1967 (9) TMI 20 - HC - Income Tax

Depreciation - asset is partially used for purposes of business - held that proportionate part of the cost of asset could not be considered to calculate proportionate depreciation - held that proportionate depreciation can be calculated by deducting from original cost of the asset only the actual depreciation allowed for part user

Issues Involved:
1. Proper construction of sections 10(2)(vi), 10(3), and 10(5) of the Indian Income-tax Act.
2. Calculation of proportionate depreciation for assets partially used for business purposes.

Detailed Analysis:

Issue 1: Proper Construction of Sections 10(2)(vi), 10(3), and 10(5)
The court examined the correct interpretation of sections 10(2)(vi), 10(3), and 10(5) of the Indian Income-tax Act to determine how depreciation should be calculated for assets partially used for business purposes. The key question was whether depreciation should be calculated by taking a proportionate part of the cost of the asset or by deducting from the original cost only the actual depreciation allowed for part usage.

Section 10(2)(vi): This section grants depreciation allowance "in respect of buildings, machinery, plant or furniture being the property of the assessee, a sum equivalent to such percentage on the original cost thereof to the assessee as may be prescribed." The court emphasized that depreciation is granted on the asset as a whole, not on a proportionate part of the asset.

Section 10(3): This section directs that where an asset is not wholly used for business purposes, the depreciation allowance should be restricted "to the fair proportional part of the amount which would be allowable if such asset was wholly so used." The court clarified that this section comes into operation only after the full depreciation is computed in terms of section 10(2)(vi).

Section 10(5): Defines "written down value" as the actual cost to the assessee less all depreciation actually allowed. The court highlighted that "depreciation actually allowed" means the depreciation that results in monetary advantage to the assessee, not any notional or allowable depreciation.

Issue 2: Calculation of Proportionate Depreciation
The court analyzed whether the Income-tax Officer's method of calculating depreciation by dividing the cost of the vehicles in the proportion of their business and personal use was correct.

Past Method: The Income-tax Officer had calculated the written down value by taking the actual cost of the vehicles and deducting the depreciation that would be allowed had the vehicles been wholly used for business purposes. He then divided this depreciation pro rata between business and personal use.

New Method (1959-60): The Income-tax Officer changed the method by dividing the cost of the vehicles in the proportion of their user (two-thirds for business and one-third for personal use) and computed depreciation on such proportionate cost. The Appellate Assistant Commissioner set aside this method, directing the officer to revert to the old method.

Tribunal's Decision: There was a difference of opinion between the Judicial Member and the Accountant Member. The Judicial Member supported the Appellate Assistant Commissioner's view that the asset's cost should not be disintegrated for depreciation calculation. The Accountant Member argued that computing depreciation on the apportioned cost was consistent with the scheme of the allowance under section 10.

President's Decision: The President agreed with the Judicial Member, emphasizing that the law's interpretation should grant the assessee the rightful allowance, regardless of any absurdities in the result.

Court's Conclusion: The court agreed with the Appellate Assistant Commissioner's view, stating that depreciation should be computed on the asset as a whole and then proportionately divided based on its business and personal use. The court found support for this view in the Andhra Pradesh High Court's decision in Vankadam Lakshminarayana v. Commissioner of Income-tax, which rejected the idea of splitting the asset's cost for depreciation purposes.

Final Judgment:
1. Part (a): The court answered in the negative, rejecting the method of calculating depreciation by taking a proportionate part of the cost of the asset.
2. Part (b): The court answered in the affirmative, supporting the method of deducting from the original cost only the actual depreciation allowed for part usage.

The Commissioner was ordered to pay the costs of the assessee.

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