1. On a requisition made by this court, the Income-tax Appellate Tribunal has drawn up the statement of the case and referred to us the following question of law :
'Whether in computing the written down value for the purposes of the second proviso to section 10(2)(vii), the initial depreciation is to be included ?'
2. We are here concerned with the assessment year 1951-52, the relevant account year for which is the calendar year 1950. The assessee is an incorporated company under the Indian Companies Act and was incorporated in the year 1927. It had been carrying on business of assembling cars and trucks and was also dealing in cars, trucks, etc. For the purpose of its business, it acquired extensive lands in the year 1946. The assessee thereafter constructed buildings, workshops and installed machinery therein, etc. It appears that in the year 1948, another company also was incorporated for doing similar business. In about October, 1949, an agreement took place between that company and the assessee company, whereunder the assessee company agreed to sell and the other company agreed to buy all lands, constructions, buildings, plants, etc., from the assessee company for a consideration of Rs. 35 lakhs - 8 lakhs being the value of moveables and 27 lakhs being the value of lands, buildings, and rights, etc. Though the agreement for sale was made in October, 1949, the possession was actually given to the purchaser on 17th February, 1950, and till then the company continued to run its business using the aforesaid property.
3. It was common ground that as a consequence of the aforesaid sale, the provisions of the second proviso to clause (vii) to sub-section (2) of section 10 of the Income-tax Act became applicable for the purposes of ascertaining the quantum of profits made by the assessee company on the sale of its buildings, machinery and plant in respect of which depreciation had been allowed to the company under clause (vi-a) of sub-section (2) of section 10 of the Act. To appreciate the dispute between the income-tax authorities and the assessee, it would be convenient to refer to certain provisions of law at this stage. The second proviso to clause (vii) reads :
'Provided further that where the amount for which any such building, machinery or plant is sold, whether during the continuance of the business or after the cessation thereof, exceeds the written down value, so much of the excess as does not exceed the difference between the original cost and the written down value shall be deemed to be profits of the precious year in which the sale took place.'
4. Under the provisions of this proviso thus, profits determined would be sale price minus written down value but not exceeding original cost minus written down value. Consequently, it follows that larger the written down value the smaller will be the margin of profits. The written down value is defined in sub-section (5) of section 10 of the Act. Clause (a) deals with the written down value of assets acquired before the previous year and clause (b) relates to cases of assets acquired before the previous year. As the assessee company had been running the business for some time, we are concerned with clause (b), and it is in the following terms :
'(b) in the case of assets acquired before the previous year the actual cost to the assessee less all depreciation actually allowed to him under this Act, or any Act repealed thereby, or under executive orders issued, when the Indian Income-tax Act, 1886 (II of 1886), was in force.'
5. It would be noticed that the larger the amount of depreciation allowed the smaller will it be of the written down value. Clauses (vi) and (vi-a) of sub-section (2) of section 10 of the Act relate to depreciation. It is not in dispute that under these clauses depreciation of three kinds is allowed as deduction in the computation of the income of the assessee from business. They are : (1) normal depreciation which is allowed every year till the cost price is wiped out by the amount of depreciation, in other words, till the written down value is reduced to zero. It is provided in the first part of clause (vi); (2) initial depreciation, which is allowed only in the first year of the new construction for the first year of the use of the new plant or machinery; this is commonly understood as initial depreciation and is provided in the latter part of clause (vi); (3) additional depreciation provided in clause (vi-a) which is allowed for the first five years of a building which is newly erected or for the first five years of the use of the plant or machinery. Now, according to the department, all these three kinds of depreciation where liable to be included in computing the written down value, while according to the assessee company the amount of initial depreciation was not liable to be included in the computation of the written down value. This contention of the assessee has not been accepted either by the income-tax authorities or by the Tribunal. The question therefore has been referred to us.
6. Mr. Dwarkadas, who appears for the assessee, presses the said contention of the assessee before us for out acceptance and in support of his contention has placed strong reliance on the clause 'which shall however not be deductible in determining the written down value for the purposes of this clause' occurring in the latter part of clause (vi) of sub-section (2) of section 10 of the Act. In our opinion, the contention is not well founded and the clear terms of the latter part of clause (vi) read together with clause (b) of sub-section (5) of section 10 are sufficient to overrule the contention. The material part of clause (vi) is in the following terms :
(2) Such profits or gains shall be computed after making the following allowances, namely :
'(vi) in respect of depreciation of such buildings, machinery, plant or furniture being the property of the assessee, a sum equivalent, where the assets are ships other than ships ordinarily playing on inland water, to such percentage on the original cost thereof to the assessee as may in any case or class of cases be prescribed and in any other case, to such percentage on the written down value thereof as may in any case or class of cases e prescribed;
and where the buildings have been newly erected, or the machinery or plant being new, not being machinery or plant entitled to the development rebate under clause (vi-b), has been installed, after the 31st day of March, 1945, and before the 1st day of April, 1956, a further sum (which shall, however, not be deductible in determining the written down value for the purposes of this clause) in respect of the year of erection or installation...'
7. It would be noticed that the clause, on which reliance is placed by Mr. Dwarkadas, in clear terms states that the initial depreciation will not be deductible in determining the written down value for the purposes of clause (vi) and that means that it will be deductible in determining the written down value under the other sub-section of section 10. We have not to determine the written down value under clause (vi), but we have to determine the quantum of written down value under the second proviso to clause (vii) of sub-section (2) of section 10. The clause on which reliance is placed, therefore, would not come in the way of the income-tax authorities in including the initial depreciation for determining the written down value under the second proviso to clause (vii) of sub-section (2) of section 10. Further, no doubt is left in the matter when one turns to clause (b) of sub-section (5) of section 10 of the Act and it in clear terms says that the written down value means the actual cost to the assessee less all depreciation actually allowed to him under the act. It cannot be disputed that the initial depreciation had been actually allowed to the assessee. It also cannot be disputed that the initial depreciation allowed to the assessee is allowed under the Act. On the plain language of the aforesaid provisions of the Act, in our opinion, there is no merit in the contention raised. It is clear that the provision made for not deducting initial depreciation in determining the written down value under clause (vi) is to safeguard the interest of the assessee in the matter of his getting normal depreciation in the subsequent years and it is for that reason that it has been provided that it should not be deductible in determining the written down value under clause (vi). It is also clear that the scheme under clause (vii) appears to be that when a building, plant and machinery are sold, the revenue seeks to recover back tax on the amount of depreciation allowed in the event the price obtained by the assessee on sale allows it.
8. For the reasons stated above, in our opinion, the answer to the question will be in the affirmative.
9. Before parting with the case we must state that Mr. Dwarkadas very fairly pointed out to us a decision reported in Popular Ltd. v. Commissioner of Income-tax which supports the view taken by us.
10. The assessee shall pay the costs of the department.
Question answered in the affirmative.