1983 (5) TMI 41 - AT - Income Tax

Summary

Issues:
- Interpretation of Section 41(2) regarding deemed profit on the sale of an asset.
- Determination of written down value and depreciation for the purpose of calculating profit under Section 41(2).

Analysis:
The appeal before the Appellate Tribunal ITAT Allahabad-B involved a dispute over the application of Section 41(2) concerning the deemed profit on the sale of a truck. The assessee, an individual engaged in the business of plying trucks, sold a truck during the relevant assessment year. The Income Tax Officer (ITO) calculated the profit under Section 41(2) by determining the written down value of the truck based on the depreciation that would have been allowable for previous assessment years. The ITO added the difference between the sale price and the calculated written down value as the assessee's profit under Section 41(2. However, the assessee contended that since no depreciation was actually allowed in previous years, Section 41(2) should not apply. The Appellate Tribunal noted the conflicting interpretations and legal precedents cited by both parties.

The Departmental representative relied on the ITO's order, arguing for the application of Section 41(2) based on the depreciation that would have been allowable. In contrast, the assessee's counsel referenced legal rulings, including the Supreme Court and High Court decisions, emphasizing that depreciation must be actually allowed, not notionally allowed, for Section 41(2) to be invoked. The counsel asserted that since no depreciation was worked out or allowed in previous assessments, there was no basis for deeming a profit under Section 41(2).

After considering the submissions, the Tribunal referred to the Supreme Court and High Court decisions cited by the parties. It clarified that for Section 41(2) to apply, depreciation must have been actually allowed as a deduction while computing business income, not merely notionally allowed. As no depreciation was worked out or allowed in prior assessments, the Tribunal concluded that Section 41(2) could not be invoked in the present case. Therefore, the profit calculated by the ITO based on notional depreciation was deemed unjustified, and the deletion of the addition by the Appellate Authority was upheld.

In the final judgment, the Tribunal dismissed the appeal, affirming the decision that there was no deemed profit under Section 41(2) due to the absence of actual depreciation allowance in prior assessments.