Depreciation 'written down value' -a recent judgment rendered by the Kerala High Court is contrary to settled legal position apparently causing miscarriage of justice due to failure of counsels to point out relevant provisions and settled legal position.

[DEV KUMAR KOTHARI]

Summary- it is well settled that 'written down value' means actual cost minus depreciation actually allowed under the Income -tax Act. There should not be any dispute on such proposition in view of several judgments of the Supreme Court. In case of tea plantation companies also manufacturing tea, it is accepted by the Revenue and well settled legal position that WDV means actual cost minus 40% of notional depreciation taken into consideration while computing composite income to determine chargeable income under Rule 8. This proposition is also well accepted in various circulars issued by the board, admitting that in case of tea company only 40% of total development rebate, development allowance, and investment allowance is allowed. Therefore, first of all the revenue should not have raised dispute on this issue before the Kerala High Court. In any case having raised such undesirable dispute, at least the Counsel for the Revenue should have pointed out settled legal position and conceded on the matter. Unfortunately the counsel of the assessee also failed to point out relevant provision section 43(6) and settled legal position.

This caused rendition of a judgment contrary to settled legal position. The judgment deserves to be challenged by the assessee by way of review petition before the High Court as well as by appeal before the Supreme Court, in case the High Court do not admit the review petition.  

Written down value:

Broadly speaking the term 'written down value', as defined in section 43(6) means the actual cost of a depreciable asset minus depreciation actually allowed by the assessing officer while computing taxable income under the provisions of the income-tax Act, 1961 and earlier enactments for computation of income for the purpose of income tax levied by the Central Government on income chargeable to the Central income-tax.

It is now very well settled that the key words 'actual cost' and `actually allowed' are the pivot of the meaning of 'written down value'. Any notional allowance or any allowance merely allowable will not be deducted from the actual cost or WDV unless benefit of depreciation has been actually given effectively in the assessment of taxable income by the Assessing Officer it will not be deducted.

Earlier Supreme Courts judgments about WDV:

About WDV under section 43(6) the Supreme Court has rendered several judgments. It has been held that the key word in the definition of WDV is "actually". It is the antithesis of that which is merely speculative, theoretical or imaginary. "Actually' contra-indicates a deeming construction of the word "allowed" which qualifies. The connotation of the phrase "actually allowed" is thus limited to depreciation actually taken into account or granted and given effect to, i.e. debited by the Income -tax Officer, against the incoming of the taxable business in computing the taxable income of the assessee; it cannot be stretched to mean "notionally allowed" or merely allowable on a notional basis.

- Madeva Upendra Senai V UOI (1975) 98 ITR 209 (SC) = [2008 -TMI - 6436-SUPREME Court]

When only a portion of gross income, or global income is taxable, then depreciation actually allowed will be only to the extent and in proportion of taxable income comprised in the gross income or global income and not the full amount of depreciation considered while computing gross income or global income. - CIT V Nandlal Bhandari Mills Ltd 1965 -TMI - 49240 - (SUPREME Court), Hukumchand Mills Ltd V. CIT 1966 -TMI - 39897 - (SUPREME Court).

Depreciation allowed or merely allowable during tax holiday period by State Government under state tax Act was also held to be not depreciation actually allowed under Income-tax act, and therefore such depreciation was not to be deducted from written down value -CIT V Dharampur Leather Co. Ltd 1965 -TMI - 49238 - (SUPREME Court).

Earlier Judgments of Calcutta High Court on the same issue:

First judgment - accepted by the revenue:

Applying the law laid down in earlier mentioned judgments and many other judgments of the Supreme Court first the Tribunal and then on appeal by revenue the Calcutta High Court in CIT v. Suman Tea & Plywood Industries Pvt. Ltd. 1993 -TMI - 20686 - (CALCUTTA High Court) held that when rule 8 is applied for determination of chargeable income from cultivation, manufacture and sale of tea only 40% of total depreciation notionally taken into consideration against composite income (comprising of exempted agricultural income-60% and taxable business income -40%) is actually allowed under the income tax and therefore, only 40% of such depreciation is to be deducted from actual cost to determine the written down value. The Hon'ble High Court had relied on various judgments of the Supreme Court on the issue of written down value. In this case, the revenue had not filed any appeal before the Supreme Court and therefore, the judgment attained finality. In view of the judgment of the Supreme Court in the case Berger Paints India Limited Vs. CIT (2004) 266 ITR 99 (SC) = [2008 -TMI - 6139 - SUPREME Court] in such circumstances the revenue should follow the ruling and should not also appeal against orders or judgments of other Tribunal or high Court in which ratio laid down in earlier judgment by a High Court is followed as because on acceptance of a judgment or by not filing an appeal the revenue is bound to follow such judgment all over India, because the income-tax Act is a central legislation.

The above said first judgment of Calcutta High Court was again followed in the case of same assessee vide CIT v. Suman Tea & Plywood Industries P.Ltd. 1997 -TMI - 17682 - (CALCUTTA High Court). In relation to determination of written down value u/s 43(6), which was relevant for the purpose of computing balancing charge or terminal depreciation as the assessee had sold the tea estate. The department had preferred an appeal against this judgment. However, the Honorable Supreme Court for delay as well as lack of any merit dismissed the same.

Therefore, it is clear that the law is laid down by the Calcutta High Court in case of Suman Tea had attained finality when the department did not file any appeal against the first judgment (204 ITR 719) and again when the Supreme Court dismissed the Revenue's appeal against the second judgment (226 ITR 34).

Therefore these judgments of the Calcutta High Court have attained finality and are binding all over India. These are now followed in West Bengal by Assessing Officers also and revenue is also not preferring any appeal in case some old appeal is decided by the CIT(A)/ ITAT in favour of the assessee. Therefore, it is clear that the position is settled, there is not even any petition for review pending. Therefore, the revenue should follow these judgments uniformally all over India, as discussed earlier.

Un just filing of appeal and unfair hiding of legal position by revenue:

From recently reported Judgment of Kerala High Court in case of CIT v. PARRY AGRO INDUSTRIES LTD [2007] 293 ITR 99(Ker.) = [2009 -TMI - 32463 - KERALA High Court] we find that the Tribunal has allowed the claim that in assessee's case only 40% depreciation is actually allowed and it should only be deducted from WDV. The revenue should have accepted the said decision, however, revenue un-necessarily filed an appeal before the High Court. Moreover, the counsel of the revenue also did not point out settled legal position. Unfortunately the counsel of the assessee also failed to point out the same.

It appears that even section 43(6) which was a specific provision required for consideration was not pointed out and referred to by the counsels.  Therefore, contrary to settled legal position the court held as follows:

a. Rule 8 of the Income-tax Rules, 1962, deals with two types of income, i.e., agricultural income and non-agricultural income

b. Agricultural income and business income are considered in the ratio of 60: 40 of the total income.

c. After computing the total income, the same has to be bifurcated in the above manner.

d. After computing the total income, the same has to be bifurcated in the ratio of 60:40 and the total income would necessarily mean the net income and not gross income.

e. The income from tea estate is computed applying sections 28 to 43C, and when computing the income, depreciation of 100 per cent. is allowed under section 32 though for the purpose of charging of income under the Income-tax Act, rule 8 is applied and the income so computed is apportioned in ratio of 40%.

f. The depreciation actually allowed against the assessee was not 40 per cent. but 100 per cent.which was to be considered for the purpose of written down value.

A mistake of counsel in the above case:

On reading of the reported judgment it appears that in the above case, all  counsels had failed to draw attention of the Hon'ble Court on the following issues: -

a. Meaning of "Written down value" - as per section 43(6)

b. Board's circulars in which it has consistently been held by the Board that in case of tea companies where rule 8 applies only 40% of total composite income, is business income chargeable under the Act, the rebate or allowance actually allowed against business income under income-tax act is only 40% and therefore, there will be sufficient compliance if relevant reserve ( Development Rebate Reserve/ Development Allowance Reserve and Investment Allowance Reserve) is created equal to 40% of rebate or allowance allowable.

c. Judgments of Calcutta High Court in CIT v. Suman Tea & Plywood Industries Pvt. Ltd which attained finality.

d. Any judgment of the Supreme Court and any other High Court on section WDV were also not pointed out.

Kerala High Court's judgment is contrary to settled legal position and the law of land:

As discussed above non of the counsels who appeared in case of Parry Agro Industries have not pointed out settled legal position  and therefore, apparently, the Hon'ble High Court could not consider the same and therefore, rendered a decision which is contrary to the settled legal position.

Computation- Deductions under chapter VIA Vis a vis WDV:

It appears that honorable Kerala high Court has, considered that as full amount of depreciation is taken into consideration while computing gross or composite income from sale of tea cultivated and manufactured by assessee therefore such full amount should be deducted from WDV. The court applied general principal laid down in CIT V C.W.S. (India) Ltd. (2000) 246 ITR 278 about computation of income by deduction of specified deduction in Chapter IV (section 28-43D) and Chapter VIA (section 80C - 80VV). However, in absence of reference by counsels, it appears that section 43(6), which is specifically related to the issue, was not at all considered. Furthermore judgments of the Supreme court in cases of Nandlal Bhandari Mills and Hukumchand Mills (supra.) which are specifically in relation to Rules governing computation of global income and finding out taxable income which was only a portion of global income were not considered. The provisions considered therein are similar to the Rule 8which was earlier considered by Calcutta high Court and now by the Kerala high Court.  

In view of the above discussion, it is clear that the judgment of Kerala High Court needs to be reconsidered and it is hoped that if so applied, the Hon'ble High Court may rectify its own judgment after taking note of the settled legal position as discussed above. In any case the assessee should appeal against the Judgment.

Applicability of rule in case of Rubber and Coffee Plantations:

Rules 7A and 7B were inserted in the Income Tax Rules w.e.f. 01.04.2002 to provide for computation of chargeable income from activity of cultivation and manufacture of rubber and coffee. These rules are, on the same lines as rule 8 except that proportion of taxable income is different. Therefore, what is laid down in relation to Rule 8 is principally applicable in case of application of Rule 7A for Rubber and Rule 7B for coffee. Therefore, the judgment of the Kerala high Court becomes more important as in the state of Kerala Rubber and Coffee are also major plantations.

No implications of recent amendments in the I.T. Act:

There is no effect on the above legal position because the recent amendments in the definition of WDV has no bearing on the computation of WDV when world income or composite income is computed and only a portion of such income is taxable under the I.T. Act and the rest is exempt.

The insertion of section 268A is also not impacting applicability of the law laid down in the case of Suman Tea, because the revenue appealed before the Supreme Court and the SLP was dismissed for lack of merit and delay both. Furthermore, in other years when revenue did not appeal in the case of Suman Tea as well as in some other cases, the revenue involved was much higher than the monetary limit prescribed for not filing appeal.

Therefore, the legal position which still prevails is that:

The ruling in cases of Suman Tea is applicable and binding all over India and the revenue should not challenge orders of CIT (A) / ITAT allowing relief to assessee, on the basis of Suman Tea's case, when assessee is engaged in activities of cultivation, manufacture and sale of tea, coffee or rubber.