Introduction
In the landmark case of Kalooram Govindram vs. Commissioner of Income Tax, the Supreme Court of India delivered a pivotal judgment on the computation of depreciation allowance for assets acquired by a Hindu Undivided Family (HUF) through partition. The case, decided on 5th April 1965, addressed a critical question under the Income Tax Act, 1922: whether the ‘original cost’ of an asset for depreciation purposes should be the historical cost to the larger joint family or the valuation at which the asset was taken over by the divided member during partition. This ruling has enduring significance for tax practitioners, ITAT proceedings, and High Court interpretations of assessment orders involving partitioned HUF assets.
Facts of the Case
The appellant, Kalooram Govindram, was an HUF carrying on business at Jaora, originally part of a larger joint Hindu family comprising two branches: Govindram’s branch and Bachhulal’s branch. In 1942, a partition suit was filed, and under a decree, each item of property was sold by competitive bidding among the branches. The sugar factory at Jaora was knocked down in favor of Govindram’s branch for Rs. 34 lakhs. After adjustments, the factory was run by the appellant.
For the assessment year 1950-51, the Income Tax Officer (ITO), Ratlam, assessed the appellant on income from the factory. The appellant claimed depreciation under Section 10(2)(vi) of the Income Tax Act, 1922, on the Rs. 34 lakhs purchase price. The ITO and the Appellate Assistant Commissioner (AAC) rejected this claim, holding that depreciation should be based on the original cost to the larger joint family. The Income Tax Appellate Tribunal (ITAT) partially allowed the appeal, ruling that for the 10/16th share already belonging to the appellant, the cost was the original cost to the larger branch, while for the 6/16th share purchased from Bachhulal’s branch, the cost was Rs. 12,75,000 (the purchase price). The High Court of Madhya Pradesh upheld the ITAT’s view, leading to the appeal before the Supreme Court.
Reasoning of the Supreme Court
The Supreme Court, in a judgment authored by Justice K. Subba Rao, focused on the interpretation of Section 10(2)(vi) and Section 10(5) of the Income Tax Act, 1922. The key phrases were “being the property of the assessee” and “original cost thereof to the assessee.” The Court held that depreciation is allowable on the actual cost of the asset to the assessee, not the historical cost to a predecessor.
The Court rejected the argument that partition under Hindu law does not involve a transfer. While partition transforms joint enjoyment into separate enjoyment, it confers absolute title to specific property on a divided member. The Court emphasized that the legal fiction of “pre-existing title” cannot be stretched to ignore the real cost incurred at partition. Using illustrative examples, the Court demonstrated that if assets appreciate unevenly, using historical cost would be inequitable and impractical. For instance, if a house originally costing Rs. 100 is allotted to a member at a partition valuation of Rs. 500 due to appreciation, the cost to that member is Rs. 500, not Rs. 100.
The Court also drew analogies from cases involving purchase, gift, bequest, and succession, where the cost to the acquirer (not the predecessor) is relevant. It expressly disagreed with the Nagpur High Court’s decision in CIT vs. Seth Mathuradas Mohta, which had held that the cost to the divided member is the original cost to the joint family. The Supreme Court clarified that where valuation at partition is real (not notional or inflated), it represents the actual cost to the assessee.
Conclusion
The Supreme Court allowed the appeal, holding that the appellant was entitled to depreciation on the basis of the valuation at which the factory was taken over during partition (Rs. 34 lakhs), not the original cost to the larger joint family. This decision underscores that for partitioned HUF assets, the ‘original cost to the assessee’ under Section 10(2)(vi) is the real cost at partition, aligning depreciation principles with economic reality. The ruling has been consistently followed by ITAT and High Courts in subsequent assessment orders, ensuring equitable tax treatment for HUFs undergoing partition.