P L D 1966 (W (PLP)

MUHAMMAD FAZLE. GHANI, J.-By this reference made under section 66 (1) of the Income-tax. Act, 1922, at the instance of the Commissioner of Income-tax, North Zone, Lahore, the Appellate Tribunal has referred the following question of law as arising out of their order dated the 26th of March 1963, in Income-tax Appeals Nos. 2385 and 2386 by the respondent-assessee :- "Whether on the facts and in the circumstances of the case, the Tribunal was right in holding that the assessee-company is entitled to additional depreciation in respect, of the assessment years 1957-58 and 1958-59 within the meaning of rule 8 (2) of the Income-tax Rules?"

2. The assessee originally carried on business in tannery, hides and skins as a firm under the name and style of Messrs Bufco Traders, Hide Market, Lahore. The firm comprised of six partners. The profits of the firm were distributed equally among the partners to the extent of 66 percent and the balance of 34 per cent. paid in proportion to the capital standing to the credit of the partners on the last day of the year. In April 1956, this firm incorporated itself into a private limited company. The share holders of the new company were the same as the former partners of defunct firm and they were allotted a share of equal value as share holders in the new company against their capital in the firm. The tennery business was set up during the "previous year" relevant to the assessment year 1956-57 and the firm was allowed the benefit of additional depreciation for the assessment year 1956-57 under rule 8 (2) of the Income-tax Rules made under section 59 of the Act. After incorporation, the company claimed additional depreciation for the year 1957-58 and 1958-59 also, the Income-tax Officer allowed 10 per cent. depreciation allowance on machinery but the additional depreciation was disallowed on the ground that the said machinery was second hand and not installed by the assessee company. The order of the Income-tax Officer was upheld in appeal and the matter was agitated in second appeal before the Appellate Tribunal which held that there was no transfer or change in the ownership in the real sense and the partners of the firm, who were carrying on business, had formed themselves into a private limited company. Relying on an Indian authority, the Tribunal allowed the claim of additional depreciation for the years 1957-58 and 1958-59.

3. The question raised in this reference involves the application of sub-rule (2) of rule 8 made under section 59 of the Income-tax Act, 1922, to the facts and circumstances of the case. . The rule is: - "8(1) The allowance under section 10 (2) (vi) of the Act in respect of depreciation of buildings, machinery, plant or furniture shall be at percentages of the written down value or original costs, as the case may be, equal to the number shown in the corresponding entry in the second column of the following statement. (2) In respect of plant and machinery (not having been previously used in Pakistan) installed on or after the first day of April 1948, and before the 1st day of June 1962, the allowance for each of the five previous years beginning with the year of installation shall be twice the amount of the allowance comprised."

4. On behalf of the Commissioner it is urged that the allowance of additional depreciation under sub-rule (2) of rule 8 is subject to the condition that the said machinery was not previously used in Pakistan and as it is established that the said machinery was used by the old firm in Pakistan, the persons who are the owners of the second hand machinery cannot be allowed the additional depreciation. Learned counsel for the assessee has contended that the depreciation claimed went with the assets and has no reference to the persons who owned it, and once the allowance as contemplated by sub-rule (2) of rule 8 has begun to run, it cannot be stopped although the ownership might have changed hands in the meantime and the question whether the machinery was or was not previously used in Pakistan will have to be determined by reference to the point of time when the machinery was installed.

5. There is no controversy about the allowance admissible under sub-rule (1) of rule 8 and what is to be determined is the application of sub-rule (2) to the present case. As already stated, the firm consisted of six partners and the persons who became share holders of the company were not different. A firm and a company are no doubt different legal entities but they are identical in this case because the persons who are benefited by profits made by the firm and those made by the company are the same and these profits are shared by the same persons in identically the same proportion and the mere fact that the firm has converted itself into a private limited company will not' disentitle the assessee from claiming the additional depreciation. What has happened in this case is that the assets of the firm now belong to the company; no change has taken place in any respect, except in the legal status of the assessee from a partnership to a corporation. The machinery which was installed in the present case is not a second hand machinery or machinery which has been reinstalled in Pakistan. The plain language of sub-rule (2) of rule 8 admits of no ambiguity and we have no doubt in our mind that once machinery is installed on or after the first day of April 1948, and before the first day of June 1962, the allowance, contemplated by this rule will be allowed for each of the "five previous years" beginning with the year of installation, once it is established that the machinery had not been previously used in Pakistan.

6. In the case of a taxing statute the Court has to look to the real nature of the transaction and not to its form. In this case, we find that it is only a readjustment, made by the partners of the firm to carry on their business as a limited company. The enterprise is the same, the persons are identical the assets, machinery, building and plant have been absorbed in the share capital of the new company and in this way neither any change of ownership has taken place nor any re-installation of machinery has been occasioned. In this view of the matter it cannot be said that the machinery is second hand and we are of the opinion that the depreciation claimed went with the assets and even if it can be said that the assets were owned by two different legal persons, the allowance has no reference to the persons who owned it but is attached to the machinery and plant itself. The question referred to by the Tribunal is accordingly answered in the affirmative. The Commissioner of Income-tax' shall pay to the assessee the costs of these proceedings. S. Q. Reference answered in the affirmative.