Actual cost or cost of acquisition of assets obtained on dissolution of firm by a partner

On what value the depreciation would be computed in the case of assets obtained on dissolution of a partnership firm by an erstwhile partner is to some extent an unresolved issue by means of a direct legal decision.

Explanation 3 to Sec.43(1) enables the AO to determine the actual cost of asset but the rider is that he must take the prior approval of the Joint Commissioner before so doing. Where the valuation of asset is fair and reasonable and is supported by valuer's report with other documents to justify the basis, the AO may accept the value of assets as declared by the firm upon its dissolution and consequent distribution of such assets.

Recently, in Dy.CIT v. Smt. Leelavati S. Mehta (2010)44DTR(Mumbai)(Trib) 34 in which though the said issue was not dealt with directly yet, the observation of the tribunal and reasoning for the decision throw some light on this aspect of law.

In this case, the assessee erroneously adopted the fair market value as on 01.04.1981 though the asset was obtained consequent to dissolution of the firm i.e on 10.09.1990. This resulted in assessee admitting more capital gain than what it would have been if the FMV as on 10.09.1990 was adopted. The tribunal approved the decision of CIT(Appeals) since the gain admitted by the taxpayer was more than the correct amount and the CIT(Appeals) had held that there is no need to reduce the gain when the taxpayer had admitted excess gain on voluntary basis in the return.

This decision in the context of sec 45(4) read with explanation 3 to sec.43(1) though indirect, could be followed as guidance on this aspect of law.