Commissioner of Income-Tax, Punjab
Jammu & Kashmir Vs. M/S. Alps Theatre, Patiala [1967] INSC 64 (15 March
1967)
15/03/1967 SIKRI, S.M.
SIKRI, S.M.
SHAH, J.C.
RAMASWAMI, V.
CITATION: 1967 AIR 1437 1967 SCR (3) 181
CITATOR INFO :
D 1992 SC1782 (10)
ACT:
Indian Income-tax Act, 1922 (11 of 1922), s.
10(2)(4)Depreciation--If land included.
HEADNOTE:
The Revenue authorities did not allow
depreciation on the cost of land alongwith the cost of building standing
thereon. The Appellate Tribunal accepted the assessee's appeal and the High
Court answered the question in favour of the assessee. In appeal to this Court
by the Revenue:
HELD: The appeal must be allowed.
Building under s. 10(2), does not include the
site because there cannot be any question of destruction of the site.
[183 E] The word used in s. 10(2)(vi) is
"depreciation" and "depreciation" means "a decrease in
value of property through wear, deter oration, or obsolescence, and allowance
made for this in book-keeping, accountings etc." In that sense land cannot
depreciate. [183 H] By r. 8 of the Indian Income-tax Rules the rate of
depreciation is fixed on the nature of the structure. It would be difficult to
appreciate why the depreciation of land would be dependent on the class of
structures. [184 DE] The whole object of s. 10 is to arrive at the assessable
income of a building after allowing necessary expenditure and deductions. If
depreciation on land was allowed it would give a wrong picture of the true
income. [184 F-G] Corporation of the City of Victoria and Bishop of Vancover
[1921] 2 A.C 384, distinguished.
CIVIL APPELLATE JURISDICTION: Civil Appeal
No. 26 of 1966.
Appeal from the judgment and order dated
October 28, 1964 of the Punjab High Court in I. T. Reference No. 28 of 1962.
S. K. Mitra, Gopal Singh, S. P. Nayyar and R.
N. Sachthey,. for the appellant.
Veda Vyasa and B. N. Kirpal, for the
respondent.
The Judgment of the Court was delivered by
Sikri, J. At the instance of the Commissioner of Income Tax,, the Appellate
Tribunal, Delhi Bench "C", referred the following question
"Whether the cost of land is entitled to depreciation under the schedule
to the Incometax Act alongwith the cost of the building standing
thereon.?" 182 This question arose out of the following facts : The respondent,
M/s Alps Theatre, hereinafter referred to as the assessee, carries on business
as exhibitor of films. The Income Tax Officer initiated proceedings under s.
34(1)(b) of the Indian Income Tax Act, 1922, on the ground that in the original
assessment depreciation was allowed on the entire cost of Rs. 85,091/-, shown
as cost ,of the building which included Rs. 12,000/as cost of land. The Income
Tax Officer, by his order dated February 22, 1959, recomputed the depreciation,
excluding cost of land. The assessee appealed to the Appellate Assistant
Commissioner. The Appellate Assistant Commissioner upheld the order of the
Income Tax Officer. The assessee then appealed to the Appellate Tribunal which
accepted the appeal. In accepting the appeal it observed as follows :
"You cannot conceive of a building
without the land beneath it. It is not possible to conceive of a building
without a bottom. What Section (10) (2) (vi) of the Act says is that
depreciation will be allowed on the building.
The word "building" itself connotes
the land upon which something has been constructed. It was, therefore, wrong on
the part of the authorities below to exclude the value of the land upon which
some construction was made.
The true meaning of the word 'building' means
the land upon which some construction has been made. The two must necessarily
go together." The High Court answered the question referred to it against
the Department. Mahajan, J., observed that in Section 10(2)(vi) of the Income
Tax Act, a building is placed at par with machinery and furniture and is
treated as a unit, and, therefore, for the purposes of depreciation a building
cannot be split up into building material and land. He further observed that if
the Legislature wanted to exclude land from the building for purposes of
depreciation it could have said so. He then added :
"Moreover, depreciation is allowed on
the capital. The capital here is a unit building.
If later on it is sold and it fetches more
than its written down value the surplus is liable to tax [see in this
connection Section 10(2) (vii) proviso.]" He felt that "the crux of
the matter is that the building is treated as a unit for purposes of
depreciation or repair, and there is no warrant in the Act which would permit us
to split the unit for the purposes of section IO." He further felt that at
any rate two equally plausible interpretations are possible and the one in
favour of the assessee should be adopted.
183 Dua, J., in a concurring judgment, felt
that the question was not free from difficulty, but he answered the question in
favour of the assessee on the ground that much could be said for both points of
view and the view in support of the assessee's submission had found favour with
the Tribunal which had not been shown to be clearly erroneous.
The answer to the question depends upon the
true interpretation of S. 10(2)(vi), and in particular whether the word
"building" occurring in it includes land. Section 10 deals with the
profits and gains derived from any business, profession or vocation. Section
10(2) provides that such profits or gains shall be computed after making
certain allowances. The object of giving these allowances is to determine the
assessable income. The first three allowances consist of allowance for rent paid
for the business premises, allowance for capital repairs and allowance for
interest in respect of capital borrowed. Sub-clauses (iv), (v), (vi), (vi-a)
and (vii) of S. 10(2) deal with allowances in respect of buildings, machinery,
plant or furniture. The word "building" must have the same meaning in
all these clauses. Sub-clause (iv) runs as under :
"in respect of insurance against risk of
damage or destruction of buildings, machinery, plant, furniture,stocks or
stores, used for the purpose of the business,profession or vocation, the amount
of any premium paid." "Building" here clearly, it seems to us,
does not include the site because there cannot be any question of destruction
of the site. Clause (v) reads :
" in respect of current repairs to such
buildings, machinery, plant or furniture, the amount paid on account
thereof." This again cannot include the site. Then we come to sub-cl.
(vi), the relevant portion of which reads as
under :
"in respect of depreciation of such
buildings, machinery, plant or furniture being the property of the assessee, a
sum equivalent .... as may in any case or class of cases be prescribed."
It would be noticed that the word used is "depreciation" and
"depreciation" means :
a decrease in value of property through wear,
deterioration, or obsolescence the allowance made for this in book-keeping,
accounting, etc." (Webster's New World Dictionary').
In that sense land cannot depreciate. The
other words to notice are "such buildings". We have noticed that in
subcls. (iv) and 184 (v), "building" clearly means structures and
does not include site. That this is the proper meaning is also borne out by r.
8 of the Indian Income Tax Rules, 1922. Rule 8 has a schedule, and as far as
buildings are concerned, it reads as under :
Class of asset Rate perRemarks centage
1.Buildings (1) First class substantial buildings of materials.. 2.5 Double
these numbers (2)Scond class building will be taken for factory of less
substantial con5 buildings excluding struction.... offices,godowns,officer's
(3)Third class building 7.5 and employees quarters.
of construction infeior to that of second
class building,but not including purely temporory erection.
(4) Purely temporary No rate is prescribed:
erection such as wooden renewals will be allowed
structure. as revenue expenditure.
The rate of depreciation is fixed on the
nature of the structure. If it is a first class substantial building, the rate
is less. In other words, first class building would depreciate at a much less
rate than a second class building.
It would be noticed that for purely temporary
erections, such as wooden structures, no rate of depreciation is prescribed and
instead renewals are allowed as revenue expenditure. But if the contention of
the respondent is right, some rate for depreciation should have been prescribed
for land under the temporary structures. Further it would be difficult to
appreciate why the land under a third class building should depreciate three
times quicker than land under a first class building.
One other consideration is important. The
whole object of s. 10 is lo arrive at the assessable income of a business after
allowing necessary expenditure and deductions.
Depreciation is allowable as a deduction both
according to accountancy principles and according to the Indian Income Tax Act.
Why'? Because otherwise one would not have a true picture of the real income of
the business. But land does not depreciate, and if depreciation was allowed it
would give a wrong picture of the true income.
The High Court relied on Corporation of the
City of Victoria and Bishop of Vancouver Island(), but in our view this case is
distinguishable and gives no assistance in determining the meaning of the 'word
'buildings' in the context of S.
10(2)(vi). In this case the Privy Council had
to construe S. 197(1) of the Municipal Act, British Columbia, which exempted
from municipal rates and taxes (1) [1912] 1 2 A.C. 384.
185 "every building set apart and in use
for the public worship of God." The Privy Council held that the above
exemption applied to the land upon which a building of the description
mentioned above was erected as well as to the fabric. The Privy Council was not
concerned with the question of depreciation but with the question of exemption
from Municipal rates.
In the result the appeal succeeds, the
judgment of the High Court set aside and the question referred is answered in
the negative and against the assessee. In the circumstances there will be Y.P
Appeal allowed.
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