Law: Income Tax Act, 1961

Section: 32

Law: Income Tax Act, 1922

Section: 10(2)(vii)

Section 32 of the Income-tax Act, 1961 [Corresponding to section 10(2)(vii) of the Indian Income-Tax Act, 1922] - Depreciation - Allowance of - Assessment year 1946-47 - Whether if profits or gains of a business for a particular year are to be taxed they must be computed for whole year taking into account losses incurred during same year - Held, yes - Whether therefore, where business had been carried on by assessee for at least a part of accounting year and machinery used for purpose of said business had been sold at a loss during year of account and said loss had been brought into books of assessee and written off, assessee would be entitled to deduction under section 10(2)(vii) of 1922 Act - Held, yes FACTS The assessee-firm acquired certain business in January, 1945 as a going concern. Finding it difficult to continue the business, the assessee closed it in August, 1945. Thereafter, it sold the equipments etc. at a loss and wrote them off. The assessee in its return claimed deduction under section 10(2)(vii) in respect of said machinery. The ITO however, disallowed this deduction on ground that loss was of a capital nature and same could not be allowed under section 10(2)(vii) as business of assessee had closed down. The stand of ITO was sustained by Commissioner (Appeals) as well as Tribunal. On reference, the High Court held that there was evidence that the business had, in fact, been continued only till 28-8-1945, and that the business having been carried on for at least a part of the accounting year, section 10(2)(vii) was applicable, and that, therefore, this allowance had to be made under that clause. On appeal to the Supreme Court: HELD It may be assumed for the purposes of this case that the business did, in fact, close down on 28-8-1945, even though some incomings and outgoings were taking place for the rest of the year and the books of account were not finally closed till 28-2-1946. The second proviso to section 10(2)(vii ) enacts a fiction which the main clause does not. The reason for the introduction of the fiction in the proviso appears to be this : Loss in business may take place in various ways. If the business requires more to run it than…

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