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Esthuri Aswathiah v. Commissioner Of Income-Tax, Mysore
Factual and Procedural Background
The assessee is a Hindu undivided family engaged in various businesses, including hiring out lorries. Two lorries are at issue.
First, lorry MYS 5424X was purchased new in the accounting year relevant to assessment year 1952-53 for Rs. 23,769 and ran 4 1/2 months in that year. Depreciation allowances were granted in successive years, and in the accounting year ending March 31, 1955 the lorry was sold for Rs. 10,000. In that accounting year it ran 4 1/2 months and total depreciation allowed up to sale amounted to Rs. 23,572, leaving a difference between cost and depreciation of Rs. 197. The Income-tax Officer assessed Rs. 9,803 as profit under section 10(2)(vii) (the sale proceeds less the written down value/difference).
Second, lorry MR 9087X was purchased new in the accounting year relevant to assessment year 1954-55 for Rs. 27,491. Depreciation was allowed in subsequent years totaling Rs. 20,626 up to assessment year 1955-56. In the accounting year relevant to assessment year 1956-57 (when the lorry ran 4 5/6 months) the assessee sold it for Rs. 9,000 and no depreciation was allowed for that year because it was sold. The Income-tax Officer assessed the difference between sale price and written down value as profit under section 10(2)(vii), arriving at (as recorded) Rs. 2,075 (the opinion notes the correct figure would appear to be Rs. 2,135).
The assessee appealed against the computations of profit under section 10(2)(vii) for the relevant years, contending that the initial depreciation (initial allowance under section 10(2)(via)) should not be included in the written down value when computing profit on sale. The Appellate Assistant Commissioner rejected this contention, and on appeal the Appellate Tribunal also rejected the assessee's claim.
Further, in respect of assessment year 1955-56 the assessee raised a separate point that the assessment order dated February 29, 1960 (communicated to the assessee on April 4, 1960) was barred by limitation under section 34(3) of the Indian Income-tax Act, 1922. The Appellate Assistant Commissioner and the Tribunal rejected that limitation argument as well.
The present applications seek a statement of case and reference of one or more questions of law arising from the Tribunal's order (I.T.A. Nos. 7606 and 7607 of 1961-62 dated May 31, 1962) to the High Court of Mysore at Bangalore. The court concluded that questions of law did arise, drew a consolidated statement of the case, and referred the questions to the High Court.
Legal Issues Presented
- Whether the initial allowance (initial depreciation) allowed under section 10(2)(via) should be taken into account in ascertaining the written down value for the purpose of computing the profit under section 10(2)(vii) of the Indian Income-tax Act, 1922.
- Whether, on the facts and circumstances of the case, the assessment order dated February 29, 1960 (communicated to the assessee on April 4, 1960) is barred by limitation within the meaning of section 34(3) of the Indian Income-tax Act, 1922.
Arguments of the Parties
Assessee's (Appellant's) Arguments
- The initial depreciation (initial allowance under section 10(2)(via)) should be excluded when computing the written down value of the assets for the purpose of calculating profit under section 10(2)(vii).
- Regarding limitation, the assessee contended that the assessment order was barred because the order should have been made (or at least communicated) within four years from the end of the assessment year; the assessee relied on the decision of the Calcutta High Court in Director of Supplies and Disposals v. Member, Board of Revenue, Government of West Bengal to support the view that the relevant date is the date of communication or knowledge of the order.
- Counsel for the assessee (Sri Srinivasan) also urged that earlier decisions (Popular Ltd. and Asoka Mills) should be reconsidered, arguing that those decisions did not notice certain textual aspects of section 10(2)(vi), specifically (a) that the second part of section 10(2)(vi) does not expressly say "in respect of depreciation", and (b) that if the provision only dealt with depreciation allowances, clause (c) of the proviso would have been worded differently.
Revenue's Arguments (as reflected in the Appellate Assistant Commissioner and Tribunal)
- The initial depreciation is part of the depreciation allowances and, as such, must be taken into account in determining the written down value used for computing profit on sale under section 10(2)(vii). The Tribunal referred to the definition of written down value in section 10(5)(b) (actual cost less all depreciation actually allowed) and treated initial depreciation as included among "all depreciation actually allowed".
- On limitation under section 34(3), the Revenue relied on the Madras High Court decision in RM. P. R. Viswananthan Chettiar v. Commissioner of Income-tax, which held that it is sufficient that the assessment and determination of tax be completed within the prescribed period; communication of the order to the assessee is not required to be within that period. Accordingly, an order made within the four-year period is valid even if communicated later.
Table of Precedents Cited
| Precedent | Rule or Principle Cited For | Application by the Court |
|---|---|---|
| RM. P. R. Viswananthan Chettiar v. Commissioner of Income-tax (Madras High Court) | Interpreted section 34(3) to mean that the assessment and determination of tax must be completed within the four-year period; communication of the terms of the order to the assessee within that period is not necessary. | The Appellate Assistant Commissioner followed this decision in holding the assessment was made within time. The court agreed with and followed this decision, concluding that the making of the order (not its communication) is of essence under section 34(3), and thus the assessment was not barred by limitation. |
| Director of Supplies and Disposals v. Member, Board of Revenue, Government of West Bengal (Calcutta High Court) | Used by the assessee to support the proposition that the relevant date for limitation may be the date of communication or knowledge of the order (as relied upon in arguments). | The decision was relied upon by the assessee before the Appellate Assistant Commissioner, but the Assistant Commissioner and the Tribunal did not accept this view, preferring the Madras decision. The court did not adopt the Calcutta decision for the purposes of interpreting section 34(3). |
| Popular Ltd. v. Commissioner of Income-tax | Previous decision interpreting the provisions relevant to depreciation and written down value (cited as being against the assessee's contention). | The court regarded this decision as adverse to the assessee's construction and indicated there was no reason to depart from it; it formed part of the established view the court followed in answering the question on depreciation. |
| Asoka Mills Co. Ltd. v. Commissioner of Income-tax | Previous decision interpreting the provisions relevant to depreciation and written down value (cited as being against the assessee's contention). | The court treated this decision similarly to Popular Ltd. as contrary to the assessee's argument and declined to revisit or overturn that prior authority; it supported the court's conclusion that initial depreciation should be included. |
Court's Reasoning and Analysis
The court first determined that questions of law did indeed arise from the Appellate Tribunal's order and accordingly drew up an agreed (consolidated) statement of the case to be referred to the High Court.
On the limitation question (second question), the court closely examined section 34(3) of the Indian Income-tax Act, 1922, which provides that "no order of assessment or reassessment shall be made after the expiry of four years from the end of the year in which the income, profits or gains were first assessable." The court emphasized that the statutory language speaks of the making of the order and contains no requirement as to the communication of the order within the four-year period. The court therefore accepted and followed the Madras High Court decision in RM. P. R. Viswananthan Chettiar that it is sufficient for the order to be made (i.e., for the assessment and tax determination to be completed) within the prescribed period; it is not necessary that the order be communicated to the assessee within that period. The court noted that cases holding that the relevant date for filing appeals or revisions may be the date of knowledge or communication of the order do not address the same statutory question under section 34(3) and are not contrary to the court's present purpose.
On the depreciation question (the common question), the court focused on the text of section 10(2)(vi) (and related provisos and section 10(5)(b)). The Tribunal had relied on the definition of written down value in section 10(5)(b), which describes written down value as actual cost less "all depreciation actually allowed." The court analyzed the grammar and structure of section 10(2)(vi), observing that the phrase "in respect of depreciation" governs both parts of that clause (the parts are separated by a colon, not a full stop) and that the provision is concerned with allowances to be given towards depreciation.
The court also considered the wording of the proviso (clause (c)) and explained that it was drafted to include not only depreciation allowances under section 10(2)(vi) but also initial depreciation allowances under clause (via) or under earlier Acts (such as the Income-tax Act, 1886). The court rejected the assessee's contention (advanced by Sri Srinivasan) that those textual features required excluding initial depreciation from the written down value: the suggested alternative constructions were not persuasive and the earlier case law (Popular Ltd. and Asoka Mills) was regarded as correctly decided on this point.
For these reasons the court concluded that initial depreciation (the initial allowance under section 10(2)(via)) is to be included among "all depreciation actually allowed" and therefore must be taken into account in ascertaining the written down value for the purpose of computing profit under section 10(2)(vii).
Holding and Implications
Holding: The court answered the referred questions in favour of the Revenue.
More specifically:
- Answer to Question No. 1: The initial depreciation allowed under section 10(2)(via) should be taken into account in ascertaining the written down value for the purpose of computing profits under section 10(2)(vii) of the Indian Income-tax Act, 1922.
- Answer to Question No. 2: On the facts and circumstances of the case, the assessment order dated February 29, 1960 (communicated to the assessee on April 4, 1960) is not barred by limitation under section 34(3) of the Indian Income-tax Act, 1922.
Implications:
- The direct effect is that the assessments challenged by the assessee (insofar as they depend on excluding initial depreciation from written down value) stand supported by the court's answers in favour of the Revenue; the computation method adopted by the assessing authority (and upheld by the Tribunal) is validated.
- The court followed existing authorities (including RM. P. R. Viswananthan Chettiar and earlier decisions such as Popular Ltd. and Asoka Mills) rather than establishing a novel departure; the opinion does not purport to set a new broad precedent beyond affirming the textual interpretation applied to the statutes and prior case law.
- The assessee was ordered to pay costs, including an advocate's fee of Rs. 250, as recorded in the opinion.
1. By these applications the assessee requires the Appellate Tribunal to refer three questions of law which are said to arise out of the Tribunal's order in I.T.A. Nos. 7606 and 7607 of 1961-62 dated May 31, 1962 (Jaishta 10, 1884) to the High Court of Mysore at Bangalore. Inasmuch as, in our opinion, questions of law do arise out of the Tribunal's order, we accordingly state an agreed case and refer it to the High Court. As one of the questions is common to both these references a consolidated statement of the case is hereby drawn.
2. The assessee is a Hindu undivided family. It carried on various business, among them was the business of the plying lorries for hire.
3. One of the lorries MYS 5424X was purchased new during the accounting year relevant for the assessee year 1952-53 for a sum of Rs. 23,769. In that accounting year it ran for 4 1/2 months. The depreciations allowed in regard to this lorry from 1952-53 are as under :
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4. In the accounting year ending on March 31, 1955, the assessee sold this lorry for Rs. 10,000. During this accounting year, it ran for a period of 4 1/2 months only. Income was estimated for this period. The total depreciation allowed was Rs. 23,572. The difference between the cost thereon and the depreciation allowed amounted to Rs. 197.
5. The Income-tax Officer assessed the sum of Rs. 9,803 representing the difference of the sale proceeds of Rs. 10,000 and Rs. 197 mentioned above as profit under section 10(2)(vii).
6. In the accounting year relevant for the assessment year 1956-57, the assessee sold another lorry MR 9087X for Rs. 9,000. This was purchased new during the accounting year relevant for the assessment year 1954-55 for a sum of Rs. 27,491. It was paid for a part of that year. The depreciation allowed from 1954-55 was as under :
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7. The total depreciation allowed up to the assessment year 1955-56 was Rs. 20,626. In the accounting year relevant for the assessment year 1956-57, the lorry ran for 4 5/6 months. No depreciation was allowed because the lorry was sold in the same year.
8. The difference between the cost price and the depreciation allowed amounted to Rs. 6,865. The Income-tax Officer assessed the difference between this figure and the sale price of Rs. 9,000 as profit under section 10(2)(vii). The figure assessed by the Income-tax Officer was Rs. 2,075. The correct figure would appear to be 2,135.
9. The assessee appealed, among other things, against the computation of the profit under section 10(2)(vii) in 1955-56 and 1956-57. The contention was that the initial depreciation allowed in respect of two lorries mentioned above should not be taken into account in arriving at the written down value of the two lorries.
10. The Appellate Assistant Commissioner rejected this contention. After referring to section 10(2)(vib), he observed that :
"........initial depreciation is restricted in the sense that the depreciation which is allowed at the time of installation is kept apart and is not deducted in determining the written down value for the subsequent assessments. It certainly forms part of the depreciation allowance and is in addition to the ordinary allowance. But according to the definition of written down value, all depreciation actually allowed has to be taken into consideration which will certainly include initial depreciation as well. Hence in computing the profits under section 10(2)(vii) not only the difference between the sale price and written down value is taken into consideration but also the initial depreciation which was allowed in the year of installation."
11. In the appeal to the Tribunal on this point, it held that :
"The written down value as far as 2nd proviso to section 10(2)(vii) is concerned is as meant under section 10(5)(b) which says that in the case of assets acquired before the previous year, the actual cost to the assessee less all depreciation actually to him under this Act or any Act or under executive orders under the Indian Income-tax Act, 1886."
12. The allowance under section 10(2)(via) is also called depreciation. We, therefore, consider that there is no merit in the claim of the assessee for the exclusion of the initial depreciation in arriving at the written down value of the assets for the purpose of computing the profit under section 10(2)(vii).
13. The question of law common to both the year is :
"Whether the initial of depreciation allowed under section 10(2)(via) should be taken into account in ascertaining the written down value for the purpose of computing the profit under section 10(2)(vii) of the Indian Income-tax Act, 1922 ?"
14. In regard to the assessment year 1955-56 the assessee has raised the following question of law :
"Whether, on the facts and circumstances of the case, the assessment order dated February 29, 1960, and communicated to the assessee on April 4, 1950, is barred by limitation within the meaning of section 34(3) of the Income-tax Act, 1922 ?"
15. The facts relating to the above are as under :
The accounting year is the year ending March 31, 1955, corresponding to the assessment year 1955-56. This assessment was completed under section 23(3) on February 29, 1960. This assessment order was sent by registered post to the assessee. It was received by the assessee on April 4, 1960.
16. The assessee appealed to the Appellate Assistant Commissioner against the assessment. It was contended before him that the assessment was barred by limitation on the ground that the assessment order ought to have been made within four years from the end of the assessment year, i.e., within March 31, 1960, that the assessment could be said to have been made only on the date on which the order was communicated to the assessee or the date on which the assessee came to know of the assessment. The decision of the Calcutta High Court in Director of Supplies and Disposals v. Member, Board of Revenue, Government of West Bengal was relied upon.
17. The Appellate Assistant Commissioner rejected this contention observing :
"The wording of section 34(3) is that 'no order of assessment or reassessment shall be made after the expiry of four year from the end of year in which the income, profits or gains were first assessable. The Madras High Court in RM. P. R. Viswananthan Chettiar v. Commissioner of Income-tax, have held that all the section required was that the assessment of the income and the determination of the tax payable should be completed within that period and that it was not necessary that the terms of the order of assessment should be communicated to the assessee within that period. When there is direct authority under the Income-tax Act itself that it would be sufficient that an order is made before the expiry of four years and that it does not extend to the date of service of the order on the appellant, there does not seem to be any necessity to refer to a decision under a different enactment. Following respectfully the decision of the Madras High Court, I hold that the order of the Income-tax Officer was made well within time and that it is legally valid."
18. There was a further appeal to the Appellate Tribunal. The Appellate Tribunal agreed with the Appellate Assistant Commissioner in rejecting the assessee's contention. The order of the Tribunal forms part of the case.
19. Taking up the second question first the point under discussion is covered by the decision of the Madras High Court in RM. P. R. Viswanathan Chettiar v. Commissioner of Income-tax. We are in full agreement with that decision as the same accords with the language of section 34(3) of the Indian Income-tax Act, 1922. That section says that an order of assessment or reassessment shall not be made
"after the expiry of four years from the end of the year in which the income, profits or gains were first assessable."In this case, the order in question was made within the period mentioned therein. The grievance of the assessee is that by the time that order was communicated to him, the period stipulated therein had expired. What is of essence in the case is the making of the order and not its communication. Section 34(3) does not speak of any communication. No decision taking a contrary view has been brought to our notice. Sri Srinivasan read to us certain decisions which have held that for the purpose of filing an appeal or revision against an order made the relevant date is date of the knowledge of the order or the date on which it is communicated. This line of cases are not opposite for our present purpose.
20. Now coming to the first question, here again the decided cases are against the contention advanced by Sri Srinivasan : see Popular Ltd. v. Commissioner of Income-tax and Asoka Mills Co. Ltd. v. Commissioner of Income-tax. Sri Srinivasan contends that these decisions require reconsideration as they did not notice certain material portions of section 10(2)(vi). The aspects that were considered material by Sri Srinivasan are : (1) that the second part of section 10(2)(vi) does not say "in respect of depreciation" and (2) that if section 10(2)(vi) only dealt with depreciation allowances, clause (c) of the proviso would have mentioned "the aggregate of all allowances provided under the clause". Neither of these contentions appears to be sound. Now coming to the main part of section 10(2)(vi) the words "in respect of depreciation" not only governs the first part of that clause but also the second part. It must be remembered that the first part and the second part of that clause are only separated by colon and not by a fullstop. On a plain reading of section 10(2)(vi) it is clear that that provision deals with the allowances to be given towards depreciation.
21. Now coming to clause (c) of the proviso, the proviso had to be worded in the manner it has been done because the legislature wanted to include within that proviso not only the depreciation allowances provided under section 10(2)(vi) but also the deeeepreciation allowances provided under clause (via) or under any Act repealed hereby or under the Indian Income-tax Act, 1886 (Act II of 1886).
22. Hence the ingenious construction tried to be placed by Sri Srinivasan cannot be accepted.
23. For the reasons mentioned above, our answers to the questions submitted to us are in a favour of the revenue; in other words, our answer to question No. (1) is that the initial depreciation allowed under section 10(2)(via) should be taken into account in ascertaining the written down value for the purpose of computing profits under section 10(2)(vii) of the Indian Income-tax Act, 1922, and our answer to question No. (2) is that, on the facts and circumstances of the case, the assessment order dated February 29, 1960, which was communicated to the assessee on April 4, 1960, is not barred by limitation under section 34(3) of the Indian Income-tax Act, 1922. The assessee to pay the costs. Advocate's fee Rs. 250.
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