1993 (8) TMI 65 - HC - Income Tax

Business Expenditure, Deposits, Depreciation, Depreciation Actually Allowed, Disallowance, Tea Business, Written Down Value

Issues Involved:
1. Interpretation of section 43(6) of the Income-tax Act read with rule 8(1) of the Income-tax Rules, 1962, regarding the computation of the written down value of depreciable assets used in tea business.
2. Applicability of section 40A(8) of the Income-tax Act, 1961, on current account balances of shareholders and others.
3. Consideration of net interest payable for the purpose of allowance under section 40A(8) of the Income-tax Act, 1961.

Issue-wise Detailed Analysis:

1. Interpretation of Section 43(6) read with Rule 8(1):

The primary issue is whether for computing the written down value of depreciable assets used in tea business, only 40% of the depreciation allowable at the prescribed rate should be deducted instead of 100%. The assessee-company argued that since only 40% of its business income is chargeable to income-tax under rule 8 of the Income-tax Rules, 1962, only 40% of the depreciation should be deducted when determining the written down value of depreciable assets.

The Tribunal relied on the Supreme Court judgments in CIT v. Nandlal Bhandari Mills Ltd., CIT v. Dharampur Leather Co. Ltd., and Madeva Upendra Sinai v. Union of India, which interpreted the expression "actually allowed" in section 43(6)(b). These cases established that only the proportionate part of the depreciation that is actually used in computing taxable income should be considered. The Tribunal accepted the assessee's contention, holding that only 40% of the depreciation is actually allowed for the purpose of computing the written down value of depreciable assets in the tea business.

The High Court upheld the Tribunal's decision, agreeing that the written down value should be computed by deducting only 40% of the depreciation. The court referenced the Supreme Court's principle that the term "actually allowed" refers to the depreciation that is taken into account in computing taxable income, not the full depreciation allowed in the initial computation of composite income. Thus, the first question was answered in the affirmative and in favor of the assessee.

2. Applicability of Section 40A(8) on Current Account Balances:

The second issue concerns whether section 40A(8) of the Income-tax Act, 1961, applies to interest paid on current account balances of shareholders and others. The Income-tax Officer disallowed 15% of the interest paid on these balances, treating them as deposits under section 40A(8).

The Tribunal found that the balances in the current accounts of shareholders and directors did not fall within the definition of "deposit" as per Explanation (b) to section 40A(8). This view was supported by the Madhya Pradesh High Court in CIT v. Kalani Asbestos (P.) Ltd., which held that interest paid on current account balances does not qualify as interest on deposits.

The High Court agreed with the Tribunal, stating that the disallowance under section 40A(8) applies only to interest payable on deposits, not on current account balances. The court noted that the definition of "deposit" in section 40A(8) includes any money borrowed by the company but does not extend to current account transactions involving interest payments on balances arising from regular business activities. Consequently, the Tribunal's decision to not disallow interest under section 40A(8) was upheld.

3. Consideration of Net Interest Payable under Section 40A(8):

The third issue is whether only the net interest payable, after adjusting interest receipts against interest payments, should be considered for disallowance under section 40A(8). The Income-tax Officer disallowed 15% of the gross interest paid, without considering the net interest payable.

The Tribunal held that section 40A(8) should apply to the net interest payable, supporting the assessee's claim. However, the High Court found that the Tribunal did not provide sufficient factual findings to support this conclusion. The court noted that the definition of "deposit" in section 40A(8) is broad, including any money borrowed by the company, and emphasized the need for a detailed examination of the nature of the transactions.

Due to the lack of necessary factual findings, the High Court declined to answer the second and third questions definitively. Instead, it remanded the matter to the Tribunal for re-examination, directing it to allow the parties to present additional evidence as needed.

Conclusion:

The High Court affirmed the Tribunal's decision on the first issue, holding that only 40% of the depreciation should be deducted when computing the written down value of depreciable assets in the tea business. On the second and third issues, the court remanded the matter to the Tribunal for further fact-finding and re-examination, emphasizing the need for a detailed analysis of the transactions involved. There was no order as to costs.

← Previous Next →