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PETITIONER: COMMISSIONER  OF  INCOME-TAX,  PUNJAB  JAMMU  &  KASHMIR   &

       Vs.

RESPONDENT: M/S.  ALPS THEATRE, PATIALA

DATE OF JUDGMENT: 15/03/1967

BENCH: SIKRI, S.M. BENCH: SIKRI, S.M. SHAH, J.C. RAMASWAMI, V.

CITATION:  1967 AIR 1437            1967 SCR  (3) 181  CITATOR INFO :  D          1992 SC1782  (10)

ACT: Indian  Income-tax  Act,  1922 (11 of  1922),  s.  10(2)(4)- Depreciation--If land included.

HEADNOTE: The  Revenue authorities did not allow depreciation  on  the cost  of  land  alongwith  the  cost  of  building  standing thereon.   The  Appellate Tribunal accepted  the  assessee’s appeal and the High Court answered the question in favour of the assessee.  In appeal to this Court by the Revenue: HELD: The appeal must be allowed. Building  under s. 10(2), does not include the site  because there  cannot  be any question of destruction of  the  site. [183 E] The  word  used  in  s.  10(2)(vi)  is  "depreciation"   and "depreciation"  means  "a  decrease  in  value  of  property through wear, deter oration, or obsolescence, and  allowance made  for  this in book-keeping, accountings etc."  In  that sense land cannot depreciate. [183 H] By  r.  8  of  the  Indian  Income-tax  Rules  the  rate  of depreciation  is fixed on the nature of the  structure.   It would  be  difficult to appreciate why the  depreciation  of land would be dependant on the class of structures. [184  D- E] The  whole  object of s. 10 is to arrive at  the  assessable income  of a building after allowing  necessary  expenditure and  deductions.   If depreciation on land  was  allowed  it would give a wrong picture of the true income. [184 F-G] Corporation  of the City of Victoria and Bishop of  Vancover [1921] 2 A.C 384, distinguished.

JUDGMENT: CIVIL APPELLATE JURISDICTION: Civil Appeal No. 26 of 1966. Appeal from the judgment and order dated October 28, 1964 of the Punjab High Court in I. T. Reference No. 28 of 1962. S.   K.  Mitra,  Gopal  Singh,  S.  P.  Nayyar  and  R.   N. Sachthey,. for the appellant.

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Veda Vyasa and B. N. Kirpal, for the respondent. The Judgment of the Court was delivered by Sikri,  J.  At the instance of the  Commissioner  of  Income Tax,, the Appellate Tribunal, Delhi Bench "C", referred  the following question               "Whether  the  cost  of land  is  entitled  to               depreciation under the schedule to the Income-               tax  Act  alongwith the cost of  the  building               standing thereon.?" 182 This question arose out of the following facts : The respon- dent,  M/s  Alps  Theatre, hereinafter referred  to  as  the assessee,  carries on business as exhibitor of  films.   The Income  Tax Officer initiated proceedings under s.  34(1)(b) of  the Indian Income Tax Act, 1922, on the ground  that  in the  original  assessment depreciation was  allowed  on  the entire cost of Rs. 85,091/-, shown as cost ,of the  building which included Rs. 12,000/- as cost of land.  The Income Tax Officer,  by his order dated February 22,  1959,  recomputed the depreciation, excluding cost of land.  The assessee  ap- pealed   to  the  Appellate  Assistant  Commissioner.    The Appellate  Assistant  Commissioner upheld the order  of  the Income  Tax  Officer.   The assessee then  appealed  to  the Appellate Tribunal which accepted the appeal.  In  accepting the appeal it observed as follows :               "You cannot conceive of a building without the               land  beneath  it.   It  is  not  possible  to               conceive of a building without a bottom.  What               Section (10) (2) (vi) of the Act says is  that               depreciation will be allowed on the  building.               The  word "building" itself connotes the  land               upon which something has been constructed.  It               was,  therefore,  wrong  on the  part  of  the               authorities below to exclude the value of  the               land  upon which some construction  was  made.               The true meaning of the word ’building’  means               the land upon which some construction has been               made.  The two must necessarily go together." The High Court answered the question referred to it  against the  Department.   Mahajan,  J., observed  that  in  Section 10(2)(vi) of the Income Tax Act, a building is placed at par with machinery and furniture and is treated as a unit,  and, therefore,  for  the  purposes of  depreciation  a  building cannot  be  split up into building material  and  land.   He further  observed that if the Legislature wanted to  exclude land from the building for purposes of depreciation it could have said so.  He then added :               "Moreover,  depreciation  is  allowed  on  the               capital.  The capital here is a unit building.               If  later  on it is sold and it  fetches  more               than  its  written down value the  surplus  is               liable to tax [see in this connection  Section               10(2) (vii) proviso.]" He felt that "the crux of the matter is that the building is treated  as a unit for purposes of depreciation  or  repair, and there is no warrant in the Act which would permit us  to split  the unit for the purposes of section IO." He  further felt that at any rate two equally plausible  interpretations are possible and the one in favour of the assessee should be adopted. 183 Dua,  J., in a concurring judgment, felt that  the  question was  not free from difficulty, but he answered the  question in  favour of the assessee on the ground that much could  be said for both points of view and the view in support of  the

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assessee’s  submission  had found favour with  the  Tribunal which had not been shown to be clearly erroneous. The answer to the question depends upon the true interpreta- tion  of  S. 10(2)(vi), and in particular whether  the  word "building" occurring in it includes land.  Section 10  deals with  the  profits  and gains  derived  from  any  business, profession  or vocation.  Section 10(2) provides  that  such profits  or  gains shall be computed  after  making  certain allowances.   The  object of giving these allowances  is  to determine the assessable income.  The first three allowances consist  of  allowance  for  rent  paid  for  the   business premises,  allowance for capital repairs and  allowance  for interest in respect of capital borrowed.  Sub-clauses  (iv), (v), (vi), (vi-a) and (vii) of S. 10(2) deal with allowances in respect of buildings, machinery, plant or furniture.  The word  "building"  must have the same meaning  in  all  these clauses.  Sub-clause (iv) runs as under :               "in  respect  of  insurance  against  risk  of               damage or destruction of buildings, machinery,               plant,  furniture,stocks or stores,  used  for               the  purpose   of the  business,profession  or               vocation, the amount of any premium paid." "Building"  here clearly, it seems to us, does  not  include the site because there cannot be any question of destruction of the site.  Clause (v) reads :               "  in  respect  of  current  repairs  to  such               buildings, machinery, plant or furniture,  the               amount paid on account thereof." This again cannot include the site.  Then we come to sub-cl. (vi), the relevant portion of which reads as under :               "in respect of depreciation of such buildings,               machinery,   plant  or  furniture  being   the               property    of    the    assessee,    a    sum               equivalent .... as may in any case or class of               cases be prescribed." It would be noticed that the word used is "depreciation" and "depreciation" means :               a decrease in value of property through  wear,               deterioration,  or obsolescence the  allowance               made  for  this in  book-keeping,  accounting,               etc." (Webster’s New World Dictionary’). In  that sense land cannot depreciate.  The other  words  to notice  are "such buildings".  We have noticed that in  sub- cls. (iv) and 184 (v),  "building"  clearly  means  structures  and  does  not include site.  That this is the proper meaning is also borne out  by r. 8 of the Indian Income Tax Rules, 1922.   Rule  8 has  a schedule, and as far as buildings are  concerned,  it reads as under :      Class of asset      Rate per-       Remarks                          centage 1.Buildings - (1) First class substantial buildings of materials..    2.5  Double these numbers (2)Scond class building          will be taken for factory of less substantial con-      5  buildings excluding struction....                    offices,godowns,officer’s (3)Third class building      7.5 and employees quarters. of construction infeior to that of second class building,but not inclu- ding purely temporory erection. (4) Purely temporary         No  rate is prescribed:

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erection such as wooden      renewals will be allowed structure.                   as revenue expenditure. The  rate  of  depreciation is fixed on the  nature  of  the structure.  If it is a first class substantial building, the rate  is less.  In other words, first class  building  would depreciate at a much less rate than a second class building. It  would  be noticed that for purely  temporary  erections, such  as  wooden  structures, no  rate  of  depreciation  is prescribed  and instead renewals are allowed as revenue  ex- penditure.   But  if  the contention of  the  respondent  is right,   some  rate  for  depreciation  should   have   been prescribed for land under the temporary structures.  Further it  would  be difficult to appreciate why the land  under  a third  class building should depreciate three times  quicker than land under a first class building. One  other consideration is important.  The whole object  of s.  10 is lo arrive at the assessable income of  a  business after   allowing  necessary  expenditure   and   deductions. Depreciation  is allowable as a deduction both according  to accountancy  principles and according to the  Indian  Income Tax Act.  Why’?  Because otherwise one would not have a true picture  of the real income of the business.  But land  does not  depreciate,  and if depreciation was allowed  it  would give a wrong picture of the true income. The High Court relied on Corporation of the City of Victoria and Bishop of Vancouver Island(), but in our view this  case is  distinguishable and gives no assistance  in  determining the  meaning of the ’word ’buildings’ in the context  of  S. 10(2)(vi).   In this case the Privy Council had to  construe S.  197(1)  of the Municipal Act,  British  Columbia,  which exempted from municipal rates and taxes (1)  [1912] 1 2 A.C. 384. 185 "every building set apart and in use for the public  worship of  God."  The Privy Council held that the  above  exemption applied to the land upon which a building of the description mentioned  above was erected as well as to the fabric.   The Privy  Council  was  not  concerned  with  the  question  of depreciation  but  with  the  question  of  exemption   from Municipal rates. In the result the appeal succeeds, the judgment of the  High Court set aside and the question referred is answered in the negative  and  against the assessee.  In  the  circumstances there will be Y.P                                 Appeal allowed. L4SupCI/67-13 186