1965 (12) TMI 28 - SC - Income Tax

Court affirms depreciation on plant/machinery pre-1953 cost.

The Supreme Court dismissed the appeal and affirmed the High Court's decision that depreciation should be allowed on the original cost of plant and ... Depreciation on original cost of plant and machinery acquired prior to 1 July 1953 - construction of 'actually allowed' in section 10(5)(b) of the Income-tax Act, 1922 - effect of exemptions granted under paragraph 15 of the Merged States (Taxation Concessions) Order, 1949 - application of the Taxation Laws (Merged States) (Removal of Difficulties) (Amendment) Order, 1962Depreciation on original cost of plant and machinery acquired prior to 1 July 1953 - effect of exemptions granted under paragraph 15 of the Merged States (Taxation Concessions) Order, 1949 - Depreciation for the assessment year 1955-56 is to be computed on the original cost of assets acquired and used prior to 1 July 1953 where no depreciation had been actually allowed in the earlier exempt years. - HELD THAT: - The Court accepted the High Court's answer to the reference that, for the assessment year 1955-56 (accounting year April 1, 1954 to March 31, 1955), where the assessee's earlier profits had been exempted under the relief granted following paragraph 15 of the Merged States (Taxation Concessions) Order, 1949, and no depreciation had in fact been allowed in those years, depreciation must be computed on the original cost of the various items of plant and machinery. The appeal tribunal's contrary approach, which treated depreciation as if it had been allowed in the exempt years by computing written down values as though the allowances had been given, was rejected. The Court applied the contemporaneous ruling in Commissioner of Income-tax v. Straw Products Limited that the words 'actually allowed' cannot be stretched to include notional or deemed allowances, and therefore where no allowance was actually made in the exempt years the original cost remains the basis for depreciation in the first non-exempt assessment.Depreciation allowable on original cost for the assessment year 1955-56 where no depreciation was actually allowed in the prior exempt years.Construction of 'actually allowed' in section 10(5)(b) of the Income-tax Act, 1922 - application of the Taxation Laws (Merged States) (Removal of Difficulties) (Amendment) Order, 1962 - The expression 'actually allowed' in section 10(5)(b) does not include notional or deemed allowances, and the 1962 Amendment to the Removal of Difficulties Order does not render the exemption to be treated as granted under an agreement for the purpose of that provision. - HELD THAT: - The Court held that, following its decision in the contemporaneous Straw Products case, the phrase 'actually allowed' must be given its ordinary meaning and cannot be read to include notional allowances that were not in fact given in prior years of exemption. Consequently the Appellate Tribunal's view that depreciation had to be computed on written down values as if allowances had been made was incorrect. Further, the Court rejected the submission that the 1962 Amendment (the Explanation in the Removal of Difficulties Order) could be invoked to treat the Central Government's grant of exemption under paragraph 15 of the Merged States (Taxation Concessions) Order, 1949, as an exemption 'granted under an agreement' with the Ruler. The exemption was granted under paragraph 15 pursuant to section 60A of the Act and thus the case falls to be determined with reference to section 10(5)(b) of the Act without assistance from the 1962 Amendment.'Actually allowed' excludes notional allowances; the 1962 Amendment is inapplicable to convert the Central Government grant under paragraph 15 into an exemption 'under an agreement.'Final Conclusion: The appeal is dismissed. The Court affirmed the High Court's conclusion that, for the assessment year 1955-56, depreciation is to be computed on the original cost where no depreciation had actually been allowed in the earlier exempt years, and held that 'actually allowed' does not embrace notional allowances nor does the 1962 Amendment alter the character of the exemption granted under paragraph 15 of the Merged States (Taxation Concessions) Order, 1949. Issues:1. Allowability of depreciation on the original cost of plant and machinery acquired before July 1, 1953.Analysis:The case involved the question of whether depreciation is allowable on the original cost of plant and machinery acquired and used prior to July 1, 1953. The appellant, an assessee-company, contended that since no depreciation had been actually allowed in any earlier assessment year, the depreciation should be computed on the original cost of the assets. However, the Income-tax Officer, Appellate Assistant Commissioner, and Appellate Tribunal held that depreciation must be computed on the written down values of machinery. The High Court ruled that if no depreciation had been actually allowed in prior years, the actual cost incurred by the assessee for acquiring the machinery would be considered the written down value. The appellant argued that depreciation should be deemed to have been allowed in the years when the income was exempted. The court, referring to a previous judgment, held that 'actually allowed' does not include notional allowance and must be interpreted accordingly.The appellant further contended that the exemption granted under the Taxation Laws (Merged States) (Removal of Difficulties) Order, 1949, applied to the case as a continuance of the agreement with the Ruler of Dharampur State. However, the court disagreed, stating that the exemption was granted under paragraph 15 of the Merged States (Taxation Concessions) Order, 1949, issued under the Indian Income-tax Act, 1922. The court concluded that the case should be determined with reference to section 10(5)(b) of the Act, unaffected by the amendment made by the 1962 Order. Consequently, the court upheld the High Court's decision that depreciation should be computed on the original cost of the assets acquired before July 1, 1953.In conclusion, the Supreme Court dismissed the appeal, affirming the High Court's decision that depreciation should be allowed on the original cost of the plant and machinery and other assets acquired and used prior to July 1, 1953. The court held that the exemption granted was under the Act and not under any agreement, thus rejecting the appellant's arguments based on the Taxation Laws (Merged States) (Removal of Difficulties) Order, 1949, and its amendment in 1962.