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Dharampur Leather Cloth Co. Ltd. v. Commissioner Of Income-Tax, Bombay City.
Structured Summary of the Opinion — Tambe, J.
Factual and Procedural Background
The Tribunal, on an application under section 66(1) of the Indian Income-tax Act, referred the following question of law to the court:
“Whether depreciation is allowable on the original cost of the various components of the plant and machinery and other assets of the company as acquired and used prior to July 1, 1953?”
The facts in summary (as stated in the opinion): The assessee-company was incorporated on 15 June 1949 and began manufacturing leather cloth and coated fabrics in the former Dharampur State. Before incorporation the promoters obtained from the Ruler of Dharampur State a seven-year exemption from State income-tax. After the company commenced business the Dharampur territory merged into the Indian Union. Section 60A empowered the Central Government to modify taxation for merged States and, exercising that power, the Central Government issued the Merged States (Taxation Concessions) Order, 1949. Clause 15 of that Order provided a procedure for industrial undertakings claiming pre-existing concessions to apply for relief; the assessee applied and the Central Government granted exemption from income-tax and super-tax for five years from 1 April 1950, with a direction that shareholders would be liable on dividends.
As a result, the company was exempt from income-tax and super-tax up to assessment year 1954-55. The assessment year under consideration was 1955-56 (accounting year ending 31 March 1955) and it was the first year in which the assessee was assessed to tax. In the assessment proceedings the assessee claimed that, because no depreciation had been allowed in prior (exempt) years, depreciation for 1955-56 should be computed on the original cost (i.e., original cost should be treated as the written down value). The Income-tax Officer rejected this claim, treating the written down value as if depreciation had been claimed and allowed in previous years. The Appellate Assistant Commissioner and the Tribunal affirmed the Income-tax Officer’s view. The Tribunal held that exemption was only from payment of tax, not from computation, and that the words “actually allowed” in section 10(5)(b) covered the present case; the Tribunal dismissed the assessee’s appeal and referred the question above to this Court.
Legal Issues Presented
- Whether depreciation is allowable on the original cost of plant, machinery and other assets acquired and used prior to 1 July 1953, when no depreciation had been actually allowed to the assessee in prior (tax-exempt) years.
- Whether, when an assessee was exempt from payment of tax in earlier years (by Government order), the tax authorities may compute written down value and depreciation on the basis that, as if, depreciation had been claimed and allowed in those exempt years (i.e., whether “written down value” incorporates depreciation merely ascertained but not actually allowed).
Arguments of the Parties
Assessee's Arguments (Mr. Kolah)
- The assessee admitted that in fact no assessment for income had been made in any previous year and that it had not claimed or had any depreciation allowed in those years.
- The assessee contended that, under section 10(2)(vi) read with section 10(5)(b) of the Indian Income-tax Act, the written down value for assets acquired prior to the previous year should be the actual cost less all depreciation actually allowed; since no depreciation had been actually allowed, the original cost should be treated as the written down value and depreciation for 1955-56 should be computed on that basis.
- The counsel for the assessee relied on decisions including Commissioner of Income-tax v. Kamala Mills Ltd. and Rajrathna Naranbhai Mills Co., Ltd., as supportive authority for this position.
Revenue's Arguments (Mr. Joshi)
- The Indian Income-tax Act applied to the merged Dharampur territory soon after the assessee commenced business, so the company was liable to tax from the start; the exemptions granted were only in respect of payment of tax, not in respect of computation of income.
- The department argued it was open to treat the prior years as if the procedure required for computation had been followed — i.e., as if returns had been filed, depreciation claimed and allowed in prior years — and thus to determine written down value and depreciation for the present assessment on that footing.
- The Revenue cited Commissioner Of Income-Tax, Bombay v. National Electrical Industries Ltd. (1959) in support of its position.
Table of Precedents Cited
| Precedent | Rule or Principle Cited For | Application by the Court |
|---|---|---|
| Commissioner of Income-tax v. Kamala Mills Ltd. [1949] 171 I.T.R. 130 | Used to support the proposition that where allowable depreciation for a prior year was not actually allowed (because of a resultant loss, etc.), it cannot be treated as having been "actually allowed" and therefore the written down value remains the original cost until depreciation has been actually allowed in an assessment. | The Court accepted and applied this authority as supporting its interpretation of section 10(5)(b): because depreciation had not been actually allowed in prior years, the written down value remains the original cost and the assessee is entitled to claim depreciation on that basis. |
| Rajrathna Naranbhai Mills Co., Ltd. v. Commissioner of Income-Tax, Bombay [1950] 18 I.T.R. 122 | The opinion records that this decision was cited by the assessee before the Court. | The Court did not rely upon this decision in its reasoning and stated it was not necessary to refer to it; no specific application of its rule is set out in the opinion. |
| Commissioner Of Income-Tax, Bombay v. National Electrical Industries Ltd., Bombay [1959] 37 I.T.R. 131 | Cited by the revenue; the Court records that the decision concerned priority between exemption under section 15C and set-off of loss under section 24(2). | The Court held this decision had no bearing on the present question and was of little assistance to the department for the issue at hand. |
Court's Reasoning and Analysis
The Court's analysis proceeds from a textual reading of section 10 of the Indian Income-tax Act (computation of profits and gains of business), in particular:
- Section 10(2)(vi) provides that depreciation is allowable at prescribed percentages on the written down value of assets, subject to prescribed particulars being furnished.
- Section 10(5)(b) defines "written down value" in the case of assets acquired before the previous year as the actual cost to the assessee less "all depreciation actually allowed to him" under this Act or earlier enactments.
From this textual structure the Court concluded:
- The statutory scheme entitles an assessee to depreciation at prescribed rates on the written down value; the written down value for assets acquired prior to the previous year is calculated as actual cost minus depreciation actually allowed.
- If no depreciation has been actually allowed in prior years, the written down value remains the actual cost incurred for acquiring the assets. Thus the statutory phrase "actually allowed" is decisive: only depreciation which has been actually allowed in an assessment reduces the written down value.
- The obligation to claim depreciation and to furnish prescribed particulars rests on the assessee; if particulars are not furnished, depreciation is not allowed. It is not shown that failure to claim depreciation in a prior year automatically forfeits the entitlement in a later year; similarly, nothing in the Act mandates that cost is automatically reduced absent an actual allowance.
- Given the admitted facts — that the assessee had not filed returns or claimed depreciation in prior (exempt) years, and that no depreciation had at any time been actually allowed in those years — it follows from the statutory language that the written down value for 1955-56 is the original cost, and depreciation for that assessment year must be computed on that basis.
- The Court found the contrary approach (adopted by the Income-tax Officer, the Appellate Assistant Commissioner and the Tribunal) — namely, to compute written down value as if depreciation had been claimed and allowed in each exempt year — inconsistent with the unambiguous expression "actually allowed" in section 10(5)(b).
- The Court observed that the decision in Kamala Mills supports this interpretation and that the Revenue's cited authority (National Electrical Industries) addressed a different question (priority between exemption and loss set-off) and therefore was not relevant to the present issue.
On these grounds the Court answered the referred question in the affirmative for the assessee and directed that the Commissioner pay the costs of the assessee.
Holding and Implications
Holding: The Court answered the referred question in the affirmative. In other words:
The assessee is entitled to claim depreciation for the assessment year 1955–56 computed on the original cost (the actual cost) of plant, machinery and other assets acquired and used prior to the previous years, where no depreciation had been actually allowed in those prior years.
Implications (direct and as stated in the opinion):
- Direct effect on the parties: The assessee's claim to compute depreciation on the original cost is upheld for the assessment year in question; the Commissioner is ordered to pay the assessee's costs.
- Broader implications: The opinion rests on statutory interpretation of section 10(5)(b) and relies on existing authority (Kamala Mills). The Court did not state that it was establishing a new or broader precedent beyond applying the statutory text and cited authority; the decision governs the proper treatment of "written down value" where depreciation has not been actually allowed in prior years as described in this case.
Disposition reported in the opinion: "Question answered in the affirmative. The Commissioner shall pay the costs of the assessee."
Tambe, J.:— On an application by the assessee under section 66(1) of the Indian Income-tax Act, the Tribunal drew up a statement of case and has referred the following question of law to this court:
“Whether depreciation is allowable on the original cost of the various components of the plant and machinery and other assets of the company as acquired and used prior to July 1, 1953?”
2. We are concerned with the assessment year 1955-56, the relevant accounting year being ending 31st March, 1955, and the question arises thus: The assessee-company was incorporated on 15th June, 1949, as a private limited company. Later it became a public limited company in the year 1949. On its incorporation it started a factory forthwith in the former Dharampur State for manufacturing leather cloth and coated fabrics from cloth, coarse and medium, P.V.C resin, plasticisers, pigments, etc. Before its incorporation the promoters of the company negotiated with the Ruler of Dharampur State and secured from the Ruler in advance a total exemption from the State income-tax on the profits of the company for a period of seven years from the commencement of its working. However, soon after the company started working, the territories of the Dharampur State merged in the Indian Union. Section 60A of the Indian Income-tax Act empowered the Central Government to make an exemption, reduction in rate or other modification in respect of income-tax by a general or special order in regard to the income of persons residing and doing business in the merged States. In exercise of its powers under the said section, the Central Government promulgated on 3rd December, 1949, the Merged States (Taxation Concessions) Order, 1949, relating to exemptions, reductions in rates, taxes, etc. sub-clause (1) of clause 15 of the Order thereof provided that where any industrial undertaking situate in the merged States claimed that it had been granted any exemption from or concession in respect of income-tax, super-tax or business profits tax by a Ruler of the State before 1st August, 1949, it shall submit an application to the Commissioner of Income-tax giving certain particulars. Sub-clause (2) required the applicant to attach a copy of the concession granted by the Ruler of the State with his application. Sub-clause (3) empowered the Central Government to grant such relief as it thought appropriate. The assessee made an application under clause 15 for being exempted and the order of the Central Government on his application under clause 15, which was communicated to the assessee by the Commissioner of Income-tax, is in the following terms:
“I (Commissioner) have the honour to inform you that it has been decided by the Government of India that your company will be exempt from income-tax and super-tax for a period of five years with effect from the 1st April, 1950. The shareholders of the company will, however, be liable to pay tax on the amount of dividends received by them.”
3. In consequence of this order made by the Central Government, the assessee-company stood exempted from payment of income-tax and super-tax up to the assessment year 1954-55. The assessment year with which we are concerned was the first year in which the assessee-company has been assessed to tax. In the course of the assessment proceedings, the assessee, inter alia, contended that this being the first assessment after it commenced working its factory, depreciation should be allowed on the original Cost of the various items of plant and machinery and other assets of the company inasmuch as no depreciation has been actually allowed to it in any prior years. In other words, the claim of the assessee was that the original cost should be taken as the written down value of the various items of plant and machinery and other assets of the company for the purpose of determining the quantum of depreciation allowable to it. This contention was not accepted by the Income-tax Officer. The Income-tax Officer held that the written down value of the machinery for the purpose of assessment would be computed as if the income of the assessee had been worked out properly in the years when the company was exempted from the payment of tax and the depreciation having been allowed at the usual rates, The appeal filed by the assessee before the Appellate Assistant Commissioner against the order of the Income-tax Officer failed. The assessee took a second appeal to the Tribunal. Before the Tribunal the assessee contended that the Income-tax Officer and the Appellate Assistant Commissioner were wrong in allowing depreciation on the written down value computed by him after taking into consideration the allowable depreciation in the preceding accounting years. The assessee urged and claimed that the depreciation should have been allowed on the original cost of the machinery and assets. The Tribunal affirmed the facts found by the Income-tax Officer that the machinery and other assets of the company were in use in the previous years. Having regard to that fact, the Tribunal upheld the order of the Income-tax Officer and the Appellate Assistant Commissioner. The view taken by the Tribunal was that the exemption granted to the assessee was only in respect of tax and not against the computability of his income. Theoretically, therefore, computation for the various years must be deemed to have been made for each year in the manner required by the Act, The depreciation allowance must, similarly, be deemed to have been claimed by the assessee in each year. The words “actually allowed” in section 10(5)(b), on which reliance was placed by the assessee, were wide enough to cover the present case. The Tribunal, therefore, dismissed the appeal. The case has now come to us on the aforesaid reference.
4. Mr. Kolah, learned counsel for the assessee, contends that it is an admitted position that in fact no assessment in respect of the income of the assessee had been made in any previous year. The assessee had not claimed any depreciation on the machinery and assets, etc., in any of the previous years; no depreciation on the said machinery and assets had at any time been allowed to the assessee in the previous years. The assessee, therefore, is entitled to claim the cost price as the written down value for the purpose of calculating the amount of depreciation under section 10(2)(vi) read with section 10(5)(b) of the Indian Income-tax Act. He also referred us to the decisions in Commissioner of Income-tax v. Kamala Mills Ltd. [1949] 171 I.T.R 130. and Rajrathna Naranbhai Mills Co., Ltd.…Assessee v. Commissioner Of Income-Tax, Bombay [1950] 18 I.T.R 122..
5. Mr. Joshi, on the other hand, contends that the Indian Income-tax Act was made applicable to the merged territories of the Dharampur State soon after the commencement of the business of the assessee-company. The assessee-company was, therefore, liable to pay income-tax and super-tax on its income right from the commencement of its business. The exemption granted to the assessee-company either by the Dharampur State or by the Central Government was only in respect of payment of income-tax and super-tax. The assessee-company thus was not exempted from its income being computed. It is open, therefore, to the department to deal with the case as if in the previous years the procedure required to be followed in the matter of computation of total income of the assessee had been duly followed, i.e, as if the assessee had filed returns, as if he had claimed depreciation on the machinery and assets and as if the Income-tax Officer had allowed the depreciation claimed in accordance with law, and on this footing determine the written down value of the machinery, plant and assets of the assessee and on that basis determine the amount of depreciation allowable to the assessee in the assessment year with which we are concerned. He has also referred us to a decision reported as Commissioner Of Income-Tax, Bombay… v. National Electrical Industries Ltd., Bombay,…. [1959] 37 I.T.R 131.
6. Having regard to the unambiguous expressions used by the legislature in clause (b) of sub-section (5) of section 10 of the Act, we find it extremely difficult to accept the contentions of Mr. Joshi.
7. Section 10 relates to the computation of profits and gains of business. Sub-section (1) provides that the tax shall be payable by an assessee under the head “profits and gains of business, profession or vocation” in respect of the profits and gains of any business, profession or vocation carried on by him. The material part of sub-section (2) reads thus:
“Such profits or gains shall be computed after making the following allowances, namely:…
(vi) in respect of depreciation of such (used for the purpose of the business, profession or vocation) machinery (etc.)… being the property of the assessee… to such percentage on the written down value thereof as may in any case or class of cases be prescribed… provided that the prescribed particulars have been duly furnished…”
8. Sub-section (5) provides;
“In sub-section (2)… ‘written down value’ means… 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, was in force.”
9. Having regard to the aforesaid provisions it is clear that the assessee is entitled to an allowance on account of the depreciation on machinery at the prescribed rate on the written down value of the machinery, etc., and the written down value of the machinery, acquired prior to the previous year, is the actual cost minus depreciation actually allowed. It necessarily follows that if in the prior years no depreciation has been actually allowed, then the actual cost incurred by the assessee for acquiring the machinery would be the written down value of the machinery. It is further clear that if the assessee desired to claim depreciation, he must supply the required particulars. In the event the particulars are not supplied by the assessee then depreciation is not allowed to him. It is an admitted position that at no time prior to the assessment year 1955-56 the assessee had filed any returns or that lie had claimed any depreciation and in support of it supplied any particulars or that any depreciation on the machinery had actually been allowed. It is not shown to us that it is obligatory on the assessee to claim depreciation in every year of assessment, and in the event of his failure to do so, he forfeits the claim therefor or that the cost price gets automatically reduced by the allowable amount of depreciation. That being the position, it is difficult to hold that the assessee is not entitled to claim depreciation on the basis that the cost price of the machinery, etc., was the written down value thereof for the purpose of ascertaining the amount of depreciation allowable to him, and it was not open to the income-tax authorities to compute the depreciation on the basis that depreciation had been, as if, claimed in every year and allowed to the assessee.
10. The decision in Commissioner of Income-tax v. Kamala Mills Ltd., on which reliance has been placed by the assessee, lends support to the view taken by us. The facts in that case were: in the assessment year 1941-42 the written down value of certain assets of the assessee was Rs. 9,08,003 and the allowable depreciation was found to be Rs. 87,244. As in that year there was a resultant loss, effect could not be given to that allowance and the same was carried forward to the following year 1942-43. A question arose as to what should be the written down value of the assets for the year 1942-43. It was the contention of the assessee that the written down value should be taken at Rs. 9,08,003 inasmuch as in the prior year the allowable depreciation of Rs. 87,244 was not actually allowed. On the other hand, the contention of the department was that the written down value should be taken at Rs. 9,08,003 less Rs. 87,244, the amount of depreciation ascertained in the prior year. It was held that as there was loss in the prior year, the depreciation allowance of Rs. 87,244 was not set off and, therefore, it could not be said to have been actually allowed. It is, therefore, clear that unless and until the depreciation amount has been actually allowed in any assessment of the prior years, the written down value of the machinery continues to remain the cost price incurred by the assessee in acquiring the machinery or the assets. It is not necessary to refer to the other case on which reliance has been placed by the assessee. The decision on which reliance has been placed by Mr. Joshi, Commissioner of Income-tax v. National Electrical Industries, in our opinion, has no bearing on the question we have to consider and is of little assistance to the department. The question that fell for consideration in the case related to the priority between the benefit of exemption from payment of tax under section 15C and the set-off in respect of loss of the previous year under section 24(2) of the Act.
11. For reasons stated above, the answer to the question referred to will have to be in the affirmative. We answer accordingly. The Commissioner shall pay the costs of the assessee.
12. Question answered in the affirmative.
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