1931 (8) TMI 4 - HC - Income Tax

New company entitled to depreciation based on original cost, not previous owner's cost.

In Re: The Saraspur Mills Co. Ltd.

The court clarified that under Section 10(2)(vi) of the Indian Income Tax Act, depreciation for assets acquired by a new company from a liquidated entity ... - Issues:Interpretation of Section 10(2)(vi) of the Indian Income Tax Act regarding depreciation calculation based on original cost to the assessee or the previous owner.Analysis:The case involved a dispute over the calculation of depreciation for machinery and plant assets acquired by the assessee company from a liquidated company. The primary issue was whether the depreciation should be based on the cost to the assessee or the cost to the old company. Section 10(2)(vi) of the Indian Income Tax Act was crucial in determining this calculation. The Act allows for a deduction in respect of depreciation of buildings, machinery, plant, or furniture owned by the assessee, based on a percentage of the original cost. The term 'assessee' is defined as 'a person by whom Income Tax is payable.' The court emphasized that the Income Tax is payable by the new company, not the old one that has ceased to exist. Therefore, the depreciation should be based on the cost of the machinery to the assessee company, which in this case was Rs. 16 lakhs.The Commissioner referenced a Madras High Court case where a different conclusion was reached regarding depreciation calculation based on the cost to the old vendor company. However, the Bombay High Court disagreed with the Madras decision, stating that the Indian Income Tax Act's language and scheme differ significantly from the English Act. While the English Act bases depreciation on the diminished value due to wear and tear, the Indian Act calculates depreciation as a percentage of the cost price. The court held that decisions under the English Act are not directly applicable to the Indian Act. Therefore, the court concluded that the depreciation allowance should be calculated based on the original cost to the assessee, not the previous owner of the business.In the judgment, the court answered the questions as follows: (1) The original cost in Section 10(2)(vi) refers to the cost to the person being assessed, not the previous owner. (2) Consequently, the assessee is entitled to the depreciation allowance based on the original cost to them, not the old company from which they purchased the business. The judges, J.W.F. Beaumont and S.S. Rangnekar, both concurred with the decision. No costs were awarded in the case.This judgment clarifies the interpretation of the Indian Income Tax Act regarding the calculation of depreciation for assets acquired by a new company from a liquidated entity. It establishes that the depreciation allowance should be based on the original cost to the assessee, aligning with the specific language and intent of the Indian Act.