Rental from let-out factory taxed as house property; no s.32(1)(ii) depreciation, s.43A forex increase allowed

HC held that rental income from the assessee's let-out factory building was assessable under the head "Income from house property", following its earlier precedent, as the asset had ceased to be exploited as a commercial asset; consequently, depreciation under s.32(1)(ii) was not allowable on that building. However, HC allowed the assessee's claim for increased depreciation on imported machinery under s.43A, holding that the liability to pay the purchase price arose when the assets were acquired, and the enhanced liability due to foreign exchange fluctuation at year-end formed part of the "actual cost" for the relevant assessment year.

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Issues Involved:
1. Classification of rental income from factory building No. 2.
2. Applicability of section 32(1) read with section 39(2) for depreciation.
3. Claim of extra liability due to exchange rate fluctuation as revenue expenses.
4. Applicability of section 43A for determining depreciation on increased liability due to exchange rate fluctuation.

Summary:

Issue 1: Classification of Rental Income
The Tribunal held that the rental income derived from factory building No. 2 was chargeable under the head "Income from house property" and no depreciation was allowable u/s 32(1)(ii) of the Income-tax Act, 1961. This decision was based on the precedent set in CIT v. New India Industries Ltd. [1993] 201 ITR 208, which stated that if a commercial asset is not used as such, the income derived from renting it out falls under "Income from house property."

Issue 2: Applicability of Section 32(1) read with Section 39(2)
Since the Tribunal's decision on Issue 1 was upheld, Issue 2 did not require further consideration. The Tribunal's stance was that the rental income was not business income, thus depreciation u/s 32(1) was not applicable.

Issue 3: Claim of Extra Liability as Revenue Expenses
The Tribunal did not decide whether the extra liability from exchange rate fluctuation of Rs. 6,03,172 was revenue expenses. The assessee's counsel did not press this question during the hearing, so it was not considered further.

Issue 4: Applicability of Section 43A
The Tribunal initially held that the liability for payment of instalments would accrue in the subsequent year, thus rejecting the claim for depreciation for the assessment year 1973-74. However, the High Court found that the liability increased due to exchange rate fluctuation during the relevant previous year, making the assessee eligible for depreciation u/s 43A. The Supreme Court's interpretation in CIT v. Arvind Mills Ltd. [1992] 193 ITR 255 supported this view, stating that the increase in liability should be adjusted in the year it arises due to exchange rate fluctuation.

Conclusion:
- Question 1: Answered in the affirmative, against the assessee and in favor of the Revenue.
- Question 2: Not answered as it did not call for a reply.
- Question 3: Not answered as it was not pressed.
- Question 4: Answered in the negative, in favor of the assessee and against the Revenue.

The reference application was dismissed, and the rule was discharged with no order as to costs.

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