1964 (9) TMI 12 - SC - Income Tax

Whether four-fifths of the sum of 1, 21, 245 written off in the books of the assessee as depreciation for the calendar year 1953 is allowable as a deduction in the assessment completed under section 10(7) and the rules contained in the Schedule of the Income-tax Act 1922? Held that - Rule 3(b) does not empower the Income-tax Officer to adjust the accounts on the basis of a revaluation made by him or to correct the discrepancy between what is entered in the accounts and what is fact. We accept the appeal and answer the question in the affirmative. Appeal allowed.

Issues Involved:
1. Allowability of depreciation as a deduction under Section 10(7) and the rules contained in the Schedule of the Indian Income-tax Act, 1922.
2. Interpretation of Rule 3(b) and Rule 6 of the Schedule to the Income-tax Act.
3. The distinction between actual and notional depreciation.
4. The role of the Insurance Act, 1938, in determining the valuation of assets and the balance of profits in insurance businesses.

Issue-wise Detailed Analysis:

1. Allowability of Depreciation as a Deduction:
The primary issue revolves around whether four-fifths of the sum of Rs. 1,21,245 written off as depreciation by the assessee, a public limited company engaged in general insurance, is allowable as a deduction under Section 10(7) of the Indian Income-tax Act, 1922. The Income-tax Officer disallowed four-fifths of the depreciation claimed, reasoning that the rentals from the portion of the building let out were shown separately under the head 'Property' and claimed as 'exempt' under Section 4(3)(xii). The Appellate Assistant Commissioner disallowed the entire claim on the ground that the property was new and thus, there could be no actual depreciation.

2. Interpretation of Rule 3(b) and Rule 6:
The judgment delves into the interpretation of Rule 3(b) and Rule 6 of the Schedule to the Act. Rule 3(b) states that any amount written off or reserved in the accounts to meet depreciation of or loss on the realization of securities or other assets shall be allowed as a deduction. Rule 6 stipulates that the profits and gains of any business of insurance other than life insurance shall be taken to be the balance of the profits disclosed by the annual accounts after making necessary adjustments. The court emphasized that Rule 3(b) does not empower the Income-tax Officer to adjust the accounts based on a revaluation made by him or to correct discrepancies between the accounts and factual values.

3. Actual vs. Notional Depreciation:
The court examined whether the term "depreciation" in Rule 3(b) includes both actual and notional depreciation. The court concluded that the word "depreciation" covers notional depreciation as well. The court referred to the decision in Life Insurance Corporation of India v. Commissioner of Income-tax, where it was held that the Income-tax Officer must allow the depreciation written off in the accounts and has no discretion to adjust the accounts based on his revaluation.

4. Role of the Insurance Act, 1938:
The court considered the detailed provisions of the Insurance Act, 1938, which ensure the true valuation of assets and the determination of the true balance of profits of an insurance business. The Act mandates the preparation of a balance-sheet, profit and loss account, and a revenue account, which must be audited and furnished to the Controller of Insurance. The court noted that these provisions aim to provide an accurate reflection of the insurer's financial position and should be read in conjunction with Rule 6 and Rule 3(b) of the Income-tax Act.

Conclusion:
The court accepted the appeal and answered the question in the affirmative, allowing the depreciation claimed by the assessee. The court held that the word "depreciation" in Rule 3(b) includes notional depreciation and that the Income-tax Officer must allow the amount written off in the accounts. The respondent was ordered to pay the costs incurred in the Supreme Court and the High Court. The appeal was allowed, providing clarity on the interpretation of depreciation under the Income-tax Act in the context of insurance businesses.

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