The Judgment of the Court was delivered by
Sabyasachi Mukharji, J.:— In this reference under s. 256(1) of the I.T Act, 1961, the following question has been referred to this court:
“Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that depreciation under section 32(1)(ii) of the Income-tax Act, 1961, read with rule 5 of the Income-tax Rules, 1962, was not admissible @ 100% on coal tubs of the value of Rs. 12,85,132, on winding ropes of the value of Rs. 32,663 and on safety lamps of the value of Rs. 1,19,565?”
2. In order to appreciate this question, we have to refer to certain facts. It appears from the order of the ITO that for the assessment year the assessee claimed 100% depreciation on coal tubs, cap lamps and haulage ropes. The contention of the assessee can best be appreciated in the words of the ITO, which are as follows:
“During the year the assessee claimed 100% depreciation on coal tubs, cap lamps and haulage ropes. Prior to the amendment of rule 5, these assets were not considered as depreciable assets. Only the value of replacement and renewal is allowed as revenue charge. The assessee's claim for 100% depreciation on the said assets is unacceptable on the ground that these assets have already got the benefit of replacement or renewals from year to year. Further, 100% depreciation for the original cost of those assets cannot be allowed on the ground that those assets had no W.D.V at the beginning of the accounting year. Section 43(6) provides that depreciation will be allowed: (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. Hence, 100% depreciation will be allowed on coal tubs, cap lamps & haulage ropes as per revised rule only if the assets are acquired during the accounting year. From the statement filed by the assessee it is found that the assessee brought into use coal tubs, cap lamps and haulage ropes to the extent of Rs. 57,452 during the accounting year. Hence, 100% depreciation will be allowed on this amount and the claim for the balance is ignored.”
3. Being aggrieved by the order of the ITO, the assessee went up in appeal before the AAC. On this aspect, the AAC observed, inter alia, as follows:
“The learned counsel for the appellant on the other hand submits before me that the ITO was not justified in disallowing depreciation on coal tubs, ropes, safety lamps and cap lamps. He further submits that under the rules in force in the, assessment year 1969–70, no depreciation was allowable on coal tubs, cap lamps, etc., and the cost of replacement was being allowed as revenue expenditure. In other words, once an asset has been replaced, the cost of the original asset is no longer material and what is to be considered is whether under the new rules applicable for 1970–71 assessment year any allowance by way of depreciation has been granted with reference to the replaced cost.
I have given careful consideration to the various submissions made by the learned counsel but find that there is not enough force in the arguments advanced by him. The claim of depreciation on coal tubs, safety lamps, ropes and cap lamps is to the extent of Rs. 14,53,766 as against the actual use of those to the extent of Rs. 57,452 only during the assessment year 1970–71. The balance amount represents the so-called value of the cap lamps, ropes, safety lamps and cap lamps brought into use since the inception of the colliery. However, while the learned counsel has tried to claim depreciation on the amount incurred on the items referred to above he has not filed details as to the total number of tubs, ropes, safety lamps and cap lamps capitalised at the beginning of the colliery and, thereafter, details of year-wise purchase, additions, discarding and replacement allowed by the Revenue under the Rules existing at that time. The life of cap lamp, safety lamp, coal tubs is considered to be one year in view of the replacement value as well as 100% depreciation allowable. Therefore, it can be said that the items introduced several years ago continued to exist and, therefore, depreciation should have been allowed on the entirety. The appellant has not been able to say as to what extent replacement value has been reimbursed by the Revenue and if the entire amount over the year has been allowed as revenue expenditure on account of replacement of these items, where is the capital value left for this amount on which depreciation should be allowed? In the absence of any figures regarding the cost of replacement having been allowed by the Revenue, I agree with the finding given by the ITO that the assessee is not entitled to the depreciation on the value of cap lamps, safety lamps, coal tubs, etc., as claimed by the assessee. I also agree that there can be no written down value of the items which were replaced. The ITAT, ‘B’ Bench, in ITA No. 3217 (Cal) of 1973–74 in the case of South Karanpura Coal Co. Ltd. v. ITO, Comp. Dist.-II, has sustained a similar view and have upheld the ITO's action in disallowing depreciation on the original cost. The ITO's action is, therefore, upheld.”
4. Being aggrieved further, the assessee went up before the Tribunal. Before the Tribunal it was claimed that under r. 5 of the I.T Rules, as amended, the assessee was entitled to the depreciation on the original cost of coal tubs, winding ropes and on safety lamps at 100%. The Tribunal noted that the ITO was of the view that these assets had already got the benefit of replacements before the amendment of the rule and these assets had no written down value in the beginning of the year. With respect, it appears, however, that this was not a correct reading of the order of the ITO. The ITO had rejected the claim on the ground as we have indicated in the words of the ITO hereinbefore. The Tribunal thereupon went on to observe that in the appeal before the AAC, it was urged that because of the amendment of r. 5 in the year, the cost of replacements was allowed as business expenditure and that after the amendment of the rule the assessee became entitled to the depreciation as no depreciation had been allowed on those assets and it was immaterial if the replacement cost had been allowed in respect of some of those assets. The Tribunal noted that the AAC had observed that the assessee had failed to furnish the details in respect of the replacements out of the assets originally brought into use and that it could not be determined how much of the capital assets had not been reimbursed by way of replacement costs. He also agreed with the ITO that these assets were not acquired during the year and had no written down value. He, therefore, affirmed the order of the ITO. Reading the order of the AAC and the Tribunal's version of the same it appears that the facts are: (1) The claim of depreciation on coal tubs, safety lamps, ropes and cap lamps was to the extent of Rs. 14,53,766 as against the actual use thereof to the extent of Rs. 57,452 during the assessment year; (2) The balance amount represented the so-called value of the ropes, safety lamps and cap lamps brought into use since the inception of the coltiery (the expressions are underlined* by us); (3) Learned advocate tried to claim depreciation on the amount incurred “on the items referred to above” meaning thereby the items referred to in the preceding sub-clause as referred to above. However, learned advocate had not filed details as to the total number of tubs, ropes, safety lamps and cap lamps capitalised at the beginning of the colliery and, thereafter, details of year-wise purchase, additions discarding and replacement allowed by the Revenue under the rules existing at that time; (4) It was found by the AAC that the items introduced several years ago continued to exist and, therefore, depreciation should have been allowed on the entirety; (5) The assessee had not been able to say as to what extent replacement value has been reimbursed by the Revenue and if the entire amount of that year had been allowed as a revenue expenditure on account of replacement of these items, where there is capital value left for this amount on which depreciation should be allowed; (6) The AAC, in the absence of any figures regarding the costs of replacement having been allowed by the revenue, agreed with the finding given by the ITO that the assessee was not entitled to the depreciation on the value of cap lamps, safety lamps and coal tubs, etc., as claimed by the assessee; and (7) The AAC further went on to observe “I also agree that there can be no written down value of the items which were replaced”. The AAC, therefore, agreed with the order of the ITO. The Tribunal observed in its order as follows:
“Before us it is submitted by the learned counsel for the assessee that no depreciation had been allowed on these assets before the amendment of rule 5 and that only replacement costs were allowed as expenditure. According to him the allowance of replacement costs was immaterial as the replaced assets were substituted for the original assets on which no depreciation had been allowed earlier and in spite of the replacements, assets on which no depreciation had been allowed were continued to be used and as such the assessee became entitled to the depreciation according to the amended rule. According to him the replacement only kept the original capital asset alive and that the same did not lose its identity in spite of the replacements. According to him as the original assets had been acquired prior to the previous year and no depreciation had been allowed thereon, the cost of those assets represented their written down value. He has urged that according to rule 5, as amended, the assessee became entitled to depreciation not only on the assets acquired during the previous year but also on the assets acquired prior to the previous year. The learned departmental representative has supported the order of the revenue authorities.
We do not find any merit in the assessee's contention. Depreciation is allowed on the value of the specific assets used in the year whether the assets were acquired during the previous year or prior to the previous year but not on the value of the assets which had ceased to exist and which were not actually used during the year. Depreciation is allowable only on capital assets and not on the assets of which the costs have been allowed as a business expenditure. The assessee has failed to give any details as to the original assets which had not been replaced and which were used during the relevant year. We are unable to agree with the learned counsel for the assessee that under rule 5 depreciation is allowable on the substituted assets, the cost of which had been allowed as business expenditure. The action of the revenue authorities is affirmed.”
5. In this context, the question indicated above has been referred to this court. Before us, learned advocate for the assessee tried to contend that the assets which had been replaced should be given according to the existing rule prevailing in the relevant assessment year their full depreciation at 100%. It appears to us that the following propositions are well settled and cannot be disputed:
(1) The depreciation or allowance of expenditure must be determined with reference to the law prevalent in the year of assessment;
(2) In determining the depreciation allowable, the actual costs as computed and in accordance with the provisions of the I.T Act, namely, s. 32 read with s. 43(1)(6) and s. 34(2), should be computed irrespective of what was the position in the previous year.
6. These propositions we had reiterated in the case of Riverside (Bhatpara) Electric Supply Co. Ltd. v. CIT, [1911] 109 ITR 399 (Cal). We had observed in the said decision that “actual cost” and “written down value” had to be computed in accordance with the provisions of the Act, even with reference to the assets used in the previous year for the assessment year 1962–63, which were acquired prior thereto. In this case, if there has been replacement of any asset, then the written down value would be the full value of that asset. As r. 5 and the relevant Schedule prevalent in the year provides, for tubs, winding ropes, haulage ropes and sand stowing pipes 100% depreciation under Item 9 of App. I of the I.T Rules, 1962, on the value of the replaced assets which were used in the year in question, 100% depreciation was to be allowed. To this extent, learned advocate for the assessee was right but in the instant case, this controversy does not seem to be relevant because there is no finding that there were any assets which were replaced in the year in question and the actual cost and written down value of the assets of which were the full value and which were used in the year in question in respect of which depreciation had not been allowed. As the Tribunal noted, the main contention seems to have been that the asset which were acquired prior to the previous year but ceased to exist and which were not actually used during the year should be allowed depreciation. We may incidentally point out that under the I.T Rules, prior to 1st of April, 1970, under Appendix I, Item M, under the heading 3(B), depreciation was allowed at the nil rate but renewals were allowed as revenue expenditure. Therefore, if there was any renewal in the year prior to the 1st of April, 1970, that cost of renewal should have been allowed at 100% expenditure. If any asset was acquired in the year in question which was used in business, the depreciation would be the written down value of the assets which must be the full value of those assets and, therefore, 100% depreciation would be allowed. The Tribunal, in view of the facts found by the ITO and the AAC, proceeded on the basis that depreciation was allowed only on capital assets and not on the assets on which the costs have been allowed as a business expenditure. The assessee failed to give any details as to the original assets which had been replaced and which were used during the previous year. Therefore, the question of substituted assets means the assets which were old assets and which were replaced and in exchange thereof new assets had come in. Before we conclude, we have to observe that our attention was drawn to the several other decisions on the question whether retrospective operation of the rules could be given on other sections and as to how these provisions should be read. In our opinion, in this connection we may refer to the decisions of the Supreme Court in the cases of Madeva Upendra Sinai v. Union of India, [1975] 98 ITR 209 (SC); CIT v. Straw Products Ltd., [1966] 60 ITR 156 (SC); CIT v. Indian Telephone Industries Ltd., [1980] 126 ITR 548 (Kar); ITO v. M.C Ponnoose, [1970] 75 ITR 174 (SC) and Shri Panchaganga Sahakari Sakhar Karkhana Ltd. v. CIT, [1979] 119 ITR 590 (Bom).
7. In the view we have taken, it is not necessary for us to deal with these decisions to dispose of the present reference.
8. In the premises, the question is answered in the affirmative and in favour of the revenue. In the facts and circumstances of the case, each party to pay and bear its own costs.
Sudhindra Mohan Guha, J.:— I agree.