Law:

Section:

JUDGMENT Shelat, C.J.-The question which has been referred to us in this reference is "Whether, on the facts and in the circumstances of the case, the sum of Rs. 40,743 is assessable to tax by applying the second proviso to section 10(2)(vii) of the Indian Income-tax Act, 1922 ?" The present reference arises out of the assessment for the assessment year 1959-60 on the assessee which is assessed as a registered firm, and the relevant previous year is Samvat year 2014 (October 24, 1957 to November 11, 1958). The assessee-firm was carrying on business of manufacturing art silk cloth at Surat and had and still have branches at Bombay, Calcutta and Rangoon. The firm maintained and still maintains separate books of account for each of these branches. The business of manufacturing art silk cloth at Surat was carried on by the assessee-firm up to June 17, 1958, when it was taken over by a private limited company. The assessee-firm has eighteen partners and the private limited company which took over the said business have the same persons as its shareholders, and their respective interests in the limited company are the same which they had in the assessee-firm. One of the assets taken over by the limited company was machinery, the written down value of which stood at Rs. 9,962 in the books of account of the assessee-firm. The machinery was taken over by the limited company at the value of Rs. 62,232. It is an admitted fact that the total amount of depreciation allowed in respect of the machinery in the preceding years came to Rs. 40,743. The original cost of this machinery was Rs. 51,605. The Income-tax Officer applied the second proviso to section 10(2)(vii ) and brought to tax the aforesaid amount of Rs. 40,743 as profits of the previous year in which the company took over the said business and the machinery. The Appellate Assistant Commissioner confirmed the order of the Income-tax Officer. At the time of the hearing before him, it was pointed out to him that the income-tax authorities, while assessing the limited company, had applied the proviso to section 10(5)(a) so as to take the cost of the machinery in the hands of the limited company at the written down value…

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