1937 (9) TMI 8 - HC - Income Tax

Summary

Issues:
1. Interpretation of Rule 30 of the Income-tax Rules regarding deduction for depreciation in the value of securities held by the assessee.
2. Whether the assessee can treat the sums set aside for depreciation as expenditure incurred solely for earning profits without considering the appreciation in the value of securities in the subsequent year.

Analysis:
The judgment by the Bombay High Court involved a reference by the Acting Commissioner of Income-tax regarding the refusal of deduction for depreciation in the value of securities held by the assessee. The main question raised was whether the Assistant Commissioner's action in denying the deduction claimed by the assessee under Rule 30 of the Income-tax Rules was correct. The rule allows amounts written off or carried to a reserve fund for depreciation or loss on securities to be treated as expenditure for earning business profits. The assessee, a life insurance company, faced depreciation in investments in the first two years and set aside sums to a reserve fund, which were less than the actual depreciation. However, there was appreciation in the value of securities in the third year. The key issue was whether the assessee could claim these sums as expenditure without considering the subsequent appreciation.

The court analyzed Rule 30 and the contention of the Commissioner of Income-tax regarding the permissive nature of the rule. The Commissioner argued that the discretion to allow such expenditure lies with the Income-tax Officer. However, the court held that the permission granted by the rule is to the assessee, allowing them to treat the sums as expenditure for earning profits. The rule does not mandate bringing back the sums into the revenue account once the depreciation is made good. The court emphasized that the reserve fund must be used only for depreciation or loss, ensuring safeguards against excessive reservations to evade taxation. The court found the Assistant Commissioner's fact-finding irrelevant and answered the question in the negative, supporting the assessee's right to treat the sums as expenditure.

Justice Blackwell concurred with the interpretation, rejecting the Commissioner's argument that only the Income-tax Officer had the option to treat the sums as expenditure. The judge highlighted that the rule gives the assessee the option to set aside amounts justified by actual losses, irrespective of subsequent appreciation. The court emphasized that once the assessee exercises this option in accordance with the rule, there is no obligation to bring back the sums. The judgment concluded with the agreement that the question should be answered in the negative, supporting the assessee's right to claim the deduction for depreciation without considering the appreciation in the subsequent year.