Depreciation on original cost applies when no prior allowance was actually granted during exempt years.

Depreciation for the first taxable year had to be computed on the original cost of assets where the assessee had earlier enjoyed tax exemption but no depreciation had actually been claimed or allowed. The court reasoned that "written down value" under the relevant depreciation provision means actual cost less depreciation actually allowed in prior years, and a notional allowance cannot be assumed merely because income might have been assessable during the exempt period. As no returns were filed and no depreciation was allowed earlier, the original cost remained the base for depreciation. The answer to the referred question was therefore in favour of the assessee.

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Issues: Whether, where the assessee had not been assessed in earlier years because of exemption from tax and no depreciation had in fact been allowed, depreciation in the first taxable assessment year was to be computed on the original cost of the plant, machinery and other assets or on a notional written down value worked out as if depreciation had been allowed in the earlier years.

Analysis: Under section 10, depreciation is allowable on the written down value of assets used for business, and section 10(5)(b) defines written down value, in the case of assets acquired before the previous year, as the actual cost less depreciation actually allowed under the Act or the repealed law. The exemption granted to the assessee was only from payment of tax and did not mean that depreciation had been actually allowed in the earlier years. The record showed that no returns had been filed, no depreciation had been claimed, and no depreciation had been allowed in those years. The expression "actually allowed" could not be extended to a notional allowance merely because the income might theoretically have been computable in the exempt years. The earlier authorities relied on by the assessee supported the view that, unless depreciation had actually been allowed in prior assessments, the written down value remains the original cost.

Conclusion: Depreciation was allowable on the original cost of the assets, and not on a notional reduced written down value; the answer to the referred question was in the affirmative, in favour of the assessee.

Ratio Decidendi: For assets acquired before the previous year, written down value means actual cost less depreciation actually allowed in prior years, and a mere exemption from tax does not amount to depreciation having been actually allowed.

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