1968 (12) TMI 17 - HC - Income Tax

Court rules on depreciation allowance and set off of losses in agricultural company

The Court ruled in favor of the assessee regarding the determination of the written down value for depreciation allowance. However, the Court decided ... Assessee is a limited liability company and was incorporated in the erstwhile State of Rampur. It carries on the business of manufacturing sugar - whether the assessee-company was not entitled to set off its share of loss in the agricultural company in the respective years against its income - Held, yes Issues Involved:1. Determination of written down value for depreciation allowance.2. Entitlement to set off share of loss in the agricultural company against profits.3. Entitlement to depreciation for the second shift in a seasonal factory.Detailed Analysis:Issue 1: Determination of Written Down Value for Depreciation AllowanceThe Tribunal held that the written down value of the sugar factory, and the plant and machinery of the dairy farm, for the purpose of depreciation allowance, was their respective original cost minus the depreciation which would have been allowed under the Rampur Income-tax Act but for the exemption. The assessee contended that since no depreciation was actually allowed before the extension of the Act to Rampur, the written down value should be the original cost.The Court referenced the Supreme Court's decision in Straw Products Ltd. v. Income-tax Officer, which held that the 1962 Order was unauthorized. According to Section 10(2)(vi) and Section 10(5) of the Income-tax Act, only depreciation 'actually allowed' should be deducted from the original cost to determine the written down value. Since no assessment was made before 1949-50 due to the tax exemption, no depreciation was actually allowed. Therefore, the written down value should be considered the actual cost incurred by the assessee.Answer to Question 1: The Court answered in the negative, against the department and in favor of the assessee.Issue 2: Entitlement to Set Off Share of Loss in the Agricultural Company Against ProfitsThe Tribunal did not accept the agricultural company as a department of the assessee but as a separate taxable entity. The agricultural company was assessed as an unregistered firm, and its partners were not assessed under Section 23(5)(b) of the Act. The assessment was not challenged and became final. Under the second proviso to Section 24(1) of the Act, losses sustained by an unregistered firm can only be set off against the income of the firm and not against the income of its partners.The Court distinguished this case from others cited by the assessee, noting that the agricultural company was assessed and the assessment became final. Therefore, the assessee could not set off its share of the loss in the agricultural company against its income.Answer to Question 2: The Court answered in the affirmative, in favor of the department and against the assessee.Issue 3: Entitlement to Depreciation for the Second Shift in a Seasonal FactoryThe assessee, a seasonal factory, claimed it was entitled to 50% of the normal depreciation for the second shift. Rule 8 of the Income-tax Rules and the remarks column in the statement specify that for granting extra allowance for double shifts, the normal number of working days throughout the year is taken as 300. If a concern worked double shift for 100 days, the extra allowance is 1/3 of 50% of the normal allowance for the whole year. The rule does not support the claim of 50% of the normal depreciation for the second shift.Answer to Question 3: The Court answered in the negative, against the assessee and in favor of the department.Summary of Answers:1. Question No. 1 answered in favor of the assessee.2. Question No. 2 answered against the assessee.3. Question No. 3 answered against the assessee.Costs: The Court directed the parties to bear their own costs.