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TMI Blog1990 (7) TMI 44X X X X Extracts X X X X X X X X Extracts X X X X ..... ase and on a proper interpretation of the provisions of section 43 of the Income-tax Act, 1961, the Tribunal was justified in holding that the unabsorbed depreciation of Rs. 21,42,815, which was already deducted by Lube India Ltd., in working out the written down value of its assets taken over by the assesseecompany on amalgamation, should not be added back for the purpose of working out the written down value of those very assets in the hands of the assessee-company for determining the depreciation admissible on those assets ?" At the instance of the assessee : (Assessment year 197-8-79 only) "Whether, on the facts and in the circumstances of the case and on a proper interpretation of the provisions of section 40A(5) of the Income-tax Act, 1961, the Appellate Tribunal was justified in holding that, in respect of salary paid to ex-employees, the allowance under that section should be restricted to the maximum of Rs. 60,000 ?" At the instance of the assessee : (Assessment year 1979-80 only) "Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was justified in law in holding that the assessee-company was not entitled to value the stock taken ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... laimed depreciation, inter alia, on the assets it took over from Lube India Ltd. Depreciation was claimed on the written down value of the assets. In view of Explanation 2A, the written down value was claimed to be on the basis of actual cost of those assets to Lube India Ltd., less depreciation actually allowed to it, the expression "actually allowed" meaning the depreciation factually allowed and not merely computed and not given effect to in the assessments. Thus, while computing the written down value, the assessee did not reduce the actual cost further by the aforesaid amount of Rs. 21,42,815 which represented unabsorbed depreciation not given effect to. The Incometax Officer, however, held that the "written down value" was required to be determined under section 43(6)(b) read with Explanation 2A and Explanation 3. Explanation 3, it was stated, provided that, for the purpose of arriving at the written down value, depreciation not merely actually allowed but also depreciation carried forward was to be treated as depreciation "actually allowed" for the purpose of clause (b) of sub-section (6) of section 43. Accordingly, he determined the written down value by reducing from the a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Rs. 21,42,815 had not been absorbed in that case for paucity of profits as laid down in section 32(2) of the Income-tax Act, 1961. The legal position about the unabsorbed depreciation is that it is not carried forward as such and is added to the depreciation for the following previous year and deemed to be part of that allowance. However, it is implicit in the scheme of section 32(2) that such a thing would happen only if the assessee continues to carry on its business in the following year or years. Thus, for the assessment year 1975-76, the aforesaid unabsorbed depreciation could not, under section 32(2), be treated and/or allowed as the depreciation of the current year as Lube India Ltd. became non-existent as a result of amalgamation. That is why the depreciation on these assets is claimed by and is allowable in the hands of the assessee only. For this purpose, it is necessary to refer to the provisions of sections 32(1)(ii), 32(2) and of section 43(6) which read as under: "32. (1) In respect of depreciation of buildings, machinery, plant or furniture owned by the assessee and used for the purposes of the business or profession, the following deductions, shall, subject to t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed to be depreciation 'actually allowed'." It is pertinent to mention that Explanation 2A was inserted in section 43(6) by the Finance (No. 2) Act, 1967, whereas Explanations 1, 2 and 3 are there from the inception of the Income-tax Act, 1961. The main purpose of Explanation 3 appears to us to be to avoid an anomaly which would have otherwise resulted. Depreciation computed but not given effect to for paucity of funds is under section 32(2) allowable as deduction in the case of the same assessee as the depreciation of the following year or years, as the case may be. But for Explanation 3, written down value would have been the actual cost of the assets to the assessee less depreciation actually allowed. This would have resulted in certain anomalies. For instance, when depreciation is allowed not on the straight line method but on the basis of the written down value, depreciation of necessity becomes less and less in each successive year. But, if unabsorbed depreciation carried forward under section 32(2) is not taken into account for the purpose of computing the written down value, depreciation in the years in which carried forward depreciation remains unabsorbed for paucity of p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ., carried forward under section 32(2). As stated earlier, Explanation 3 is not attracted as such in this case. The case is, of course, covered by Explanation 2A. But for this Explanation, the written down value of the assets taken over by the assessee during the previous year from Lube India Ltd. would have been their actual cost to the assessee. In view of Explanation 2A, however, it will be the same as it would have been if Lube India Ltd. had continued to hold the assets for its business. Thus, Explanation 2A creates a fiction whereby though in fact at the end of the previous year the assets are not held by Lube India Ltd., the company having been amalgamated and, thus, ceased to exist, the said company will be deemed to hold the assets for its business. However, there is no further fiction created by Explanation 2A, that unabsorbed depreciation determined to the extent of Rs. 21,42,815, though actually not carried forward under section 32(2), will be treated to be so for the purpose of Explanation 3. Under the circumstances, application of Explanation 2A does not automatically mean application of Explanation 3, the applicability of which depends upon the existence of a parti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ube India Ltd. less depreciation actually allowed to the company. The unabsorbed depreciation which is not to be set off or carried forward should not be taken into account. That our construction of Explanation 3 is in consonance with the legislative intention is evident from clause 36(ii) of the Memo Explaining Provisions in the Finance (No. 2) Bill of 1967. The object of Explanation 2A is stated to be (at page 201) : "As a corollary to the provision at (i) above, the actual cost, as also the written down value of the building, machinery, plant or furniture transferred by the amalgamating company to the amalgamated company will be taken, in the assessment of the amalgamated company, to be the same as in the case of the amalgamating company. Further, for the purpose-of the provision in the Income-tax Act that the aggregate amount of depreciation allowed from year to year in respect of any asset will be limited to its actual cost, the depreciation actually allowed to the amalgamating company on the assets transferred by it to the amalgamated company will also be taken into account. In other words, when the aggregate of the depreciation allowed to the amalgamating company and the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 75,000. The limit under the second part is Rs. 60,000. This limit is in the case of expenditure incurred by the assessee on former employees irrespective of whether such former employees had or bad not worked with the assessee as employees for any time during the previous year. Former employees are persons who ceased to be employees of the assessee during the previous year or any earlier previous year. Referring to the second part of the provisions of section 40A(5)(c)(i), the Tribunal held that the Legislature had fixed the ceiling over the allowable expenditure at Rs. 60,000 without reference to the period the former employees actually worked as employees with the assessee during the previous year. Accordingly, the Tribunal confirmed the disallowance made by the Income-tax Officer in this behalf. On analysing the provisions of section 40A(5)(c)(i), it appears to us that the fixation of the limit of Rs. 60,000 in the case of former employees without reference to the period during which the concerned persons were the assessee's employees during the previous year as against the limit at the rate of Rs. 5,000 per month in the case of existing employees is not without purpose. The p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the last question in the assessee's reference. This question relates to the assessment year 1979-80. During the previous year, another company by name Caltex Oil Refining India Ltd. was amalgamated with the assessee-company. As a result, almost all the assets of Caltex company including the closing stock were taken over by the assessee-company. There is no dispute that the method of valuing the closing stock in the case of Caltex company was different from the method of valuation of closing stock regularly followed by the assessee-company and that, if the method of valuation of closing stock followed by Caltex company was also adopted by the assessee-company with regard to that stock, its value would have been found more by Rs. 10,25,480. On the assumption that the stock taken over by the assessee-company from Caltex company was the assessee's opening stock, the Tribunal held that the assessee could not follow one method for valuing the opening stock and another method for valuing the closing stock. Valuing the closing stock of the assessee out of the stock taken out from Caltex company on the same basis as the stock was valued by Caltex company, the Tribunal confirmed the addition ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be allowed as a deduction : " Gratuity is, admittedly, not an expenditure of the kind referred to in sub-clause (ii) and is an expenditure of the kind that may result in the payment of salary to the employee within sub-clause (i). The sub-clause evidently uses the expression "where an assessee incurs any expenditure resulting in the payment of any salary to an employee". This means that the amount of gratuity should result in the payment of salary to the employee. For this purpose, it is necessary to refer to the definition of the word "salary" in Explanation 2 to section 40A(5) itself:" Explanation 2. -In this sub-section, (a) 'salary' has the meaning assigned to it in clause (1) read with clause (3) of section 17 subject to the following modifications, namely: (1) in the said clause (1) .. . ." Thus, the word "salary" for the purpose of clause (i) has the meaning assigned to it in clause (1) read with clause (3) of section 17 subject to certain other modifications with which we are not concerned herein. Clause (1) of section 17 defines salary. It is an inclusive definition. Item (iii) thereof is "any gratuity" while item (iv), inter alia, is "profits in lieu of salary". Th ..... X X X X Extracts X X X X X X X X Extracts X X X X
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