Excess profits tax computation: capitalised interest depreciation allowed, but voluntary deposits and special allowance did not reduce capital employed.

Depreciation attributable to interest capitalised in machinery cost was allowable in computing excess profits because the tax computation followed income-tax principles unless expressly restricted, and the schedule did not exclude depreciation on written down value merely because cost had been enhanced by capitalised interest. A voluntary deposit made under the Finance Act, 1942 was not deductible in computing capital employed, as it was neither a statutory debt nor money outside the business for that purpose. The special allowance granted for an earlier period did not reduce opening capital for the next chargeable accounting period, because it affected only profit computation and did not show any actual reduction in capital employed.

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Issues: (i) Whether depreciation attributable to interest capitalised in the cost of machinery was deductible in computing excess profits under the Excess Profits Tax Act, 1940; (ii) whether the voluntary deposit made under section 10 of the Finance Act, 1942 was deductible while computing capital employed in the assessee's business; and (iii) whether the special allowance granted under section 26(3)(a) of the Excess Profits Tax Act, 1940 was deductible from the opening capital while computing capital employed for the subsequent chargeable accounting period.

Issue (i): Whether depreciation attributable to interest capitalised in the cost of machinery was deductible in computing excess profits under the Excess Profits Tax Act, 1940.

Analysis: The profits for excess profits tax purposes were required to be computed on the same principles as income-tax profits, subject only to the restrictions expressly found in the First Schedule. The relevant restriction did not exclude depreciation worked out on the written down value of machinery merely because the cost had been enhanced by capitalised interest. Since the additional depreciation related to the relevant years and did not involve carry-forward of unabsorbed depreciation, there was no basis for disallowance under the schedule.

Conclusion: The additional depreciation was deductible and the issue was answered in favour of the assessee.

Issue (ii): Whether the voluntary deposit made under section 10 of the Finance Act, 1942 was deductible while computing capital employed in the assessee's business.

Analysis: The voluntary deposit was distinct from the compulsory deposit scheme introduced later under the Excess Profits Tax Ordinance, 1943, and the statutory rules expressly treated only the compulsory deposit as a deductible debt. A voluntary deposit could not be treated as a debt or liability, and it also could not be characterised as money not required for the purposes of the business because it was made to secure a statutory tax advantage for the assessee.

Conclusion: The amount was not deductible while computing capital employed, and the issue was answered in favour of the assessee.

Issue (iii): Whether the special allowance granted under section 26(3)(a) of the Excess Profits Tax Act, 1940 was deductible from the opening capital while computing capital employed for the subsequent chargeable accounting period.

Analysis: The special allowance was granted to meet inequity in computing profits caused by postponed renewals or repairs during the war period. The Board did not impose a condition that converted the allowance into a reduction of capital employed, and the allowance operated only to affect the computation of profits for the earlier period. It did not show that the assessee's actual capital employed stood reduced for the later period.

Conclusion: The allowance was not deductible from the opening capital, and the issue was answered in favour of the assessee.

Final Conclusion: All three questions were decided against the revenue and the excess profits tax reference was answered in favour of the assessee with costs.

Ratio Decidendi: Where the statutory scheme adopts income-tax computation principles for excess profits tax, depreciation on capitalised interest remains allowable unless expressly excluded; voluntary tax deposits are not deductible debts unless the statute so provides; and a special profit allowance does not reduce capital employed unless the granting order or governing provision clearly makes it so.

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