Written Down Value and Business Use Depreciation: capital gains and allowance adjustments turned on actual depreciation allowed

Written down value for capital gains on transfer of a banking undertaking was held to be based on depreciation actually allowed under the Act, so the 31 December 1968 figure, not a later notional reduction for depreciation up to 18 July 1969, was the proper basis. On that footing, the reassessment enhancing capital gains on the assumption of unallowed depreciation could not stand. Depreciation on Malaysian assets was upheld on a proportionate basis because the assets were used for business, and the absence of item-wise particulars did not justify withdrawal of an allowance already granted on that basis.

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Issues: (i) Whether, for computing capital gains on the transfer of the banking undertaking, the written down value as on 31 December 1968 or the written down value as on 18 July 1969 had to be adopted. (ii) Whether the reassessment enhancing capital gains on the footing that depreciation up to 18 July 1969 had to be taken into account was valid. (iii) Whether depreciation in respect of the Malaysian assets for the assessment years 1970-71 and 1972-73 could be withdrawn for want of item-wise particulars, notwithstanding their use for business purposes.

Issue (i): Whether, for computing capital gains on the transfer of the banking undertaking, the written down value as on 31 December 1968 or the written down value as on 18 July 1969 had to be adopted.

Analysis: The cost of acquisition of the undertaking had to be determined by applying the capital gains provisions to the undertaking as a whole. In computing the written down value, only depreciation actually allowed under the Act could be taken into account. Depreciation had in fact been allowed only up to 31 December 1968, and not for the period up to 18 July 1969.

Conclusion: The written down value as on 31 December 1968 was the proper basis, and the issue was answered against the assessee.

Issue (ii): Whether the reassessment enhancing capital gains on the footing that depreciation up to 18 July 1969 had to be taken into account was valid.

Analysis: Since depreciation for the period between 1 January 1969 and 18 July 1969 had neither been claimed nor allowed, there was no legal basis to reduce the book value further by notional depreciation for that period. The reassessment proceeded on an incorrect assumption that such depreciation could be deducted.

Conclusion: The reassessment enhancing the capital gains could not be sustained, and the issue was answered in favour of the assessee.

Issue (iii): Whether depreciation in respect of the Malaysian assets for the assessment years 1970-71 and 1972-73 could be withdrawn for want of item-wise particulars, notwithstanding their use for business purposes.

Analysis: The Malaysian assets were found to have been used for business purposes. Although item-wise particulars of written down value were not available, depreciation had earlier been allowed on a proportionate basis. Once business use was established, the absence of item-wise particulars did not justify withdrawal of the allowance already granted on that basis.

Conclusion: Depreciation on the Malaysian assets was allowable on a proportionate basis, and the issue was answered in favour of the assessee.

Final Conclusion: The questions were answered partly in favour of the Revenue and partly in favour of the assessee, with the challenge to the reassessment failing and the depreciation claims on the Malaysian assets being upheld.

Ratio Decidendi: For capital gains computation, written down value under the income-tax law is based on depreciation actually allowed and not on notional or merely allowable depreciation; where assets are shown to be used for business, proportionate depreciation cannot be denied solely because item-wise particulars are unavailable.

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