1981 (9) TMI 67 - HC - Income Tax

Summary

Issues Involved:
1. Whether the written down value of the assets should be taken without deducting the allowance made under section 32(1)(iv) of the Income-tax Act, 1961, for the purposes of computation of capital employed in the industrial undertaking within the meaning of section 84 of the Income-tax Act, 1961.

Detailed Analysis:

1. Tribunal's Decision and Assessee's Claim:
The Tribunal held that for the purposes of computation of capital employed in the industrial undertaking within the meaning of section 84 of the Income-tax Act, 1961, the written down value of the assets should be taken without deducting the allowance made under section 32(1)(iv) of the said Act. The assessee-company, being a newly created undertaking, claimed relief under section 84, which allowed for profits or gains not exceeding 6% per annum on the capital employed. The assessee argued that the initial depreciation of Rs. 35,542 under section 32(1)(iv) should be excluded in arriving at the written down value of the company's assets. The Income Tax Officer (ITO) did not accept this claim and included the initial depreciation in the written down value, which was upheld by the Appellate Assistant Commissioner (AAC) but later overturned by the Tribunal.

2. Relevant Provisions and Definitions:
Section 84 of the Income-tax Act provided that income tax shall not be payable on profits and gains derived from a newly established industrial undertaking to the extent of 6% per annum on the capital employed, computed in the prescribed manner. Rule 19 of the Income-tax Rules, 1962, prescribed the manner of computation of the capital employed, stating that for assets entitled to depreciation, their written down value on the commencement date should be taken. Rule 19(6) defined "depreciation" and "written down value" in terms of allowances under section 32(1), including initial depreciation under section 32(1)(iv).

3. Legal Interpretation and Analysis:
The court examined whether the initial depreciation under section 32(1)(iv) should be excluded from the written down value for computing the capital employed under section 84. The court noted that section 32(1)(iv) provides for initial depreciation for newly constructed buildings used for employees' residences and specifies that this sum should not be deductible in determining the written down value for usual depreciation under section 32(1)(ii). However, the court emphasized that the provisions of Chapter IV (which includes section 32) and Chapter VII (which includes section 84) operate in different fields-one dealing with income computation and the other with tax benefits for newly established undertakings.

4. Court's Conclusion:
The court concluded that the written down value for the purposes of section 84 should include all types of depreciation actually allowed, including initial depreciation under section 32(1)(iv). The definitions adopted for section 84 and Rule 19 included all depreciation types, and the exclusion specified in section 32(1)(iv) was only for computing usual depreciation under section 32(1)(ii). The court rejected the assessee's reliance on the decision in Burmah-Shell Refineries Ltd. v. G. B. Chand, stating that the observations in that case were obiter dicta and not binding. The court also found the Madras High Court's decision in CIT v. Lucas-TVS Ltd. (No. 1) unpersuasive due to a lack of reasoning.

Judgment:
The court answered the question in the negative, holding in favor of the revenue. The written down value for computing the capital employed under section 84 should include the initial depreciation allowed under section 32(1)(iv). The assessee was ordered to pay the costs of the reference to the revenue.