- Bookmark
- Share
- CaseIQ
Karnani Industrial Bank Ltd. v. Commr. Of Income-Tax
Structured Summary of the Provided Opinion
Factual and Procedural Background
The assessee, Messrs Karnani Industrial Bank, a limited company, acquired cinematographic machinery on 6-4-1938 from one of its creditors for a price claimed to be Rs. 3,94,000. That figure of cost was accepted in successive assessments beginning with assessment year 1939-1940. In the assessment for 1946-1947 the Income-tax Officer conducted an inquiry and concluded that the actual cost to the assessee was Rs. 2,80,000 (not Rs. 3,94,000). Because depreciation amounting to Rs. 2,84,000 had already been allowed earlier, the Officer concluded that the written down value had become negative and that no further depreciation allowance could be allowed; a similar order was made for the assessment year 1947-1948.
The assessee contended that the Income-tax Officer was not entitled to re-determine the original cost but was limited to taking the written down value of the previous year and applying the statutory percentage of depreciation to arrive at the allowance for the assessment year. The lower authorities rejected the assessee's contention. The Tribunal referred the following question to this Court:
Whether the Income-tax Officer, dealing with the assessments for the years 1946-1947 and 1947-1948, was entitled in law to go behind the original cost which was accepted by his predecessor ever since the assessment year 1939-1940?
Legal Issues Presented
- Whether the Income-tax Officer, in making assessments for 1946-1947 and 1947-1948, was entitled to go behind the original cost of the machinery that had been accepted by earlier Income-tax Officers since assessment year 1939-1940.
- Whether, under S. 10(2)(vi) (and related definitions), the Officer was limited to applying the prescribed percentage to the written down value of the previous year (as asserted by the assessee), or whether he must, where appropriate, determine the actual cost and cumulative depreciation allowed to arrive at the written down value for the assessment year (as contended by the Revenue).
Arguments of the Parties
Appellant's (Assessee's) Arguments — Presented by Mr. Mitra
- Mr. Mitra expressly disclaimed reliance on res judicata or estoppel; his case was based solely on statutory interpretation of S. 10(2)(vi).
- He argued that S. 10(2)(vi) confines computation of depreciation (for non-ocean-going ships) to a prescribed percentage on the written down value, and therefore the Income-tax Officer, when assessing any year, must merely take the written down value of the previous year and (a) in that year apply the statutory percentage to the written down value derived from original cost, and (b) in subsequent years continue to write the value down year-by-year by applying the same statutory percentage to the preceding written down value.
- According to this submission, there is no room in the section for the Officer to look beyond the immediately preceding written down value to revisit the original cost; any revision of the original cost was excluded by the statutory scheme as Mr. Mitra read it.
Respondent's (Revenue's) Arguments — Presented by Mr. Meyer
- Mr. Meyer relied on the definition of "written down value" in S. 10(5)(b), which, in the case of assets acquired before the previous year, defines written down value as the actual cost to the assessee less all depreciation actually allowed to him under the Act (or prior legislation/executive orders).
- He argued that the definition indicates the Income-tax Officer's task: to determine the actual cost to the assessee and the cumulative depreciation allowed up to the relevant year, and to compute the written down value as the difference between those two figures.
- Thus, the Officer is not restricted to a mere arithmetical reduction from the previous year's written down value; he may, and indeed must where necessary, determine for himself the actual original cost and the amounts of depreciation allowed previously, and if he finds the original determination erroneous may correct it.
- Mr. Meyer also observed that Mr. Mitra's method implicitly refers to original cost anyway because the previous year's written down value is itself the result of working down from original cost; this supported the proposition that reference to original cost is inherent in the statutory scheme.
Table of Precedents Cited
No precedents were cited in the provided opinion.
Court's Reasoning and Analysis
The Court concentrated on the interplay between S. 10(2)(vi) (which prescribes that, in "other" cases, depreciation is to be computed as a prescribed percentage on the written down value) and the definition of "written down value" contained in S. 10(5)(b). The Court noted that the operative question concerned the latter clause of S. 10(2)(vi) (the non-ship cases) and that the statute provides for computation of depreciation on the written down value.
The Court then analysed the definition in S. 10(5)(b): in the case of assets acquired before the previous year the written down value means the actual cost to the assessee less all depreciation actually allowed under the Act (or prior Act/orders). The Court regarded this definition as decisive of the scope of the Income-tax Officer's enquiry when determining depreciation in a year other than the year immediately following purchase.
Applying the statutory text, the Court accepted Mr. Meyer’s position that the definition compels the Officer to examine two components — (a) the actual cost to the assessee, and (b) the depreciation actually allowed up to that time — and to compute the written down value as the difference. The Court rejected Mr. Mitra’s contention that the Officer was limited to a mechanical computation from the immediately preceding written down value without reference to the original cost or to past allowances.
The Court emphasised that had the Legislature intended the limitation argued by Mr. Mitra it could have defined "written down value" by reference to the previous year's written down value less the statutory percentage. Instead, the definition expressly refers back to original cost and past allowances, thereby authorising (and in the Court's view requiring) the Officer to determine original cost where necessary.
The Court also observed that neither res judicata nor estoppel were invoked by the assessee (Mr. Mitra had disclaimed such reliance) and found that no such principle stood in the way of the Income-tax Officer proceeding to determine original cost and past allowances afresh when appropriate.
Holding and Implications
Holding: The Court answered the referred question in the affirmative. In the Court's words, the Income-tax Officer dealing with the assessments for the years 1946-1947 and 1947-1948 was entitled in law to go behind the original cost which had been accepted by his predecessor since assessment year 1939-1940.
Core Ruling: The Income-tax Officer may determine the actual original cost to the assessee and the cumulative depreciation actually allowed, and compute the written down value for the assessment year on that basis; he is not limited to mechanically applying the statutory percentage to the immediately preceding written down value without reference to original cost and past allowances.
Implications (Direct effect): The direct legal consequence is that the Income-tax Officer was lawfully entitled to reassess the original cost and thereby adjust the written down value and depreciation allowances for the assessment years in question. The Commissioner of Income-tax was awarded his costs of the reference; the opinion also records the direction "Certified for two Counsel."
The opinion does not discuss broader implications or the setting of a general precedent beyond the interpretation and application of S. 10(2)(vi) and S. 10(5)(b) to the facts before the Court; the summary above states the direct effect on the parties as provided in the opinion.
Reference answered. (Chakravartti, C.J.; Lahiri, J. concurred.)
Chakravartti, C.J:— Only a few facts require to be stated in order to explain how the question referred in this case arises.
2. The assessee, Messrs Karnani Industrial Bank is a limited company and on 6-4-1938, it acquired from one of its creditors some cinematographic machinery at the price, as was claimed, of Rs. 3,94,000/-. That figure of the cost of the machinery was accepted in successive assessments of the assessee, but was doubted for the first time in the course of the assessment for the year 1946-1947. That year, the Income-tax Officer seems to have made an enquiry into the circumstances in which the machinery had been acquired and he came to the conclusion that its real cost to the assessee had been not Rs. 3,94,000/-, as claimed and as also allowed in previous assessments, but only Rs. 2,80,000./-. Since he found that depreciation allowance of the amount of Rs. 2,84,000/- had already been allowed to the assessee, he came to the conclusion that the written down value had been reduced to a minus figure and, therefore, there was no further depreciation allowance to be allowed. Necessarily, in the next assessment also, that for the year 1947-1948, he made a similar order. The assessce's contention is that the Income-tax Officer was not entitled to determine afresh, as it were the original costs of the machinery to the assessee, but had merely to take the written down value of the previous year and to work out therefrom the written down value for the assessment year and then allow the statutory percentage of deduction. The authorities below did not agree and decided against it. Thereupon, the Tribunal was required to refer the matter to this Court which has been done in the form of the following question:
Whether the Income-tax Officer, dealing with the assessments for the years 1946-1947 and 1947-1918, was entitled in law to go behind the original cost which was accepted by his predecessor ever since the assessment year 1939-1940?
3. As framed, the question seems to raise a point of estoppel or ‘res judicata.’ It refers to what had been done by successive Income-tax Officers since the assessment year 1939-1940 and asks whether the Income-tax Officer, dealing with the assessments for the two years in question, could take a view different from theirs with regard to the original costs of the machinery. Mr. Mitra, however, appearing for the assessee, expressly disclaimed any intention to put his argument on the ground of anything like res judicata or estoppel. He said that the terms of S. 10(2)(vi) sufficed for him and he would only draw attention to what the section enjoined. According to Mr. Mitra, the language of S. 10(2)(vi) limited the Income-tax Officer to working down to the written down value for the year for which he was making the assessment from the written down value accepted for the previous year. Further behind he could not, under the terms of the section, go.
4. Section 10(2)(vi) is expressed in the following terms:
10(2) “Such profits or gains shall be computed after making the following allowances, namely:
…. …… …… …… …… …. ….
(vi) in respect of depreciation of such buildings, machinery, plant or furniture being the property of the assessee, a sum equivalent, where the assets are ships other than ships ordinarily plying on inland waters, to such percentage on the original cost thereof to the assessee as may in any case or class of cases be prescribed and in any other case, to such percentage on the written down value thereof as may in any case or class of cases be prescribed…………”.
5. We are really concerned with the last clause of the section. This is not a case of ocean-going ships, but one of “other” cases and, therefore, under the language of the section, the depreciation is the prescribed percentage on the written down value of the machinery or plant concerned in the case.
6. Mr. Mitra's contention was that the written down value had a well understood meaning in commerce and so far as the Income-tax Act was concerned, both the method of determining it and the quantum at which it was to be determined were regulated by the rules framed. He pointed out that whereas the written down value, entered by the owner of a business in his own books, might be what he considered to be proper in view of the principles of commercial accounting and the exigencies of the case, the Income-tax Act laid down a fixed percentage which had to be applied. All that had to be done in the first year was to fix the original cost and thereafter the Income-tax Officer had merely to write the value down from the figure of the original cost to a figure to which the figure or the original cost would be reduced, if the statutory percentage was deducted, and then allow the statutory percentage of the written down value so determined, as an allowance. Similarly, in the next year, he had to write the written down value further down by deducting once again the same statutory percentage and grant the assessee an allowance of the statutory percentage of the value written further down in the manner stated above.
7. As this was the process contemplated and directed by the Act, Mr. Mitra contended that when in a particular year the Income-tax Officer had to decide what depreciation allowance he would grant the assessee, he had merely to see what the written down value of the previous year was and then apply the statutory percentage in the two ways I have already indicated. The section, Mr. Mitra reminded us, spoke of “such percentage on the written down value thereof as may in any case or class of cases be prescribed.” In those words there was no room, according to Mr. Mitra, for looking further behind than at the written down value immediately preceding and if that was so, any revision of the basic figure of the original cost which had been gradually scaled down to the written down value of the previous year, was wholly excluded by the section and entirely unwarranted.
8. As Mr. Mitra said that he would not rely upon the principle of ‘res judicata’ or anything like the rule of estoppel, but would be content to rely upon the statute itself, Mr. Meyer sought to meet section by section. Kc referred us to the definition of ‘written down value’, as contained in S. 10(5) of the Act. According to that section, ‘written down value’ means we are not concerned with Cl. (a)—
“(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 (2 of 1886) was in force.”
9. Mr. Meyer contended that Cl. (b), although it was a definition section, clearly indicated what the task of the Income-tax Officer was when he had to determine the depreciation allowance for any year other than the year following the year of the purchase. He had to see what the actual cost to the assessee had been and then see how much depreciation allowance had been granted to him in all up to the time and then take the difference between the two sums as the written down value for the year concerned. Since the two component parts of the definition were, (a) actual cost to the assessee, and (b) depreciation so far allowed, Mr. Meyer contended that there was nothing to prevent the Income-tax Officer from determining for himself what the actual cost had been and, in fact, the section required him to do so. He might certainly accept the cost as originally determined and in most cases would probably do so, but if he thought that the original determination was erroneous, the section left him free and indeed made it his duty to find the actual cost for himself.
10. It was pointed out that even the method suggested by Mr. Mitra implied some reference to the original cost, because the written down value of the previous year on which, according to Mr. Mitra, the Income-tax Officer would have always to rely, was only the resultant figure that had been reached by working down from the figure of the original cost.
11. As regards Mr. Mitra's actual argument, Mr. Meyer's answer was that if the intention of the Legislature was to limit the Income-tax Officer in the way contended for by Mr. Mitra, then Cl. (b) of S. 10(5) might well have said that in the case of assets acquired before the previous year, the written down value would be the value determined by deducting from the written down value of the previous year the amount of the statutory percentage. Instead of doing so, the section specifically referred the Income-tax Officer back to the original cost and back to the amounts of allowance granted in the past and thus committed to him a task of not merely performing a mathematical operation on the basis of the written down value of the previous year, but one of determining the written down value himself.
12. In my view, the contention of Mr. Meyer is right. The definition, it appears to me, completely excludes the view suggested by Mr. Mitra as to the nature of the operation to be performed under the latter part of S. 10(2)(vi). Clearly, the limit to which the Income-tax Officer can go back does not stop at the written down value of the previous year, but extends up to the figure of the original cost, and the method enjoined by S. 10(5)(b) is not that the Income-tax Officer should merely scale the written down value of the previous year down, but that he should take into consideration the actual cost, determining it for himself, if necessary, take also into consideration the allowance granted in the past and then make his own computation as to the written down value for the assessment year with which he is concerned, lit appears to me that neither is there any principle of ‘res judicata’ or estoppel standing in the way of the Income-tax Officer proceeding in the manner I have mentioned above, nor do the terms of S. 10(2)(vi) themselves limit him in the way suggested by Mr. Mitra.
13. For the reasons given above, the answer to the question referred must, in my opinion, be in the affirmative.
14. The Commissioner of Income-tax will have his costs of this Reference. Certified for two Counsel.
Lahiri, J.:— I agree.
H.G.P
15. Reference answered.
Alert