Commr.of Income Tax, Dibrugarh
Vs. Doom Dooma India Ltd.  INSC 357 (18 February 2009)
IN THE SUPREME COURT
OF INDIA CIVIL APPELLATE JURISDICTION CIVIL APPEAL NO. 1094 OF 2009 (Arising
out of S.L.P.(C) No.13070 of 2007) 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
S. H. KAPADIA, J.
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.
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)
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.
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.
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).
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
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.
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.
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
"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."
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
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
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).
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.
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
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
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'.
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.
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.
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".
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.
the aforestated reasons, we find no merit in the Department's civil appeals which
are accordingly dismissed with no order as to costs.
(H. L. Dattu)