1970 (8) TMI 27 - HC - Income Tax

Whether, on the facts and in the circumstances of the case, in arriving at the written down value for the purpose of computing the profits of the assessee under the second proviso to section 10(2)(vii) of the Indian Income-tax Act, 1922, the sum of Rs. 61,553 which had been allowed to the assessee as the initial depreciation under section 10(2)(vi) of the said Act was liable to be excluded? - Held yes

Summary

Issues Involved:
1. Determination of the written down value for computing profits under the second proviso to section 10(2)(vii) of the Indian Income-tax Act, 1922.
2. Inclusion or exclusion of initial depreciation in the written down value.
3. Interpretation of conflicting provisions between section 10(2)(vi) and section 10(5)(b) of the Act.

Detailed Analysis:

1. Determination of the Written Down Value for Computing Profits:

The central issue revolves around whether the initial depreciation of Rs. 61,553 should be excluded when determining the written down value for computing the assessee's profits under the second proviso to section 10(2)(vii) of the Indian Income-tax Act, 1922. The Income-tax Officer determined the written down value at Rs. 2,06,767 after considering the initial depreciation, which was contested by the assessee.

2. Inclusion or Exclusion of Initial Depreciation:

The Appellate Assistant Commissioner upheld the Income-tax Officer's determination, stating that initial depreciation should be included in the written down value for purposes other than those specified in section 10(2)(vi). The Tribunal, however, held a different view, suggesting that the initial depreciation should not be included, thereby reducing the profits liable to assessment.

The Tribunal's reasoning was that the initial depreciation, labeled as "a further sum" in section 10(2)(vib), is akin to a development rebate and should not be considered as depreciation for the purposes of section 10(5)(b). This interpretation was meant to harmonize the conflicting provisions of the Act.

3. Interpretation of Conflicting Provisions:

The revenue argued that the written down value should be determined by including all depreciation allowed under the Act, as per section 10(5)(b). This interpretation was supported by several judicial precedents:

- Bombay High Court in Motor House (Gujarat) Ltd. v. Commissioner of Income-tax: This case concluded that initial depreciation must be deducted from the actual cost when computing the written down value under the second proviso to section 10(2)(vii).
- Madras High Court in Popular Ltd., Madurai v. Commissioner of Income-tax: It was held that initial depreciation should be taken into account for purposes other than those specified in section 10(2)(vi).
- Bombay High Court in Asoka Mills Co. Ltd. v. Commissioner of Income-tax: It was observed that initial depreciation must be considered to ascertain the aggregate of all allowances.
- Mysore High Court in Esthuri Aswathiah v. Commissioner of Income-tax: This case directly addressed the issue, affirming that initial depreciation should be included in the written down value for computing profits under section 10(2)(vii).

The Supreme Court in Commissioner of Income-tax v. Bipinchandra Maganlal & Co. Ltd. also provided relevant observations, emphasizing that the difference between the written down value and the sale price, though not actual business profit, is deemed as profit for tax purposes under the Act.

Conclusion:

The court concluded that the initial depreciation of Rs. 61,553 should not be excluded when determining the written down value for computing profits under the second proviso to section 10(2)(vii). The authorities and judicial precedents supported the view that all depreciation, including initial depreciation, must be considered in the written down value. Consequently, the court answered the question in the negative and in favor of the revenue, affirming that the initial depreciation was not liable to be excluded.

Order:

There was no order as to costs, and the judgment was agreed upon by both judges.