1962 (7) TMI 65 - HC - Income Tax

Summary

Issues:
1. Computation of written down value for the second proviso to section 10(2)(vii) of the Income-tax Act.

Analysis:
The case involved a dispute regarding the inclusion of initial depreciation in computing the written down value for the second proviso to section 10(2)(vii) of the Income-tax Act for the assessment year 1951-52. The assessee, a company incorporated in 1927, sold its assets in 1950, triggering the application of the second proviso to determine profits. The disagreement centered on whether initial depreciation should be included in the written down value calculation. The Tribunal referred the question of law to the High Court.

The written down value, as per section 10(5) of the Act, is determined by deducting all depreciation allowed from the actual cost of assets acquired. The Act allows for three types of depreciation: normal, initial, and additional. The department contended that all three types of depreciation should be included in the written down value calculation. However, the assessee argued that initial depreciation should not be included. The Tribunal and income-tax authorities rejected the assessee's contention, leading to the reference to the High Court.

The High Court analyzed the relevant provisions of the Act, particularly clause (vi) and clause (b) of section 10(5). The Court noted that clause (vi) explicitly states that initial depreciation is not deductible for determining the written down value under clause (vi). However, for the second proviso to clause (vii), the initial depreciation can be included in the written down value calculation. The Court emphasized that the initial depreciation had been allowed to the assessee and was permitted under the Act. Therefore, the Court held that there was no merit in the assessee's contention to exclude initial depreciation.

The Court also highlighted that the provision regarding initial depreciation under clause (vi) aims to protect the assessee's interest in receiving normal depreciation in subsequent years. The scheme under clause (vii) seeks to recover tax on the depreciation allowed when assets are sold. The Court, considering the legislative intent and plain language of the provisions, ruled in favor of including initial depreciation in the written down value calculation for the second proviso to clause (vii) of section 10(2).

In conclusion, the High Court answered the question in the affirmative, stating that initial depreciation should be included in computing the written down value for the second proviso to section 10(2)(vii) of the Income-tax Act. The Court also noted a supporting decision and directed the assessee to bear the costs of the department.