1962 (8) TMI 71 - HC - Income Tax

Issues Involved:

1. Determination of "actual cost" under Section 10(5)(a) for depreciation allowance.
2. Allocation of payment to depreciable assets.
3. Timing of liability and its impact on depreciation.
4. Nature of services rendered and their attribution to depreciable assets.
5. Impact of subsequent agreement on the original cost.

Issue-wise Detailed Analysis:

1. Determination of "actual cost" under Section 10(5)(a) for depreciation allowance:

The core issue was the determination of the "actual cost" of depreciable assets acquired by the assessee for the purpose of computing depreciation allowance under Section 10(2)(vi) and 10(2)(via) of the Indian Income-tax Act, 1922. The definition of "written down value" under Section 10(5) was central to this determination. The Tribunal had to ascertain whether the sum of Rs. 3,30,000 paid to Manu Subedar could be included in the "actual cost" of the depreciable assets.

2. Allocation of payment to depreciable assets:

The assessee claimed that the entire sum of Rs. 3,30,000 paid to Manu Subedar should be included in the actual cost of the cinema building for depreciation purposes. The Income-tax Officer rejected this, considering it a preliminary expense for establishing the business. The Appellate Assistant Commissioner partially accepted the assessee's claim, allocating Rs. 2,31,000 to the cost of depreciable assets. The Tribunal, however, rejected the inclusion of any part of Rs. 3,30,000 in the cost of depreciable assets.

3. Timing of liability and its impact on depreciation:

The Tribunal also considered whether the liability to pay Rs. 3,30,000, which arose on July 10, 1950, could be taken into account for the assessment year 1950-51. The Tribunal did not address this point in detail, but the High Court noted that the timing of the liability's accrual was crucial for determining the depreciation allowance.

4. Nature of services rendered and their attribution to depreciable assets:

The services rendered by Manu Subedar included obtaining permissions, securing finance, procuring materials, and providing valuable advice during construction. The High Court scrutinized these services to determine if they were attributable to the acquisition of depreciable assets. It concluded that services related to plans, permits, import licenses, and foreign exchange facilities could be considered part of the acquisition cost of depreciable assets.

5. Impact of subsequent agreement on the original cost:

The subsequent agreement on July 10, 1950, replaced the original agreement of June 4, 1948, and fixed a lump sum payment of Rs. 3,30,000 in lieu of 2% of gross annual income for 20 years. The High Court determined that this payment was to release the assessee from the original agreement's burden, and part of this sum attributable to the acquisition of depreciable assets should be included in the actual cost.

Conclusion:

The High Court reframed the question to determine whether any part of Rs. 3,30,000 was attributable to the actual cost of acquiring depreciable assets and thus included in the depreciation allowance. The Court concluded that a portion of the sum, attributable to services related to the acquisition of depreciable assets, should be included in the cost. The Tribunal was directed to ascertain the appropriate portion of Rs. 3,30,000 to be included in the cost of depreciable assets for the relevant assessment years. The question was answered in the affirmative, and the Commissioner was ordered to pay the costs of the assessee.

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