Reportable

IN THE SUPREME COURT OF INDIA CIVIL APPELLATE JURISDICTION

CIVIL APPEAL NO.  1094   OF 2009 (Arising out of S.L.P.(C) No.13070 of 2007)

Commr. of Income Tax, Dibrugarh    … Appellant (s)

                   versus

Doom Dooma India Ltd.      … Respondent (s)

With

Civil  Appeal No. 1093 of 2009 – Arising out of S.L.P. (C) No.13069 of 2007 Civil  Appeal No. 1095 of 2009 – Arising out of S.L.P. (C) No.13072 of 2007 Civil Appeal No.  1096 of 2009 – Arising out of S.L.P. (C) No.13074 of 2007 Civil Appeal No.  1097 of 2009 – Arising out of S.L.P. (C) No.16860 of 2008

J U D G M E N T

S. H. KAPADIA, J.

1. Delay condoned.

2. Leave granted.

3. This  batch  of  civil  appeals  is  directed  against  judgments

dated 22.11.06 and 8.1.07 of the High Court of Guwahati, Assam,

in  appeals  under  Section  260A of  the  Income-tax  Act,  1961  in

respect of assessment years 1988-89, 1989-90, 1990-91 and 1991-

92.

4. What is the meaning of the expression “depreciation actually

allowed”  in  Section 43(6)(b)  of  the  1961 Act  (as  it  stood at  the

relevant time)?  How is the depreciation to be computed in cases

falling under Rule 8 of the Income-tax Rules,  1962, which deals

with taxability of composite income?  These are the two questions

which arise for determination in this batch of civil appeals.

Background facts in Civil Appeal No.         of 2009 (Arising out of S.L.P.(C) No.13070 of 2007)

5. The facts in all these civil appeals are similar.  Respondent-

assessee, at the relevant time, was in the business of growing and

manufacturing  of  tea.   In  this  case  we  are  concerned  with  the

assessment year 1988-89.  Applicability of Rule 8 is not in dispute.

Assessee  raised  additional  grounds  before  CIT(A)  at  the  time  of

hearing of the appeal  inter alia  stating that the AO had erred in

determining the opening “written down value” of the block of assets

without following the provisions of Section 43(6)(b) of the 1961 Act.

According to the assessee for arriving at the opening “written down

value” of the block of assets, the AO erred in deducting 100 per

cent of  the  depreciation for the preceding year calculated at the

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prescribed rate from the opening “written down value”.  However,

the  assessee  claimed  that  only  40  per  cent  of  the  depreciation

allowed at the prescribed rate ought to have been deducted and not

100 per cent as done by the AO.  In this connection reliance was

placed  by  the  assessee  on  Section  43(6)(b)  of  the  1961  Act.

Accordingly, by additional grounds which were allowed to be raised,

the assessee sought a direction from CIT(A) to the AO to determine

the  "written  down  value"  in  accordance  with  the  provisions  of

Section 43(6)(b) by deducting only 40 per cent of the depreciation

computed  at  the  prescribed  rate,  being  depreciation  actually

allowed.  This argument of the assessee came to be rejected by CIT

(A).

6. Aggrieved by the decision, the assessee carried the matter in

appeal to the Tribunal.  By its decision the Tribunal, following the

decision of the Calcutta High Court in the case of Commissioner of

Income-tax v.  Suman  Tea  and  Plywood  Indusries  (P)  Ltd. –

(1993) 204 ITR 719, held that since 40 per cent of the assessee’s

composite income is chargeable under Section 28 of the 1961 Act,

for  the  purposes  of  computing  the  "written  down  value"  of

depreciable  assets  used  in  the  tea  business,  only  40  per  cent

instead of 100 per cent of depreciation allowable at the prescribed

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rate shall be deducted in the case of the assessee.  This view of the

Tribunal has been affirmed by the impugned judgment of the High

Court.  Hence this civil appeal(s) by way of special leave petition(s)

is filed by the Department.

Answer  to  Question  No.(1)  –  meaning  of  the expression  “depreciation  actually  allowed”  in Section 43(6)(b) of the 1961 Act

7. Deductions  by  way  of  depreciation  allowance  have  been

specifically recognized and dealt with in Sections 32, 34 and 43(6)

of  the  1961  Act  (which  deals  with  the  definition  of  the  words

"written down value").  Section 32 adopts two methods in allowing

depreciation.   In  the  case  of  ocean-going  ships,  depreciation  is

allowed, year after year, at the fixed percentage on the original cost

of the asset [See: Section 32(1)(i)].  This is called the straight-line

method.   In  the  case  of  non-ocean-going  ships  and  buildings,

machinery,  plant  or  furniture,  the  prescribed  percentage  of

depreciation is to be computed on the basis of "written down value"

of the asset [See: Section 32(1)(ii)].  This is known as "written-down

value" method.  Both these methods seek to ensure that the total

depreciation allowance(s) granted, year after year, does not exceed

100 per cent, of the original cost of the asset.  In the straight-line

method, the entire  depreciation is written off  sooner than in the

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"written down value" method, if the figures of the actual cost and

the prescribed percentage are the same in either case.  Section 32

(2)  allows  the  carry  forward  and  unabsorbed  depreciation

allowances to any subsequent year, without any time limit, where

such non-absorption is “owing to there  being no profits or gains

chargeable for that previous year, or owing to the profits or gains

being less than the allowance”.  Depreciation loss under Section 32

(2) stands on the same footing as any other business losses.  An

assessee  claiming  depreciation  of  assets  has  to  show that  such

assets are  owned by him and are  used by him in the accounting

year for the purpose of his business, the profits of which are being

charged [See: Section 32(1)(i)].  Further, the total of all deductions

in respect of depreciation under Section 32(1)(i), made year after

year, should not, in any event, exceed the actual cost of the assets

to the  assessee  [See: Section 34(2)(i)].   The  definition of  “actual

cost” is to be found in Section 43(1) and the definition of "written

down value" is to be found in Section 43(6) of the 1961 Act.  The

latter defines "written down value" under Section 43(6) to mean –  

(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(s)

actually allowed under the 1961 Act.

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8. The key word in Section 43(6)(b) of the 1961 Act is “actually”.

We  quote  hereinbelow  an  important  observation,  made  by  this

Court on the meaning of the words “actually allowed” in Section 43

(6)(b) in the case of Madeva Upendra Sinai v. Union of India and

Others – (1975) 98 ITR 209 at pages 223 & 224, which reads as

under:

“The pivot of the definition of "written-down value" is the "actual  cost"'  of  the  assets.  Where  the  asset  was acquired and also used for the business in the previous year,  such  value  would  be  its  full  actual  cost  and depreciation  for  that  year  would  be  allowed  at  the prescribed  rate  on  such  cost.  In  subsequent  year, depreciation would be calculated on the basis of actual cost less depreciation actually allowed. The key word in clause (b) is "actually". It is the antithesis of that which is  merely  speculative,  theoretical  or  imaginary. "Actually"  contra-indicates  a  deeming  construction  of the word "allowed" which it qualifies. The connotation of the  phrase  "actually  allowed"  is  thus  limited  to depreciation  actually taken into account or granted and given  effect  to,  i.e.  debited  by  the  Income-tax  Officer against the incomings of the business in computing the taxable income of the assessee; it cannot be stretched to mean  "notionally  allowed"  or  merely  allowable  on  a notional basis.”

….

“From the above conspectus, it is clear that the essence of  the  scheme  of  the  Indian  Income-tax  Act  is  that depreciation is allowed, year after year,  on the actual cost  of  the  assets  as  reduced  by  the  depreciation actually allowed in  earlier  years.  It  follows,  therefore, that  even  in  the  case  of  assets  acquired  before  the previous year,  where  in the  past  no depreciation was

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computed,  actually allowed or  carried forward,  for  no fault  of  the  assessee,  the  "written-down  value"  may, under clause  (b)  of  Section 43(6),  also,  be  the  actual cost of the assets to the assessee.”

9. Therefore, this Court has clearly laid down the meaning of the

words “actually allowed” in Section 43(6)(b) to mean -  “limited to

depreciation actually taken into account or granted and given effect

to, i.e. debited by the Income-tax Officer against the incomings of

the business in computing the taxable income of the assessee”.

Answer  to  Question  No.(2)  –  computation  of depreciation in cases covered by Rule 8 which deals with taxability of composite income

10. In  the  case  of  Commr.  of  Income-tax,  Madhya Pradesh,

Nagpur and Bhandara v. Nandlal Bhandari Mills Ltd. – (1966) 60

ITR 173, which judgment was in the context of composite income,

the question inter alia arose whether depreciation “actually allowed”

would  mean  depreciation  deducted  in  arriving  at  the  taxable

income  or  the  depreciation  deducted  in  arriving  at  the  world

income  (composite  income).   In  that  case  the  assessee  was  a

company incorporated in Indore.  It owned and ran a textile mill.

Until 1.4.1950, when Income-tax Act, 1922 was extended to Part B

States including Madhya Bharat of which Indore became a part,

the assessee was assessed at Bombay under the Income-tax Act,

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1922  as  a  non-resident  and  for  some  years  as  resident.   The

assessee was also assessed in Indore under the Indore Industrial

Tax Rules, 1927.  For those years in which it was assessed as a

non-resident  under  Income-tax  Act,  1922,  only  that  part  of  its

profits attributable to the sale proceeds of goods received in British

India were brought to tax.  For the assessment years in question, in

ascertaining the  "written down value" of the  building, machinery

and plant, under paragraph 2 of the Taxation Laws Order, 1950,

only  the  greater  of  the  two  depreciations  “actually  allowed”  in

British India and in Indore could be taken into account.  The ITO

took into account the depreciation allowances for the years up to

1944 as computed under Income-tax Act, 1922 for the purposes of

ascertaining the world income of the assessee,  and for the years

1945 to 1948, he took into account the income as computed under

Indore Industrial Tax Rules 1927; and on that basis the ITO arrived

at the "written down value" as on January 1, 1949.  The assessee

contended,  inter alia, that in regard to the years up to 1944 only

the proportionate depreciation attributable to the taxable income

came within the meaning of the words “actually allowed” in the old

section corresponding to  Section 43(6)(b)  of  the  1961 Act.   This

contention of the assessee was accepted by the majority judgment

which held that in fixing the depreciation allowances for the years

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in which the assessee was assessed as a non-resident under the

Income-tax Act, 1922, the ITO had “actually allowed” only a portion

of the amount towards depreciation allowable in assessing its world

income.  It was further held that the mere fact that in the matter of

calculation,  the  total  amount  of  depreciation  was  first  deducted

from  the  world  income  (composite  income)  and  thereafter  a

proportion was struck did not amount to an actual allowance of the

entire depreciation in ascertaining the taxable income that accrued

in  British  India.   Therefore,  it  was  held,  that,  the  depreciation

deducted in arriving at the taxable income alone could be taken

into  account  and  not  the  depreciation  taken  into  account  for

arriving at the world income (composite income).

11. In  our  view  the  above  judgment  of  the  Supreme  Court

squarely applies to the present case.  Assessee is engaged in the

business  of  growing  and  manufacturing  of  tea.   As  per  the

provisions of Section 10(1) of the 1961 Act read with Rule 8, 40 per

cent of the business income derived from the sale of tea grown and

manufactured in India by the assessee was liable to tax.  In the

above judgment of the Supreme Court, the Court was concerned

with  the  world  income,  in  this  case  we  are  concerned  with  the

composite  income.   Therefore,  in  our  view  the  judgment  of  the

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Supreme  Court,  above  referred  to,  is  squarely  applicable  to  the

present  case.   Therefore,  we  do  not  see  any  infirmity  in  the

impugned judgment of the High Court.

12. Be  that  as  it  may,  we  can give  the  following illustration(s)

which will give an example of how the "written down value" needs

to be computed:               

Illustration ‘A’

Rs. Income from sale of tea 1000

Less: Expenses -                             Depreciation (100)                             Others (300)

        Business Profit 600 Income subject  to charge  under  the  Income Tax Act by application of Rule 8 (40% of 600)  

240

Illustration ‘B’

Rs. Income from sale of tea (40% of 1000) 400

Less: Expenses -                             Depreciation (40)                             Others (40% of 300) (120)

Business  Profit  subject  to  charge  of  income tax (40% of 600)

240

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13. Analysing the above two charts, we find that at the end of

computation  the  income  chargeable  to  tax  by  applying  Rule  8

comes to Rs.240.  Under Illustration ‘A’, the normal depreciation is

Rs.100 which is deductible from Rs.1000 being the income from

sale  of  tea.   On the  other  hand,  under  Illustration ‘B’,  we have

taken 40 per cent of each of the items, namely, income from sale of

tea, depreciation and other expenses.  Accordingly, on comparison

it may be noted that whereas income from sale of tea is Rs.1000

under  Illustration  ‘A’,  proportionately  it  comes  to  Rs.400  under

Illustration ‘B’.  Similarly, depreciation under Illustration ‘A’ which

is normal depreciation is Rs.100 whereas in Illustration ‘B’ at 40

per cent the pro rata depreciation is 40.  What is important to be

noted  is  that  at  the  end  of  computation  under  both  the

Illustrations,  the  income  taxable  by  applying  Rule  8  comes  to

Rs.240 in both the cases.  The only difference is that in Illustration

‘B’ we have gone by pro rata basis.

14. The  important  thing  to  be  noted  is  that  according  to  the

Department,  in  the  succeeding  year,  the  opening  "written  down

value" of the assets would be Rs.900 (Rs.1000 for the cost of the

assets less Rs.100) as indicated in Illustration ‘A’ whereas, if one

goes by Illustration ‘B’ the "written down value" comes to Rs.960

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(Rs.1000  for  the  cost  of  the  asset(s)  minus  40),  being  the

depreciation in Illustration ‘B’.   

15. According to the assessee, in view of the law laid down by the

judgment  of  this  Court  in  the  case  of  Madeva  Upendra  Sinai

(supra),  the "written down value" should be computed at Rs.960

and not at Rs.900 as claimed by the Department.

16. In our view, in cases where Rule 8 applies, the income which

is brought to tax as “business income” is only 40 per cent of the

composite income and consequently proportionate depreciation is

required to be taken into account because that is the depreciation

“actually allowed”.  Hence we find no merit in the civil appeals filed

by the Department.

17. Before  concluding, we may state  that the  judgment of  this

Court in  Commissioner of Income Tax v.  Willamson Financial

Services and Others – (2008) 297 ITR 17, has no application to

the present cases.  Willamson Financial Services case (supra) was

rendered in the context of deduction under Section 80-HHC of the

1961 Act.  Section 80-HHC comes under Chapter VIA.  Chapter VIA

refers to special deductions.  It is a separate Code by itself.  There

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is a distinction between “deductions/allowances in Section 30 to

Section  43D”  and  “deductions  admissible  under  Chapter  VIA”.

Deductions/allowances provided in Sections 30 to 43D are allowed

in determining Gross Total Income and are not chargeable to tax

because the same constitute charge on profit, whereas, deductions

under Chapter VIA are allowed from Gross Total Income chargeable

to tax.  Therefore, the judgments rendered in the context of Section

80-HHC of the 1961 Act, both by this Court and by the Kerala High

Court, stand on different footing.   

18. For  the  aforestated  reasons,  we  find  no  merit  in  the

Department’s civil appeals which are accordingly dismissed with no

order as to costs.         

……………………………J.                                    (S.H. Kapadia)

……….………………….J.                                   (H. L. Dattu)    

New Delhi; February  18, 2009.

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