2009 (2) TMI 9 - SC - Income Tax

Meaning of expression depreciation actually allowed in S. 43(6)(b) is that limited to depreciation actually taken into account i.e. debited by the ITO against the incomings of the business in computing the taxable income - for computing depreciation in cases falling u/r 8 of ITR, the income which is brought to tax as business income is only 40 % of the composite income & consequently proportionate depreciation should be taken into account because that is the depreciation actually allowed

Summary

Issues Involved:
1. Meaning of the expression "depreciation actually allowed" in Section 43(6)(b) of the Income-tax Act, 1961.
2. Computation of depreciation in cases falling under Rule 8 of the Income-tax Rules, 1962, dealing with the taxability of composite income.

Detailed Analysis:

Issue 1: Meaning of "Depreciation Actually Allowed" in Section 43(6)(b) of the Income-tax Act, 1961

The Supreme Court addressed the interpretation of the term "depreciation actually allowed" as found in Section 43(6)(b) of the Income-tax Act, 1961. The Court emphasized that the term "actually" is crucial, indicating that depreciation must be genuinely taken into account or granted and given effect to by the Income-tax Officer in computing the taxable income of the assessee. The Court referred to its earlier decision in Madeva Upendra Sinai v. Union of India and Others, which clarified that "actually allowed" means depreciation that is not speculative, theoretical, or imaginary but is actually debited against the business income. The Court reiterated that "actually allowed" depreciation is limited to what has been granted and accounted for in the taxable income computation.

Issue 2: Computation of Depreciation in Cases Covered by Rule 8

The Court examined how to compute depreciation under Rule 8, which deals with the taxability of composite income, particularly in the context of the tea industry where 40% of the business income is taxable. The Court referred to the case of Commr. of Income-tax, Madhya Pradesh, Nagpur and Bhandara v. Nandlal Bhandari Mills Ltd., which dealt with the computation of depreciation in the context of composite income. The judgment clarified that only the depreciation deducted in arriving at the taxable income, not the world income, should be considered as "actually allowed."

Applying this principle, the Court held that in cases where Rule 8 applies, the income brought to tax as "business income" is only 40% of the composite income, and consequently, proportionate depreciation should be taken into account as "actually allowed." The Court provided illustrative examples to demonstrate the correct computation method, showing that the written down value (WDV) should be computed by deducting the proportionate depreciation (40% in this case) from the actual cost of the assets.

Conclusion:

The Court found no merit in the Department's appeals and upheld the High Court's judgment, affirming that the "written down value" should be computed by deducting 40% of the depreciation from the actual cost of the assets, as this represents the depreciation "actually allowed." The Court also clarified that the judgment in Commissioner of Income Tax v. Willamson Financial Services and Others, which dealt with Section 80-HHC, does not apply to the present case as it pertains to special deductions under Chapter VIA, which is distinct from the general deductions under Sections 30 to 43D of the Income-tax Act.

The civil appeals filed by the Department were dismissed with no order as to costs.