- Bookmark
- Share
- CaseIQ
Vankadam Lakshminarayana v. Commissioner Of Income-Tax, Andhra Pradesh, Hyderabad
Summary of Opinion delivered by Chandra Reddy, C.J.
Factual and Procedural Background
This reference was made under section 66(1) and raises questions about the loss, if any, sustained by an assessee on the sale of a motor car and the amount of such loss for the purposes of section 10(2)(vii) of the Income-tax Act. The salient facts and procedural history, as stated in the opinion, are:
- The assessee family were tobacco dealers.
- A new Vauxhall motor car was purchased on 12 December 1952 for Rs. 13,144. The car was used partially for the family business and partially for non-business (personal) purposes.
- The business accounts were made up to 31 March each year.
- For the assessment years 1953-54, 1954-55 and 1955-56 the Income-tax Officer allowed depreciation under sections 10(2)(vi) and 10(2)(vi-a).
- The car was sold on 22 August 1955 for Rs. 4,025 (in the previous year ending 31 March 1956, relevant to assessment year 1956-57).
- For the assessment year 1956-57 the Income-tax Officer calculated the loss under section 10(2)(vii) at Rs. 78.
- The assessee contended that the loss sustained was Rs. 708 (para 4 of the opinion) and appealed against the assessment to the Appellate Assistant Commissioner, who confirmed the Income-tax Officer's view.
- The assessee further appealed to the Income-Tax Appellate Tribunal (ITAT). The Tribunal held that the department's procedure in computing written down value was erroneous (it had not taken into account the full depreciation allowable under clauses (vi) and (vi-a) when determining written down value). The Tribunal thought the department's method was more favourable to the assessee, and that using the Tribunal's method the sale should have resulted in a profit rather than a loss; however, because the department did not appeal, the Tribunal would not enhance the assessment and dismissed the assessee's appeal.
- Two questions were referred to the court under section 66(1): (1) whether the sale for Rs. 4,025 resulted in any loss for the purposes of section 10(2)(vii); and (2) if yes, whether the loss was Rs. 78, Rs. 708 or some other sum.
Legal Issues Presented
- Whether by reason of the sale of the motor car for Rs. 4,025 the assessee sustained any loss for the purpose of making the allowance provided in section 10(2)(vii) of the Act.
- If the answer to the first question is affirmative, whether the said loss is Rs. 78 or Rs. 708 or another sum.
Arguments of the Parties
Assessee's Arguments
- The assessee contended (and repeated on further appeal) that the loss sustained on sale of the car was Rs. 708 (para 4). This contention formed the basis of the appeals to the appellate authorities and the Tribunal.
- No further detailed argumentation by the assessee (e.g., method of calculation beyond the asserted loss figure) is set out in the provided opinion.
Department's / Revenue's Arguments and the Tribunal's Position
- The Income-tax Officer computed the written down value and the loss under section 10(2)(vii) in a manner that resulted in a computed loss of Rs. 78 for the assessment year 1956-57 (para 3).
- The Appellate Assistant Commissioner concurred with the Income-tax Officer's computation (para 4).
- The Income-Tax Appellate Tribunal considered that the department's procedure in computing the written down value was erroneous because it did not take into account the depreciation allowable under clauses (vi) and (vi-a) in determining written down value; the Tribunal regarded the method adopted by the department as more favourable to the assessee, and noted that if the Tribunal's approach were adopted the sale would have resulted in a profit rather than a loss (para 5).
- The Tribunal's theory (which was supported by the learned counsel for the department in argument before the court) included an alternative proposition that where an asset is used partly for business and partly for non-business purposes the asset should be regarded as divisible (for example, half the asset used for business) — a theory that the court later rejects as lacking basis in the language of section 10(3) (para 14).
Table of Precedents Cited
No precedents were cited in the provided opinion.
Court's Reasoning and Analysis
The court's analytical approach is founded on close textual interpretation of the relevant statutory provisions (all references are to the Income-tax Act provisions as quoted in the opinion). The court confined itself to the language of sections 10(2)(vi), 10(2)(vi-a), 10(2)(vii), 10(3) and the definition of "written down value" contained in section 10(5)(a) and (b). The key steps in the court's reasoning are:
- Identification of the decisive statutory question: whether the written down value for the purposes of section 10(2)(vii) should be computed by reference to the full depreciation "allowable" under clauses (vi) and (vi-a) or by reference to the depreciation "actually allowed" to the assessee (paras 6–9).
- Examination of the statutory definition: the court recited that section 10(5)(a)–(b) defines "written down value" and that clause (b) refers to the actual cost less "all depreciation actually allowed to him" under the Act (para 7, 20–23, 24).
- Textual emphasis on the phrase "actually allowed": the court gave decisive weight to the Legislature's deliberate use of the words "depreciation actually allowed" in section 10(5)(b) and contrasted that expression with the notion of a notional or theoretical "allowance" which might be "allowable" under clauses (vi) and (vi-a) (paras 11–13). The court reasoned that the Legislature knew the distinction between "allowed" and "allowable" and chose its words accordingly.
- Rejection of purposive considerations advanced by the Tribunal: the court stated that "considerations such as those which the Tribunal had in mind are irrelevant in construing the provisions of the statute" and that one must be guided by the language of section 10(5)(b) rather than by section 10(3) or by notions of preventing an alleged "undue advantage" (para 10).
- Interpretation of section 10(3): the court clarified that section 10(3) restricts the allowance to the fair proportional part where an asset is not wholly used for business, but that this provision does not require dividing the asset itself into business and non-business halves. The correct operation of section 10(3), according to the court, is to apportion the depreciation allowance, not to split the asset or to change the way "written down value" is defined (para 14).
- Application to the facts: having interpreted the statutory definition to mean that only depreciation actually allowed to the assessee (for example, under section 10(3) or other operative provisions) is to be deducted in calculating written down value, the court concluded that the department could not, for the assessment year in question, take into account the full notional depreciation permissible under clauses (vi) and (vi-a) where the actual allowed depreciation differed (para 31). The court noted the numerical consequence if the department had taken the whole permissible allowance (it would have taken Rs. 630 and estimated loss at Rs. 703 rather than Rs. 78) — this observation is descriptive of the arithmetic consequence under the differing methods rather than a separate legal principle (para 31).
The court therefore grounded its conclusion in the statutory language, especially the phrase "depreciation actually allowed" in section 10(5)(b), and rejected the Tribunal's approach which sought to rely on perceived policy or on an expansive reading of section 10(3).
Holding and Implications
Core Ruling:
Answered in favour of the assessee.
Implications and immediate consequences (as recorded in the opinion):
- The two questions referred under section 66(1) were answered in favour of the assessee (para 16).
- The assessee was awarded costs against the department; the advocate's fee was fixed at Rs. 100 (para 16).
Broader implications: the opinion rests on a textual interpretation of the statutory definition of "written down value" and emphasises that only depreciation actually allowed to an assessee under the Act should be deducted when computing written down value under section 10(5)(b). The opinion does not set out any further, explicit statement of novel or wide-ranging precedent; therefore the immediate, concrete effect is the determination of the questions in favour of the assessee for these facts and the award of costs as noted above.
Opinion delivered by: Chandra Reddy, C.J. — "Answered in favour of assessee." (As recorded in the provided text.)
The Order of the Court was delivered by
Chandra Reddy, C.J
2. This reference raises questions of interest and importance and is bare of authority. It involves the following questions:—
(1) Whether by reason or sale of motor car for Rs. 4,025 the assessee sustained any loss thereon for the purpose of making the allowance spoken of in section 10(2)(vii); and
(2) If the answer to the above question is in the affirmative, whether the said loss is Rs. 78 or Rs. 708 or another sum.
3. The circumstances leading to this reference may be briefly stated. The assessee family is a dealer in tobacco. A new Vauxhall motor car was purchased by this family on 12th December 1952, for Rs. 13,144 for the use partially of the family business and partially for non-business purpose; such as personal requirements of the members of the family. The accounts of the bnsiness were made up for the year ending with 31st March of every year. For the assessment years 1953-1954, 1954-1955 and 1955-1956 the Income. Tax Officer made allowance of depreciation under sections 10(2)(vi) and 10(2)(vi-a). The car was sold for Rs. 4,025 on 22nd August, 1955, i.e, in the ‘previous year’ ended with 31st March, 1956, relevant to the assessment year 1956-1957. In that year also the Income-tax Officer determined the depreciation allowance under sections 10(2)(vi) and 10(2)(vi-a) and computed the loss permissible under section 10(2)(vii) at Rs. 78.
4. Contending that the loss sustained by the assessee in that deal was Rs. 708 and not Rs. 781 the assessee carried the matter in appeal to the Appellate Assistant Commissioner. The appellate authority confirmed the assessment concurring in the view of the Income-Tax Officer.
5. In the further appeal taken by the assessee to the Income-Tax Appellate Tribunal, this contention was repeated by the assessee. The Appellate Tribunal felt that the procedure adopted by the department in anrving at the written down value was erroneous, since it had not taken into account the depreciation allowable under clauses (vi) and (vi-a) in the determination of the written down value. The Tribunal expressed the view that, the methed of computation adopted by the department was more favourable to the assessee in that if the method indicated by them was adopted, the sale of the car should have resulted in a profit and not in a loss. However, as there was no appeal by the department against the assessment made by the Income-Tax Officer, the Tribunal opined that they could not enhance the assessment. In the result, the appeal was dismissed. The questions stated above have been referred to us under section 66(1).
6. The point that calls for decision here is whether the written down value of the vehicle should be arrived at after taking into account the normal depreciation and additional depreciation to which an assessee is entitled under section 10(2), clauses (vi) and (vi-a) or the depreciation allowance that is actually allowed to him by reason of section 10(3) of the Act.
7. This depends upon the language of sections 10(2), clauses (vi), (vi-a), (vii), section 10(3), sections 10(5)(a) and 10(5)(b).
Section 10(2): Such profits or gains shall be computed after making the following allowances, namely:
******
Clause (vi): In respect of depreciation of such 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 in any case at class of cases be prescribed . . . . . to such percentage on the written down value thereof an may in any case or class of cases be prescribed.
And where the buildings have been newly erectedr or the machinery of plant being new, not being machinery or plant entitled to the development rebate under clause (vi-b) has been installed, after the 31st day of March, 1945, and before the 1st day of April, 1956, a further sum which shall however not be deductible in determining the written down value for the purposes of this clause in respect of the year of erection or installation equivalent—
******
(c) in the case of machinery or plant, to twenty per cent, of the cost thereof to the assessee.
Clause (vi-a): In respect of depreciation of buildings, newly erected, or of machinery or plant being new which has been installed after the 31st day of March, 1948, a further sum (which shall be deductible in determining the written down value) equal to the amount admissible under clause (vi) (exclusive of the extra allowance for double or multiple shift working of the machinery or plant and the initial depreciation allowance admissible under that clause for the first year of erection of the building or the installation of the machinery or plant) in not more than five successive assessments for the financial years next following the previous 1 year in which such buildings are erected and such machinery and plant installed and falling within the period commencing on the 1st day of April, 1949 and ending on the 31st day of March, 1959
Clause (vii): In respect of any such building, machinery or plant which has been sold or discarded or demolished or destroyed, the amount by which the written down value thereof exceeds the amount for which the building, machinery or plant, as the case may be, is actually sold or its scrap value:
******
Section 10(3): Where any building, machinery, plant or furniture in respect of which any allowance is due under clause (iv), clause (v) clause (vi) or clause (vii) of sub-section (2) is not wholly used for the purposes of the business, profession or vacation, the allowance shall be restricted to the fair proportional part of the amount which would be allowable if such building, machinery, plant or furniture was wholly so used.
Section 10(5) In sub-section (2) paid means actually paid or incurred according to the method of accounting upon the basis of which the profits or gains are computed under this section; ‘plant’ includes vehicles, books, scientific apparatus and surgical equipment purchased for the purposes of the business profession or vocation; and ‘written down value’ means—
(a) In the ease of assets acquired in the previous year, the actual cost to the assessee:
******
(b) In the case of assets acquired before the previous year the actual cost to the assessee less all depreciation actually allowed to him under this Act or any Act repealed thereby, or under executive orders issued when the Indian Income-tax Act, 1886 ??? of 1986) was in force:
8. It is manifest from clauses (vi) and (vi-a) of section 10(2) that a certain percentage by way of depreciation allowance is to be granted on the written down value of the vehicle. What the written down value, is, is to be judged with reference to the definition contained in section 10(5)(a) and (b) extracted above.
9. We have to adjudicate upon the claim of the assessee on the basis of the definition of written down value of the vehicle, since section 10(2)(vii) contemplates the ascertainment of the loss in the light of the difference between its written down value and the price for which it is sold. The matter is a bit complicated by reason of the existence of section 10(3) which restricts the allowance admissible under clauses (iv), (v), (vi) or (vii) of sub-section (2), when the asset envisaged therein is not wholly used for the purposes of the business, profession or vocation, to the fair proportional part of the amount which would be allowable if such building, machinery, plant or furniture was wholly so used. It is this sub section that impelled the Tribunal to take the view that the entire depreciation allowance calculated at rates mentioned in the two clauses that should be taken into account in computing the written down value. The Tribunal thought that an assessee situated in that position, would be deriving an undue advantage if only the allowance admissible under section 10(3) were to enter the calculation of the written down value and that to some extent, that would be defeating the object of section 10(3).
10. We feel that we cannot subscribe to the opinion of the Tribunal in regard to the interpretation of the relevant statutory provisions. Considerations such as those which the Tribunal had in mind are irrelevant in construing the provisions of the statute. If the statute allows certain advantages to an assessee, there is no reason why he should be deprived of it on pre-conceived notions. The decision of the question is to be solely guided by the language of section 10(5)(b) and not by section 10(3) which only lays down that if an asset is used partly for business purposes and partly for non-business purposes the assessee should be entitled only to a proportion of the amount allowable under certain clauses of that section.
11. We have, therefore, to answer the questions posed before us with reference to the definition of written down value. In this connection, we cannot ignore the words ‘depreciation actually allowed’ to the assessee in section 10(5)(b). Having regard to that language, we do not think that we will be justified in taking into account the notional allowance that might be admissible under the clauses. The Legislature has advisedly used the words ‘actually allowed to the assessee’. If the intendment of the Legislature was that the whole of the depreciation allowance permissible under those clauses were to be taken into account, surely it would have used appropriate language to convey that thought. We cannot assume that the Legislature was not aware of the distinction between ‘depreciation allowable to an assessee’ and ‘depreciation allowed to him’, as used in clause (b) of section 10(5). That the Legislature is aware of this difference is apparent from language used in the Proviso tdj clause (b).
12. It is worthy of note that in the Proviso the Legislature indicated the meaning of ‘written down value’ in that clause by appropriate language, namely, “written down value means the actual cost to assessee reduced by an amount equal to the depreciation calculated at the rate in force on that date that would have been allowable had the building been used……”
13. Thus, a comparison of these two sections leads us to the inevitable inference that the Legislature had in mind only the depreciation allowance that, was granted to an assessee under section 10(3) or under some other provision. That the Legislature bore always in mind the difference between the expressions ‘what is actually allowed’ and ‘what is allowable’ could also be gleaned from section 9(1), (iv) in which the word ‘payable’ is used and section 10(5) which defines ‘paid’ as actually paid. The notion of actual payment is emphasised there; all these indications are pointers to the conclusion that it is only such depreciations as are in fact granted to an assessee that should enter in the determination of the written down value.
14. We have to deal with another theory propounded by the Tribunal and which is sought to be sustained by the learned counsel for the department namely, that the concept underlying section 10(3) is that the asset used partly for business purposes and partly for non-business purposes should be regarded as half the asset used for business purposes and, therefore, in calculating the original cost price of the asset, only half its price should be taken into account. We find it difficult to share this view as there is no basis. For such division or the splitting up of the asset into two. On the other hand, the language of section 10(3) makes it plain that such a theory cannot be sustained. It is not the division of the asset as being used for business and non-business purposes that is contemplated by the section but it is only apportionment of the depreciation allowance as between the use of it for business purposes and its use for non-business purposes. However, that need not detain us any longer as we, are not convinced that such a proposition can be sustained either on the language of any section or on authority.
15. If that were the correct view, we think that the Income-Tax Officer could not adopt a different basis for the assessment year 1956-1957 by taking into consideration the whole of the depreciation allowance permissible under clauses (vi) and (vi-a). Adopting the same procedure, he should have taken into account Rs. 630, in which case the loss sustained by the assessee would have been estimated at Rs. 703 and not Rs. 78;
16. In the result, questions 1 and 2 referred to us should be answered in favour of the assessee. The assessee will get his costs from the department., Advocate's fee is fixed at Rs. 100.
17. M.S.K
Answered in favour of assesses.
Alert