1. The assessee is a registered firm carrying on business of manufacture and sale of electric wire and cables. In respect of the assessment year 1966-67, the relevant previous year ending April 30, 1966, the assessee submitted a return disclosing an income of Rs. 2,19,820. It claimed relief in respect of a sum of Rs. 40,148 under s. 84 of the I.T Act as representing 6% of Rs. 6,69,130 said to be capital employed in the business. The ITO found that the machinery of the value of Rs. 61,172 had not been actually used during the relevant previous year. He, therefore, declined to grant relief pertaining to the same and allowed only Rs. 36,441 by way of relief under s. 84. The assessee had also claimed a set-off of Rs. 55,752 representing the loss for the assessment year 1964-65, but that was also not allowed and the ITO determined the total income at Rs. 6,07,368.
2. The assessee preferred an appeal to the AAC contending that he should have been allowed relief under s. 84 in respect of Rs. 61,782 as being the value of machinery and that the ITO should also have set off Rs. 55,752 being the loss assessed for the assessment year 1964-65, but the AAC did not accept both the contentions and confirmed the order of the ITO. On further appeal, the Tribunal held:
“……that where an assessee has acquired an asset after the commencing date of the computation period, its value can be taken as capital employed only if it had been used. But such question of user does not arise in the case of asset acquired before the commencing date of the computation period. It is now stated before us that out of the machinery of the value of Rs. 61,172 which had not been used during the computation period, machinery worth Rs. 45,857 had been purchased in the earlier year. If this is correct, the appellant will be entitled to relief under section 84 at 6% thereon. The Income-tax Officer will have to verify this and allow the claim if it is found to be true.”
3. In respect of the other claim relating to set off of Rs. 55,752, following the decision in Ballarpur Collieries Co. v. Commissioner Of Income-Tax, Poona., [1973] 92 ITR 219 (Bom), the Tribunal held that though the contention that the loss of Rs. 55,752 sustained in the earlier year should be set off against the income computed for this year could not be accepted in that form, the assessee would be entitled to set off unabsorbed depreciation allowance, if full effect had not been given to the depreciation allowance in the assessment of the partners. In that view, the ITO was directed to find out whether the said loss of Rs. 55,752 included any unabsorbed depreciation of the earlier years not adjusted in the accounts of the partners and if so it will have to be allowed for the assessment year 1966-67.
4. At the instance of the revenue, the following two questions have been referred:
“(a) Whether, on the facts and in the circumstances of the case, the assessee was entitled to relief under section 84 of the Income-tax Act, 1961, on Rs. 45,857 in the assessment for the assessment year 1966-67, if it is found that it had purchased machinery of that value in the year earlier to the computation period, even though it had not been used during the relevent previous year?
(b) Whether, on the facts and in the circumstances of the case, the unabsorbed depreciation of the assessment year 1965-66 should be set off against the income of the assessee for the assessment year 1966-67, to the extent it was not adjusted in the assessments of the partners for the assessment year 1965-66?”
5. Section 84 of the I.T Act, 1961, provided that income-tax shall not be payable by an assessee on so much of the profits and gains derived from any industrial undertaking or business of a hotel or from any ship, to which that section applied, as does not exceed six per cent. per annum on the capital employed in such undertaking or business or ship, computed in the prescribed manner. Rule 19 of the I.T Rules, 1962, prescribes the method of computation of capital employed for purposes of s. 84. Under cl. (a) of that rule, the capital employed in an undertaking shall be taken to be in the case of assets acquired by purchase and entitled to depreciation, (i) if they have been acquired before the computation period, the written down value on the commencing date of the said period; and (ii) if they have been acquired on or after the commencing date of the computation period, their average cost during the said period. For the purposes of r. 19, cl. (6) thereof defined “average cost” and “written down value”. The average cost was defined in relation to any asset as meaning such proportion of the actual cost thereof as the number of days of the computation period during which such asset is used in the business bears to the total number of the days comprised in the said period. The written down value means the written down value computed under sub-s. (6) of s. 43 as if for the words “previous year”, the words “computation period” were substituted.
6. The written down value is defined in s. 43(6) as follows:
“(a) in the case 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 under the Indian Income-tax Act, 1922 (XI of 1922), or any Act repealed by that Act, or under any executive orders issued when the Indian Income-tax Act, 1886 (II of 1886), was in force…….”
7. The proviso and the Explanations which are unnecessary are omitted.
8. In this definition, in view of r. 19(6), the previous year will have to be read as computation period.
9. The argument of the learned counsel for the revenue is that the words written down value imply that in the case of an asset acquired before the computation period it should have been used before the computation period. Though, normally, a written down value would imply that the asset has been used in the previous years and in respect of the; same some depreciation allowance had been, in fact, given so that it is not the actual cost of the asset itself, we are unable to agree that, necessarily and in all Circumstances, written down value would only mean something less than the actual cost. We may refer to s. 43(6) itself where in respect of an asset acquired in the computation period the written down value is denned to be the actual cost to the assessee. Thus, the Act itself contemplates the actual cost being considered as the written down value for the purpose of computation of capital employed. Rule 19(1)(b) also states that the capital employed in an undertaking shall be taken to be in the case of assets acquired by purchase and not entitled to depreciation if they have been acquired before the computation period, their actual cost to the assessee. Thus, in the case of an asset which is not entitled to depreciation, though it might have been used before the computation period, for the purpose of computing the capital employed for the purpose of s. 84, the actual cost to the assessee is to be taken and not a depreciated value of the asset. The learned counsel then contended that in the case of an asset acquired on or after the commencing date of the computation period, the rule requires that the average cost during the said period is to be taken and with reference to the definition of average cost the capital employed will have to be determined at such proportion of the actual cost thereof as the number of days of the computation period during which such asset is used in the business bears to the total number of the days comprised in the Said period. Thus, in a case where an asset was acquired on or after the commencing date, the capital employed is determined with reference to the number of days during which the asset was used is taken into account and there should be no reason why a similar construction cannot be made in respect of cases where the asset was acquired before the computation period. We are not concerned with the wisdom of the legislative provision; but, on the actual language used, we have no escape from the conclusion that in the case of an asset acquired before the computation period, its actual cost to the assessee only will have to be taken into account. As already pointed put, the legislature itself seemed to be aware, because in cl. (b) of r. 19(1), it is mentioned that in the case of assets acquired by purchase and not entitled to depreciation if they have been acquired before the computation period, their actual cost to the assessee will have to be taken into account. We are, therefore, of the view that the Tribunal was right in holding that if the asset of the value of Rs. 45,857 had been purchased before the computation period, the assessee would be entitled to relief under s. 84.
10. On the second question of law that has been referred, the Tribunal itself has followed the decision of the Bombay High Court in Ballarpur Collieries Co. v. Commissioner Of Income-Tax, Poona., [1973] 92 ITR 219. That decision was considered by this court in CIT v. Nagapatinam Import and Export Corporation, [1979] 119 ITR 444 and this court held that in the case of a registered firm, either the whole of the depreciation allowance or any part thereof for which effect had not been given by adjustment in the hands of the partners, will have to be added to the amount of the depreciation in the following year in the firm's assessment and be deemed to be part of the allowance for the later year and can be considered for set-off or adjustment in the hands of the firm. In fact, the same Bench which decided the case in CIT v. Nagapatinam Import and Export Corporation, [1979] 119 ITR 444 (Mad) applied the ratio of that judgment to the assessee in the present case with respect to a subsequent assessment year in the decision in CIT v. Madras Wire Products, [1979] 119 ITR 454 (Mad). In view of these two decisions, we have to hold that the Tribunal is right even on the second question. Accordingly, we answer both the references in the affirmative and against the revenue. The assessee will be entitled to its costs—counsel's fee Rs. 500.