depreciation

I had sent this query last week. But perhaps all were busy with tax audit and hence I did not receive any reply. Hence I am posting the same question. Please Help out.

Two of my clients who were running the business of plying buses were individually filing the returns. To avoid competition and other reasons, on 1-12-2004 they entered into partnership contributing all thier assets and liabilities as their capital contribution and continued the business in partnership. While transfering the assets, depreciation was claimed upto 30-11-2004 on prorata basis in individual returns and from 1-12-2004 to 31-03-2005 in Firm's return and the same were allowed in IT scrutiny assessment. Now the Dept has issued 154/155 notice stating that the assessee can not claim the deprn. and same is treated as short term capital loss which can not be set off against the business income and hence the assessee is liable for paying tax on the portion of deprn claimed.

Now the question is does merging two individual businesses into a partnership amount to transfer? Can we not claim the deprn on the assets till such merger? Is it very much necessary to own the assets on the last day of the year to claim deprn? What should be my stand in this case? Please help me out with valuable suggestions. Can anybody give me appropriate case laws or other proofs ?

Thanks in advance,

CA B.V.Raveendranath

G.P.Road, SAGAR

KARNATAKA

98454 60896

bvrnath @ sify.com

bvrnath @ gmail.com

Dear Raveendranath Sir,

1) Transfer of Individual Business into Partnership amounts to Transfer simply because it is nowhere excluded...(No benefit is available u/s 47 as in case of conversion of individual business into Company)

2) Proportional Depreciation is allowed in ur case as per 5th Provisio to Clause (ii) of Sec 32(1) read with Sec 170.

3) Yes it is necessary that asset should exist on the last day of the Previous year (there r few exceptions as mentioned in 2 point)

As per Law AO is justified in Invoking 154 & treating as Capital Gain..I think u should look for other things like-

1) whether notice u/s 154 has been served in time or not..(within 4 years from the end of year in which assessment was made.)

2) Interesting thing would be Sale Price of this tranfer, see If u can challenge his sale price..

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Raveendranath B V

Amir

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