1976 (11) TMI 41 - HC - Income Tax

Capital Asset Claiming Depreciation Depreciation And Development Rebate Priority Industry Unabsorbed Depreciation

Summary

Issues Involved:
1. Deduction under Section 80E of the Income-tax Act, 1961.
2. Inclusion of indirect expenditure in capital assets for depreciation and development rebate.
3. Depreciation on expenditure incurred on road construction.

Issue-wise Detailed Analysis:

1. Deduction under Section 80E of the Income-tax Act, 1961:

The first issue concerns whether the assessee is entitled to an 8% deduction from its profits and gains under section 80E of the Income-tax Act, 1961, for the assessment year 1967-68. The assessee, a priority industry, claimed a deduction of 8% on its entire income of Rs. 71,43,105. The Income-tax Officer, however, argued that unabsorbed depreciation, development rebate, and earlier business losses totaling Rs. 31,81,202 should be deducted from the profits before applying the 8% deduction. The Tribunal rejected this contention and held that the assessee was entitled to the deduction on the entirety of Rs. 71,43,105. The court upheld the Tribunal's decision, referencing a previous judgment (Commissioner of Income-tax v. L. M. Van Moppes Diamond Tools (India) Ltd.), which clarified that earlier years' losses were not to be deducted before calculating the 8% profit deduction under section 80E. The court further reasoned that unabsorbed development rebate and unabsorbed depreciation should not be deducted either, as the sequence of adjustments places unabsorbed depreciation after the adjustment of business losses.

2. Inclusion of Indirect Expenditure in Capital Assets for Depreciation and Development Rebate:

The second issue pertains to whether Rs. 1,30,768, representing indirect expenditure such as salaries, rent, and lighting, should be included in the capital assets for the purpose of depreciation allowance and development rebate. The assessee had capitalized this expenditure and allocated it to capital assets. The Income-tax Officer excluded this amount, considering it unrelated to the installation of machinery and acquisition of other assets. The Tribunal, however, held that this expenditure formed part of the capital assets. The court affirmed the Tribunal's decision, citing the Supreme Court's ruling in Challapalli Sugars Ltd. v. Commissioner of Income-tax and Commissioner of Income-tax v. Hindustan Petroleum Corporation, which established that all necessary expenditures to bring assets into existence and working condition should be included in the cost of fixed assets.

3. Depreciation on Expenditure Incurred on Road Construction:

The third issue involves whether the expenditure incurred on the construction of roads is entitled to depreciation as part of the building under section 32 of the Income-tax Act, 1961. The assessee claimed depreciation on roads laid out on its land, which the Income-tax Officer and the Appellate Assistant Commissioner denied, classifying roads as land not eligible for depreciation. The Tribunal, however, allowed the depreciation claim, noting that the roads provided access to the factory and ancillary buildings. The court upheld the Tribunal's decision, reasoning that the term "building" should be understood in a common-sense manner and in the context of the Income-tax Act's provisions for depreciation. The court distinguished this case from the Supreme Court's decision in Commissioner of Income-tax v. Alps Theatre, which dealt with the cost of land under a building, not roads. The court concluded that roads, being integral to the factory's operation and subject to wear and tear, are eligible for depreciation.

Conclusion:

The court answered all questions in favor of the assessee and against the revenue, affirming the Tribunal's decisions on all three issues. The assessee is entitled to the 8% deduction under section 80E without deducting unabsorbed depreciation, development rebate, or earlier business losses. Indirect expenditures are to be included in capital assets for depreciation and development rebate, and the expenditure on road construction is eligible for depreciation.