibility of a claim of
C expenditure being payment of interest on a Joan taken for purchase of
shares in the sugar factory. The Income-tax Officer had allowed the
claim of Rs. 75,211. The Appellate Assistant Commissioner gave
notice to the assessee and disallowed the same. The Appellate Tri-
bunal reversed the finding of the Appellate Assistant Commissioner in
D regard to the admissibility of the claim. Thus the assessee as also the
Revenue applied to the Tribunal to refer the case to the High Court.
As far as relevant, the following questions were referred for the opi-
nion of the High Court under section 66( 1) ofthe Act at the instance of
/ the assessee.

1. Whether on the facts and in the circumstances of the case, the
E
sums of Rs.16,000 and Rs.39,262 received from Kanshi Ram and
Devi Chand respectively were assessable as income of the
assessee?

2. Whether on the facts and in the circumstances of the case,
depreciation is allowable on the 1/6th share in S.B. Sugar Mills,
F Bijnore which the assessee had acquired from Seth Sheo Prasad?

So far as the first question is concerned, the High Court referred to the
arrangement entered into by the parties as also the terms of com-
promise and referred to certain dedsions and came to the conclusion
that the sum of Rs. 16,000 received as a part of the total sum of
G Rs.68,000 constituted an assessable receipt . On the same reasoning,
the High Court held that the amount of Rs.39,262 received from Devi
Chand was also liable to ta:x.

So far as the other question is concerned, the High Court held:-
H "The question, however, remains whether the assessee is
BANARSI DAS v. C.I.T. DELHI [MISRA, J.J 105

entitled to claim depreciation on the ground that it has A
acquired I/6th share in the S.B. Sugar Mills. It is to be
noted that the assessee does not claim to be full owner of
the property. All that the assessee claims is l/6th share in
S.B. Sugar Mills."

I "The asscssee claims allowance under clause (vi) of sub- B
t section (2) of section JO of the Indian Income-tax Act of
'
1922. Clause (vi) is:

- 'In respect of depreciation of such buildings, machin-
ery, plant or furniture being the property of the asses-
~e..........
," C
"In order to qualify for an allowance under clause (vi), the
assessee has to make out that the building, machinery, plant
or furniture is the property of the asses see. Mr. Shanti
Bhushan appearing for the assessee urged that clause (vi) is
attracted even where an assessee owns a fractional share in D
the machinery. On the other hand, Mr. Brij Lal Gupta
appearing for the Department urged that ownership of a
fractional share in machinery does not attract clause (vi).
The point is not free from difficulty."

- The High Court ultimately came to hold:

"In order to qualify for an allowance under clause (vi), the
claimant must make out that the machinery is the property
of the assessee. That test is not satisfied by the present
E

assessee. The assessee does not claim to be the full owner
of the machinery in question. All that is claimed for the F
assessee is !/6th share in the machinery. Such a fractional
share will not suffice for granting an allowance for depre-
ciation under section !0(2)(vi) of the Act."

We have heard learned counsel for the assessee-appellant at
length. He has referred to several authorities in support of the asses- G
see's stand of admissibility of the claim on both scores. According to
him, the proper test to be adopted should have been to find out
whether the arrangement constituted an apparatus to earn profit,
whether the arrangement was one in course of business activity, and
whether what was received constituted a part of the circulating capital
or was a part of the fixed asset. We have considered the submissions of H
106 SUPREME COURT REPOF.TS (1987] 3 S.C.R.
,J_
the learned counsel for the appellant but are not in a position to accept
A
the same. There is hardly scope to doubt that the benefit of section
I0(2)(vi) of the Act would be admissible only where the assessee is the
owner of the property. It too is not admissible in respect of a fractional
claim. Similarly, we are of the view, in agreement with the High Court.
that the amounts which the assessee received under the compromise or
B by amicable arrangement was in the nature of profits to be received by (

.
-\
the assessee for the interest held in the business and, therefore,
constituted taxable income. No other point was canvassed before us .
This appeal has to fail and is hereby dismissed. Parties are directed to
bear their own costs throughout.
~

C.A. No. 233 of 1976
c
This appeal between the parties is also by certificate granted by .l,
the Allahabad High Court and relates to the assessment year 1955-56
for the accounting period ending on 30th June, 1954. Leave has been
confined to two questions-as would appear from the order granting
D the certificate, namely, as to whether one of the instalments received
by the assessee out of the said amount of Rs.68,000, as referred to ,J
above, in respect of an earlier assessment year constituted a taxable
receipt. The second question relates to acquisition of the ]:6th share
under a deed of exchange from Devi Chand under the exchange deed
dated 16th July, 1948, which indicated that the valuation of that in-
E terest was shown to be Rs.4,50,000 and depreciation was claimed in
regard to it. Both the questions raised here are covered by our
aforesaid judgment. The appeal of the assessee has therefore to fail.
The appeal is accordingly dismissed. Parties are directed to bear their
-r
own costs.
I
F C. A. No. 1101of1975.

The rele,dnt assessment year in this case is 1954-55 correspond-
ing to the accounting period ending June 30, 1953. Three questions
survive for consideration: One relating to the receipt of Rs. 16,000 and
Rs.42,957 in the same manner as already indicated, and the other
G depreciation in regard to the !16th share, said to have been valued at 4--
Rs.4,50,000. Both the questions have to be answered agrtinst the asses-
see for the reasons already indicated. In this case, there is a third
question which is relevant, namely, whether in the facts and circum-
stances of the case, the unabsorbed carried forward loss of Rs.78,08.\
was liable to be set off against the share of the rent received by the
H assessee from the Receiver. Dealing with this question, the High
Court observed:·
T
BANARSI DAS v. C.l.T. DELHI (MISRA, J.J 107

"During the previous year relevant·to the assessment year A
1953·54. the assessee had suffered a loss in sugar business.
After setting off the loss against other heads of income
there remained an unabsorbed loss of Rs. 78,084. In the
assessment year in dispute the assessee claimed that the
unabsorbed loss of the preceding year should be brought
l forward and set off against its share in lease money re· B
f ceived from the Receiver in respect of S.B. Sugar Mills.
This claim of the assessee has been disallowed and the
question arises as to whether the assessee was entitled to
carry forward and set off the loss as claimed by it."

The High Court referred to section 24 of the Income-tax Act of 19:':' C
and indicated that two conditions had to be fulfilled before the claim of
set off of tarried forward loss could be admitted, firstly, the income
against which the loss has to be set off should be income from business
and secondly. the business should be same in which the loss was suf·
fered. The High Court referred to certain decisions including the one
of this Court in 26 !TR 765 and ultimately negatived the claim of the D
}- assessee by saying that the question would not arise because the letting
out of the sugar mill was not the business of the assessee. In fact the
receiver was appointed for dissolution of the firm and the main reason,
as found by the High Court, for allowing the sugar factory to work was
to dispose it of as a running mill so that proper price would be fetched.
Having heard learned counsel for the parties, we are satisfied that E
- there is no merit in the assessee's stand and the same has got to be
y-· dismissed. The appeal is accordingly dismissed. Parties are directed to
bear their own costs throughout.

---/ CA. No. 941of1975
F
This appeal is by certificate from the judgment of the Allahabad
High Court. The assessee is the sugar mill which during the relevant
assessment year 1960·6! corresponding to the accounting period end·
ing 30th June, 1959, was in the hands of a Court Receiver. The sugar
mill was being assessed as an Association of Persons. Banarsi Dass. a
partner, had 1/6th share therein. He had acquired under a deed of G
exchange dated 16th July, 1948 1/6th share of Shea Prasad in exchange
of shares held by Banarsi Dass in Lord Krishna Sugar Mills valued at
Rs.-1.50,000. In this assessment year, the receiver claimed that for the
purposes of computing the depreciation allowance, the written down
value of the business assets be enhanced so as to reflect the sum of
Rs.4,50,000 in place of 1/6th share representing the share of H

....
108 SUPREME COURT REPORTS [ 1987) 3 S.C.R.

A Sheo Prasad. Similar claim had been raised by Banarsi Dass in his own
assessment. The Income-tax Officer rejected the claim and such rejec-
tion has been upheld throughout. We have already turned down the .
claim of Banarsi Dass. This claim has, therefore, to be rejected. We
may additionally point out that under the scheme of the Act, it is the
assessee who alone is entitled to maintain such claim of depreciation
B
and it would indeed be difficult, within the framework of the scheme
contained in the statute, to maintain a separate value of the part of the
asset to work out depreciation. The book-value as shown must be
applicable to the entire assets of the firm including the 1/6th share
which Sheo Prasad had given to Banarsi Dass. The claim has rightly

c
been rejected in the forums below including the High Court. The
appeal has no merit and is dismissed. Parties will bear their own costs. --
P.S.S. Appeals dismissed.

y

I