Depreciation on government-transferred assets allowed, but statutory insurance-fund contribution held non-deductible as reserve-like appropriation.

Depreciation was allowable on assets transferred by the Government under the Government Grants Act, 1895, because the transferee was treated as owner for depreciation purposes under the Income-tax Act, 1961; the claim was therefore accepted. By contrast, a contribution to an insurance fund created under the Motor Vehicles Act, 1939, was treated as a statutory appropriation to meet contingent liabilities and not as actual revenue expenditure; it was therefore not deductible. The reference was answered in favour of the assessee on depreciation and in favour of the Department on deductibility of the fund contribution.

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Issues: (i) Whether depreciation was allowable on assets transferred by the Government to the assessee despite the absence of legal ownership; and (ii) whether the contribution made to the insurance fund under the statutory scheme was deductible.

Issue (i): Whether depreciation was allowable on assets transferred by the Government to the assessee despite the absence of legal ownership.

Analysis: The transfer was made by the Government under the Government Grants Act, 1895, and the relevant statutory provisions were applied along with the depreciation provision under the Income-tax Act, 1961. On the facts, the assessee had been treated as the owner for the purpose of the transfer, and the earlier decision on the same statutory setting was followed.

Conclusion: Depreciation was allowable and the issue was decided in favour of the assessee and against the Department.

Issue (ii): Whether the contribution made to the insurance fund under the statutory scheme was deductible.

Analysis: The contribution was made to a fund created to meet liabilities arising under the Motor Vehicles Act, 1939. The Court treated the amount set apart as a statutory appropriation to meet contingent future liabilities and applied the principles distinguishing actual expenditure from contingent liability. In the light of the later Supreme Court authority on statutory reserves, the amount was held to be a reserve-like appropriation and not a deductible revenue outgoing.

Conclusion: The contribution to the insurance fund was not deductible and the issue was decided in favour of the Department and against the assessee.

Final Conclusion: The reference was answered on both questions, with the first issue decided in favour of the assessee and the second issue decided in favour of the Department, leaving the Revenue substantially successful.

Ratio Decidendi: An amount set apart as a statutory reserve or fund to meet contingent liabilities is not deductible as business expenditure, whereas depreciation may be claimed where the transferee is treated as owner for the purposes of the governing statutory transfer regime.

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