1993 (8) TMI 65 - HC - Income Tax

High Court rules on depreciation deduction for tea business assets, remands section 40A(8) issues for further review

The High Court affirmed that only 40% of the depreciation should be deducted when computing the written down value of depreciable assets in the tea ... Written down value - depreciation actually allowed - computation of written down value under section 43(6) - application of rule 8(1) of the Incometax Rules, 1962 in composite businesses - section 40A(8) - disallowance of interest on deposits/borrowings - definition of 'deposit' in Explanation (b) to section 40A(8)Written down value - depreciation actually allowed - computation of written down value under section 43(6) - application of rule 8(1) of the Incometax Rules, 1962 in composite businesses - Only 40 per cent of the depreciation computed at the prescribed rate is to be deducted in determining the written down value of depreciable assets used in the tea business for the assessment year 1983-84. - HELD THAT: - The Court construed the phrase 'actually allowed' in section 43(6)(b) in the light of rule 8(1) which requires first determining the composite income and then taking 40 per cent as the taxable business income for tea companies. Relying on binding Supreme Court precedent interpreting the identical expression in the earlier statute, the Court held that 'actually allowed' denotes the portion of depreciation that enters into the computation of income chargeable to tax. Although full depreciation is allowable in computing the composite (world) income, only that proportion of that depreciation which is reflected in the taxable income (40 per cent in terms of rule 8(1)) can be treated as having been actually allowed for purposes of reducing the cost to arrive at written down value. The Board circulars and prior High Court authority were noted as supporting this approach. Applying this principle, the Court answered the reference in favour of the assessee.Answered in the affirmative and for the assessee: only 40% of depreciation is deductible in computing written down value.Section 40A(8) - disallowance of interest on deposits/borrowings - definition of 'deposit' in Explanation (b) to section 40A(8) - Whether section 40A(8) applies to interest on current account balances of shareholders/directors and whether netting of interest receipts against payments should be applied was not finally decided; the matter was remanded for factual examination. - HELD THAT: - The Court examined the statutory definition of 'deposit' in Explanation (b) to section 40A(8), noting its wide scope to include money borrowed by a company while recognising specific exceptions in subclauses (i)-(ix). The Court observed that whether a current account balance amounts to a 'deposit' within the meaning of the Explanation depends on factual findings (for example, whether advances arose in discharge of duties under subclause (vii) or related to allotment/ calls under subclause (viii)). The Tribunal's general finding treating the accounts as current loan accounts lacked necessary factual determination. For these reasons the Court declined to decide the second and third questions on the basis of the record, and directed the Tribunal to reexamine the facts and permit the parties to lead such evidence as may be necessary.Declined to answer; remanded to the Tribunal for fresh factual enquiry and evidence on applicability of section 40A(8) to the current account balances and on the question of netting interest.Final Conclusion: For AY 1983-84 the reference was answered in part: the Court held that only 40% of depreciation (reflecting the portion of income taxable under rule 8(1)) is to be deducted in computing written down value; the questions on disallowance under section 40A(8) and on netting interest were remitted to the Tribunal for factual reexamination and further evidence. No order as to costs. Issues Involved:1. Interpretation of section 43(6) of the Income-tax Act read with rule 8(1) of the Income-tax Rules, 1962, regarding the computation of the written down value of depreciable assets used in tea business.2. Applicability of section 40A(8) of the Income-tax Act, 1961, on current account balances of shareholders and others.3. Consideration of net interest payable for the purpose of allowance under section 40A(8) of the Income-tax Act, 1961.Issue-wise Detailed Analysis:1. Interpretation of Section 43(6) read with Rule 8(1):The primary issue is whether for computing the written down value of depreciable assets used in tea business, only 40% of the depreciation allowable at the prescribed rate should be deducted instead of 100%. The assessee-company argued that since only 40% of its business income is chargeable to income-tax under rule 8 of the Income-tax Rules, 1962, only 40% of the depreciation should be deducted when determining the written down value of depreciable assets.The Tribunal relied on the Supreme Court judgments in CIT v. Nandlal Bhandari Mills Ltd., CIT v. Dharampur Leather Co. Ltd., and Madeva Upendra Sinai v. Union of India, which interpreted the expression 'actually allowed' in section 43(6)(b). These cases established that only the proportionate part of the depreciation that is actually used in computing taxable income should be considered. The Tribunal accepted the assessee's contention, holding that only 40% of the depreciation is actually allowed for the purpose of computing the written down value of depreciable assets in the tea business.The High Court upheld the Tribunal's decision, agreeing that the written down value should be computed by deducting only 40% of the depreciation. The court referenced the Supreme Court's principle that the term 'actually allowed' refers to the depreciation that is taken into account in computing taxable income, not the full depreciation allowed in the initial computation of composite income. Thus, the first question was answered in the affirmative and in favor of the assessee.2. Applicability of Section 40A(8) on Current Account Balances:The second issue concerns whether section 40A(8) of the Income-tax Act, 1961, applies to interest paid on current account balances of shareholders and others. The Income-tax Officer disallowed 15% of the interest paid on these balances, treating them as deposits under section 40A(8).The Tribunal found that the balances in the current accounts of shareholders and directors did not fall within the definition of 'deposit' as per Explanation (b) to section 40A(8). This view was supported by the Madhya Pradesh High Court in CIT v. Kalani Asbestos (P.) Ltd., which held that interest paid on current account balances does not qualify as interest on deposits.The High Court agreed with the Tribunal, stating that the disallowance under section 40A(8) applies only to interest payable on deposits, not on current account balances. The court noted that the definition of 'deposit' in section 40A(8) includes any money borrowed by the company but does not extend to current account transactions involving interest payments on balances arising from regular business activities. Consequently, the Tribunal's decision to not disallow interest under section 40A(8) was upheld.3. Consideration of Net Interest Payable under Section 40A(8):The third issue is whether only the net interest payable, after adjusting interest receipts against interest payments, should be considered for disallowance under section 40A(8). The Income-tax Officer disallowed 15% of the gross interest paid, without considering the net interest payable.The Tribunal held that section 40A(8) should apply to the net interest payable, supporting the assessee's claim. However, the High Court found that the Tribunal did not provide sufficient factual findings to support this conclusion. The court noted that the definition of 'deposit' in section 40A(8) is broad, including any money borrowed by the company, and emphasized the need for a detailed examination of the nature of the transactions.Due to the lack of necessary factual findings, the High Court declined to answer the second and third questions definitively. Instead, it remanded the matter to the Tribunal for re-examination, directing it to allow the parties to present additional evidence as needed.Conclusion:The High Court affirmed the Tribunal's decision on the first issue, holding that only 40% of the depreciation should be deducted when computing the written down value of depreciable assets in the tea business. On the second and third issues, the court remanded the matter to the Tribunal for further fact-finding and re-examination, emphasizing the need for a detailed analysis of the transactions involved. There was no order as to costs.