2009 (2) TMI 9 - SC - Income Tax

Supreme Court: Only genuinely granted depreciation is considered in taxable income computation

The Supreme Court clarified that 'depreciation actually allowed' under Section 43(6)(b) of the Income-tax Act must be genuinely granted and accounted for ... Depreciation actually allowed - written down value - taxability of composite income under Rule 8 - proportionate deduction of depreciation - application of Madeva Upendra Sinai principleDepreciation actually allowed - written down value - Meaning of the expression 'depreciation actually allowed' in Section 43(6)(b) of the Income-tax Act, 1961 - HELD THAT: - The Court reaffirmed that the qualifying word 'actually' in Section 43(6)(b) limits 'depreciation actually allowed' to depreciation which has been taken into account, granted and given effect to in computing the taxable income of the assessee - i.e., depreciation debited by the Income-tax Officer against the incomings of the business. The phrase excludes notional or merely allowable but unavailed depreciation. Reliance was placed on this Court's prior exposition in Madeva Upendra Sinai that 'actually allowed' contra-indicates a deeming or notional construction and means depreciation actually taken into account in the assessment. [Paras 7, 8, 9]The words 'depreciation actually allowed' mean depreciation actually taken into account or granted and given effect to in computing taxable income; not a notional or merely allowable amount.Taxability of composite income under Rule 8 - proportionate deduction of depreciation - application of Madeva Upendra Sinai principle - How depreciation is to be computed for purposes of written down value where Rule 8 (composite income) applies - HELD THAT: - Applying the principle that only depreciation actually allowed in computing the taxable income is to be deducted in computing written down value, and following the Court's earlier decision in Nandlal Bhandari Mills (on composite/world income), the Court held that where Rule 8 brings only a proportion (40%) of composite business income to tax, only the proportionate depreciation (40% of normal depreciation) is 'actually allowed' for that taxable income. The Court illustrated that computing items on a pro rata basis (income and expenses including depreciation) yields the same taxable figure but results in a higher opening written down value when only full depreciation is deducted; the correct approach is to deduct the proportionate depreciation which was actually allowed for tax purposes. The Court distinguished authorities concerning Chapter VIA deductions as not being apposite. [Paras 12, 13, 14, 15, 16]In cases governed by Rule 8, depreciation must be taken proportionately to the part of composite income brought to tax (i.e., only the proportionate depreciation is 'actually allowed' and deducted in computing written down value).Final Conclusion: The Department's appeals were dismissed; the Court held that 'depreciation actually allowed' means depreciation actually taken into account in computing taxable income and, where Rule 8 applies, only the proportionate depreciation corresponding to the part of composite income chargeable to tax is to be deducted in computing the written down value. Issues Involved:1. Meaning of the expression 'depreciation actually allowed' in Section 43(6)(b) of the Income-tax Act, 1961.2. Computation of depreciation in cases falling under Rule 8 of the Income-tax Rules, 1962, dealing with the taxability of composite income.Detailed Analysis:Issue 1: Meaning of 'Depreciation Actually Allowed' in Section 43(6)(b) of the Income-tax Act, 1961The Supreme Court addressed the interpretation of the term 'depreciation actually allowed' as found in Section 43(6)(b) of the Income-tax Act, 1961. The Court emphasized that the term 'actually' is crucial, indicating that depreciation must be genuinely taken into account or granted and given effect to by the Income-tax Officer in computing the taxable income of the assessee. The Court referred to its earlier decision in Madeva Upendra Sinai v. Union of India and Others, which clarified that 'actually allowed' means depreciation that is not speculative, theoretical, or imaginary but is actually debited against the business income. The Court reiterated that 'actually allowed' depreciation is limited to what has been granted and accounted for in the taxable income computation.Issue 2: Computation of Depreciation in Cases Covered by Rule 8The Court examined how to compute depreciation under Rule 8, which deals with the taxability of composite income, particularly in the context of the tea industry where 40% of the business income is taxable. The Court referred to the case of Commr. of Income-tax, Madhya Pradesh, Nagpur and Bhandara v. Nandlal Bhandari Mills Ltd., which dealt with the computation of depreciation in the context of composite income. The judgment clarified that only the depreciation deducted in arriving at the taxable income, not the world income, should be considered as 'actually allowed.'Applying this principle, the Court held that in cases where Rule 8 applies, the income brought to tax as 'business income' is only 40% of the composite income, and consequently, proportionate depreciation should be taken into account as 'actually allowed.' The Court provided illustrative examples to demonstrate the correct computation method, showing that the written down value (WDV) should be computed by deducting the proportionate depreciation (40% in this case) from the actual cost of the assets.Conclusion:The Court found no merit in the Department's appeals and upheld the High Court's judgment, affirming that the 'written down value' should be computed by deducting 40% of the depreciation from the actual cost of the assets, as this represents the depreciation 'actually allowed.' The Court also clarified that the judgment in Commissioner of Income Tax v. Willamson Financial Services and Others, which dealt with Section 80-HHC, does not apply to the present case as it pertains to special deductions under Chapter VIA, which is distinct from the general deductions under Sections 30 to 43D of the Income-tax Act.The civil appeals filed by the Department were dismissed with no order as to costs.