Commr.Of Income Tax,Dibrugarh vs Doom Dooma India Ltd

Commr. of Income Tax, Dibrugarh ... Appellant (s)

versus

Doom Dooma India Ltd. ... Respondent (s)

With

Civil Appeal No. 1093 of 2009 - Arising out of S.L.P. (C) No.13069 of 2007 Civil Appeal No. 1095 of 2009 - Arising out of S.L.P. (C) No.13072 of 2007 Civil Appeal No. 1096 of 2009 - Arising out of S.L.P. (C) No.13074 of 2007 Civil Appeal No. 1097 of 2009 - Arising out of S.L.P. (C) No.16860 of 2008

JUDGMENT

S. H. KAPADIA, J.

1. Delay condoned.

2. Leave granted.

3. This batch of civil appeals is directed against judgments

dated 22.11.06 and 8.1.07 of the High Court of Guwahati, Assam, 2

in appeals under Section 260A of the Income-tax Act, 1961 in

respect of assessment years 1988-89, 1989-90, 1990-91 and 1991-

92.

4. What is the meaning of the expression "depreciation actually

allowed" in Section 43(6)(b) of the 1961 Act (as it stood at the

relevant time)? How is the depreciation to be computed in cases

falling under Rule 8 of the Income-tax Rules, 1962, which deals

with taxability of composite income? These are the two questions

which arise for determination in this batch of civil appeals.

Background facts in Civil Appeal No. of 2009 (Arising out of S.L.P.(C) No.13070 of 2007)

5. The facts in all these civil appeals are similar. Respondent-

assessee, at the relevant time, was in the business of growing and

manufacturing of tea. In this case we are concerned with the

assessment year 1988-89. Applicability of Rule 8 is not in dispute.

Assessee raised additional grounds before CIT(A) at the time of

hearing of the appeal inter alia stating that the AO had erred in

determining the opening "written down value" of the block of assets

without following the provisions of Section 43(6)(b) of the 1961 Act.

According to the assessee for arriving at the opening "written down

value" of the block of assets, the AO erred in deducting 100 per

cent of the depreciation for the preceding year calculated at the 3

prescribed rate from the opening "written down value". However,

the assessee claimed that only 40 per cent of the depreciation

allowed at the prescribed rate ought to have been deducted and not

100 per cent as done by the AO. In this connection reliance was

placed by the assessee on Section 43(6)(b) of the 1961 Act.

Accordingly, by additional grounds which were allowed to be raised,

the assessee sought a direction from CIT(A) to the AO to determine

the "written down value" in accordance with the provisions of

Section 43(6)(b) by deducting only 40 per cent of the depreciation

computed at the prescribed rate, being depreciation actually

allowed. This argument of the assessee came to be rejected by CIT

(A).

6. Aggrieved by the decision, the assessee carried the matter in

appeal to the Tribunal. By its decision the Tribunal, following the

decision of the Calcutta High Court in the case of Commissioner of

Income-tax v. Suman Tea and Plywood Indusries (P) Ltd. -

(1993) 204 ITR 719, held that since 40 per cent of the assessee's

composite income is chargeable under Section 28 of the 1961 Act,

for the purposes of computing the "written down value" of

depreciable assets used in the tea business, only 40 per cent

instead of 100 per cent of depreciation allowable at the prescribed 4

rate shall be deducted in the case of the assessee. This view of the

Tribunal has been affirmed by the impugned judgment of the High

Court. Hence this civil appeal(s) by way of special leave petition(s)

is filed by the Department.

Answer to Question No.(1) - meaning of the expression "depreciation actually allowed" in Section 43(6)(b) of the 1961 Act

7. Deductions by way of depreciation allowance have been

specifically recognized and dealt with in Sections 32, 34 and 43(6)

of the 1961 Act (which deals with the definition of the words

"written down value"). Section 32 adopts two methods in allowing

depreciation. In the case of ocean-going ships, depreciation is

allowed, year after year, at the fixed percentage on the original cost

of the asset [See: Section 32(1)(i)]. This is called the straight-line

method. In the case of non-ocean-going ships and buildings,

machinery, plant or furniture, the prescribed percentage of

depreciation is to be computed on the basis of "written down value"

of the asset [See: Section 32(1)(ii)]. This is known as "written-down

value" method. Both these methods seek to ensure that the total

depreciation allowance(s) granted, year after year, does not exceed

100 per cent, of the original cost of the asset. In the straight-line

method, the entire depreciation is written off sooner than in the 5

"written down value" method, if the figures of the actual cost and

the prescribed percentage are the same in either case. Section 32

(2) allows the carry forward and unabsorbed depreciation

allowances to any subsequent year, without any time limit, where

such non-absorption is "owing to there being no profits or gains

chargeable for that previous year, or owing to the profits or gains

being less than the allowance". Depreciation loss under Section 32

(2) stands on the same footing as any other business losses. An

assessee claiming depreciation of assets has to show that such

assets are owned by him and are used by him in the accounting

year for the purpose of his business, the profits of which are being

charged [See: Section 32(1)(i)]. Further, the total of all deductions

in respect of depreciation under Section 32(1)(i), made year after

year, should not, in any event, exceed the actual cost of the assets

to the assessee [See: Section 34(2)(i)]. The definition of "actual

cost" is to be found in Section 43(1) and the definition of "written

down value" is to be found in Section 43(6) of the 1961 Act. The

latter defines "written down value" under Section 43(6) to mean -

(a) in the case of assets acquired in the previous year, the actual cost to the assessee;

(b) in the case of assets acquired before the previous year, the actual cost to the assessee less all depreciation(s) actually allowed under the 1961 Act.

6

8. The key word in Section 43(6)(b) of the 1961 Act is "actually".

We quote hereinbelow an important observation, made by this

Court on the meaning of the words "actually allowed" in Section 43

(6)(b) in the case of Madeva Upendra Sinai v. Union of India and

Others - (1975) 98 ITR 209 at pages 223 & 224, which reads as

under:

"The pivot of the definition of "written-down value" is the "actual cost"' of the assets. Where the asset was acquired and also used for the business in the previous year, such value would be its full actual cost and depreciation for that year would be allowed at the prescribed rate on such cost. In subsequent year, depreciation would be calculated on the basis of actual cost less depreciation actually allowed. The key word in clause (b) is "actually". It is the antithesis of that which is merely speculative, theoretical or imaginary. "Actually" contra-indicates a deeming construction of the word "allowed" which it qualifies. The connotation of the phrase "actually allowed" is thus limited to depreciation actually taken into account or granted and given effect to, i.e. debited by the Income-tax Officer against the incomings of the business in computing the taxable income of the assessee; it cannot be stretched to mean "notionally allowed" or merely allowable on a notional basis."

....

"From the above conspectus, it is clear that the essence of the scheme of the Indian Income-tax Act is that depreciation is allowed, year after year, on the actual cost of the assets as reduced by the depreciation actually allowed in earlier years. It follows, therefore, that even in the case of assets acquired before the previous year, where in the past no depreciation was 7

computed, actually allowed or carried forward, for no fault of the assessee, the "written-down value" may, under clause (b) of Section 43(6), also, be the actual cost of the assets to the assessee."

9. Therefore, this Court has clearly laid down the meaning of the

words "actually allowed" in Section 43(6)(b) to mean - "limited to

depreciation actually taken into account or granted and given effect

to, i.e. debited by the Income-tax Officer against the incomings of

the business in computing the taxable income of the assessee".

Answer to Question No.(2) - computation of depreciation in cases covered by Rule 8 which deals with taxability of composite income

10. In the case of Commr. of Income-tax, Madhya Pradesh,

Nagpur and Bhandara v. Nandlal Bhandari Mills Ltd. - (1966) 60

ITR 173, which judgment was in the context of composite income,

the question inter alia arose whether depreciation "actually allowed"

would mean depreciation deducted in arriving at the taxable

income or the depreciation deducted in arriving at the world

income (composite income). In that case the assessee was a

company incorporated in Indore. It owned and ran a textile mill.

Until 1.4.1950, when Income-tax Act, 1922 was extended to Part B

States including Madhya Bharat of which Indore became a part,

the assessee was assessed at Bombay under the Income-tax Act, 8

1922 as a non-resident and for some years as resident. The

assessee was also assessed in Indore under the Indore Industrial

Tax Rules, 1927. For those years in which it was assessed as a

non-resident under Income-tax Act, 1922, only that part of its

profits attributable to the sale proceeds of goods received in British

India were brought to tax. For the assessment years in question, in

ascertaining the "written down value" of the building, machinery

and plant, under paragraph 2 of the Taxation Laws Order, 1950,

only the greater of the two depreciations "actually allowed" in

British India and in Indore could be taken into account. The ITO

took into account the depreciation allowances for the years up to

1944 as computed under Income-tax Act, 1922 for the purposes of

ascertaining the world income of the assessee, and for the years

1945 to 1948, he took into account the income as computed under

Indore Industrial Tax Rules 1927; and on that basis the ITO arrived

at the "written down value" as on January 1, 1949. The assessee

contended, inter alia, that in regard to the years up to 1944 only

the proportionate depreciation attributable to the taxable income

came within the meaning of the words "actually allowed" in the old

section corresponding to Section 43(6)(b) of the 1961 Act. This

contention of the assessee was accepted by the majority judgment

which held that in fixing the depreciation allowances for the years 9

in which the assessee was assessed as a non-resident under the

Income-tax Act, 1922, the ITO had "actually allowed" only a portion

of the amount towards depreciation allowable in assessing its world

income. It was further held that the mere fact that in the matter of

calculation, the total amount of depreciation was first deducted

from the world income (composite income) and thereafter a

proportion was struck did not amount to an actual allowance of the

entire depreciation in ascertaining the taxable income that accrued

in British India. Therefore, it was held, that, the depreciation

deducted in arriving at the taxable income alone could be taken

into account and not the depreciation taken into account for

arriving at the world income (composite income).

11. In our view the above judgment of the Supreme Court

squarely applies to the present case. Assessee is engaged in the

business of growing and manufacturing of tea. As per the

provisions of Section 10(1) of the 1961 Act read with Rule 8, 40 per

cent of the business income derived from the sale of tea grown and

manufactured in India by the assessee was liable to tax. In the

above judgment of the Supreme Court, the Court was concerned

with the world income, in this case we are concerned with the

composite income. Therefore, in our view the judgment of the 1 0 Supreme Court, above referred to, is squarely applicable to the

present case. Therefore, we do not see any infirmity in the

impugned judgment of the High Court.

12. Be that as it may, we can give the following illustration(s)

which will give an example of how the "written down value" needs

to be computed:

Illustration `A'

Rs.

Income from sale of tea 1000

Less: Expenses - Depreciation (100) Others (300)

Business Profit 600 Income subject to charge under the Income 240 Tax Act by application of Rule 8 (40% of 600)

Illustration `B'

Rs. Income from sale of tea (40% of 1000) 400

Less: Expenses - Depreciation (40) Others (40% of 300) (120)

Business Profit subject to charge of income 240 tax (40% of 600) 1 1

13. Analysing the above two charts, we find that at the end of

computation the income chargeable to tax by applying Rule 8

comes to Rs.240. Under Illustration `A', the normal depreciation is

Rs.100 which is deductible from Rs.1000 being the income from

sale of tea. On the other hand, under Illustration `B', we have

taken 40 per cent of each of the items, namely, income from sale of

tea, depreciation and other expenses. Accordingly, on comparison

it may be noted that whereas income from sale of tea is Rs.1000

under Illustration `A', proportionately it comes to Rs.400 under

Illustration `B'. Similarly, depreciation under Illustration `A' which

is normal depreciation is Rs.100 whereas in Illustration `B' at 40

per cent the pro rata depreciation is 40. What is important to be

noted is that at the end of computation under both the

Illustrations, the income taxable by applying Rule 8 comes to

Rs.240 in both the cases. The only difference is that in Illustration

`B' we have gone by pro rata basis.

14. The important thing to be noted is that according to the

Department, in the succeeding year, the opening "written down

value" of the assets would be Rs.900 (Rs.1000 for the cost of the

assets less Rs.100) as indicated in Illustration `A' whereas, if one

goes by Illustration `B' the "written down value" comes to Rs.960 1 2 (Rs.1000 for the cost of the asset(s) minus 40), being the

depreciation in Illustration `B'.

15. According to the assessee, in view of the law laid down by the

judgment of this Court in the case of Madeva Upendra Sinai

(supra), the "written down value" should be computed at Rs.960

and not at Rs.900 as claimed by the Department.

16. In our view, in cases where Rule 8 applies, the income which

is brought to tax as "business income" is only 40 per cent of the

composite income and consequently proportionate depreciation is

required to be taken into account because that is the depreciation

"actually allowed". Hence we find no merit in the civil appeals filed

by the Department.

17. Before concluding, we may state that the judgment of this

Court in Commissioner of Income Tax v. Willamson Financial

Services and Others - (2008) 297 ITR 17, has no application to

the present cases. Willamson Financial Services case (supra) was

rendered in the context of deduction under Section 80-HHC of the

1961 Act. Section 80-HHC comes under Chapter VIA. Chapter VIA

refers to special deductions. It is a separate Code by itself. There 1 3 is a distinction between "deductions/allowances in Section 30 to

Section 43D" and "deductions admissible under Chapter VIA".

Deductions/allowances provided in Sections 30 to 43D are allowed

in determining Gross Total Income and are not chargeable to tax

because the same constitute charge on profit, whereas, deductions

under Chapter VIA are allowed from Gross Total Income chargeable

to tax. Therefore, the judgments rendered in the context of Section

80-HHC of the 1961 Act, both by this Court and by the Kerala High

Court, stand on different footing.

18. For the aforestated reasons, we find no merit in the

Department's civil appeals which are accordingly dismissed with no

order as to costs.

.................................J. (S.H. Kapadia)

................................J. (H. L. Dattu)

New Delhi;

February 18, 2009.