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Commissioner of Income-tax, Bombay City-i Vs. Zenith Steel Pipes Ltd. (Now Zenith Steel Pipes and Industries Ltd.) - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtMumbai High Court
Decided On
Case NumberIncome-tax Reference No. 181 of 1971
Judge
Reported in(1982)26CTR(Bom)124; [1982]137ITR34(Bom)
ActsIncome Tax Act, 1961 - Sections 28, 32, 32(1), 34, 43, 43(6), 43(6) and 84
AppellantCommissioner of Income-tax, Bombay City-i
RespondentZenith Steel Pipes Ltd. (Now Zenith Steel Pipes and Industries Ltd.)
Excerpt:
.....of income tax act, 1961 - whether tribunal was right in holding that for purpose of computation of capital employed in industrial undertaking within meaning of section 84 written down value of assets should be taken without deducting allowance made under section 32 (1) (iv) - for purpose of computation of capital employed under section 84 initial depreciation allowable under section 32 (1) (iv) was to be included in determining written down value of assets - court answered in negative and in favour of revenue. - - 32(1) clearly indicates that it was only for determining the written down value for the purposes of cl. 32(1)(iv) as well, which were specifically adopted for the purposes of s. ' 22. even the said observations of the court show that the observations of the learned judges..........of the case, the tribunal was right in holding that for the purposes of computation of capital employed in the industrial undertaking within the meaning of section 84 of the income-tax act, 1961, the written down value of the assets should be taken without deducting the allowance made under section 32(1)(iv) of the said act ?'2. we are concerned with the assessment year 1966-67, with the relevant accounting year ending on 30th april, 1965. in its assessment return the assessee-company had, on the basis that it was a newly created undertaking, claimed relief under s. 84 of the i.t. act, 1961, as it then stood. under the said s. 84 the relief admissible was to the extent of the profits or gains which did not exceed 6% per annum on the capital employed in such industrial.....
Judgment:

Rege, J.

1. In this reference by the Income-tax Appellate Tribunal Bombay Bench 'A', Bombay, under s. 256(1) of the I.T. Act, 1961, the following question has been referred to us for our opinion :

'Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that for the purposes of computation of capital employed in the industrial undertaking within the meaning of section 84 of the Income-tax Act, 1961, the written down value of the assets should be taken without deducting the allowance made under section 32(1)(iv) of the said Act ?'

2. We are concerned with the assessment year 1966-67, with the relevant accounting year ending on 30th April, 1965. In its assessment return the assessee-company had, on the basis that it was a newly created undertaking, claimed relief under s. 84 of the I.T. Act, 1961, as it then stood. Under the said s. 84 the relief admissible was to the extent of the profits or gains which did not exceed 6% per annum on the capital employed in such industrial undertaking computed in the prescribed manner. The computation of the capital for the said s. 84 was prescribed under r. 19 of the I.T. Rules, 1962. The assessee had in its return claimed that a sum of Rs. 35,542, allowable to it as the initial depreciation under s. 32(1)(iv) of the I.T. Act on the value of certain labour quarters constructed by the company, should be excluded in arriving at the written down value of the company's assets. The ITO did not accept the said claim of the assessee and, for the purposes of determining the capital employed, computed the written down value of the company's assets by taking into consideration along with other depreciations, also the said amount of Rs. 35,542 allowed as an initial depreciation. He, accordingly, held the capital of the company to be Rs. 1,26,91,335 and calculated on that, amount the allowance on profits permissible under s. 84.

3. Against the said order of the ITO the assessee appealed to the AAC. Before the AAC, the same contentions were raised. The AAC, however, accepted the contentions of the assessee, set aside the order of the ITO and directed the exclusion of the said amount of Rs. 35,542 from the determination of the written down value of the assets.

4. Against the said order of the AAC, the revenue filed an appeal to the Tribunal. The Tribunal, following the decisions of this court in the case of Burmah-Shell Refineries Ltd. v. G. B. Chand, ITO : [1968]67ITR653(Bom) , came to the same conclusion as that of the AAC and rejected the appeal. The Tribunal did not accept the contention of the revenue that the depreciation of Rs. 35,542, allowable to the assessee as initial depreciation along with other depreciation, was to be taken into consideration in determining the capital employed under s. 84 of the I.T. Act, 1961, read with r. 19 of the capital employed under s. 84 of the I.T. Act, 1961, read with r. 19 of the I.T. Rules, 1962, which prescribed the mode of computation of capital employed in an industrial undertaking as the same was included in the definition of the written down value under s. 43(6)(b) and in the definition of 'depreciation' for the purposes of the said r. 19. The revenue also pointed out that in this court's decision in Burmah-Shell's case [1988] 67 ITR 653 relied upon by the Tribunal the said question was not for consideration of court. However, the Tribunal negatived the said contentions of the revenue and upheld the order the AAC. The very same contentions have been raised before us.

5. IN order to determine this question it would be convenient first to set out the relevant provisions of the I.T. Act. Section 84 of the I.T. Act, which was applicable to this case, deal with the income of 'a newly established industrial undertaking'. It provided, inter alia, that income-tax shall not be payable by an assessee on so much of the profits and gains derived from the industrial undertaking.... as does not exceed 6% per annum on the capital employed in such undertaking... computed in the prescribed manner'.

6. Rule 19 of the I.T. Rule prescribed the manner of computation of the capital employed as required under s 84 of the I.T. Act. The said rule make it clear that it was for the purpose the said s. 84. The said rule makes it clear that it was for the purposes of the said s. 84. The said r. 19, in so far as is relevant, provided as under :

'19.Computation of capital employed in an industrial undertaking or a hotel. - (1) For the purposes of section 84, the capital employed in an undertaking or a hotel to which the said section applies shall be taken to be -

(a) in the case of assets acquired by purchase and entitled to depreciation -

(i) if they have been acquired before the computation period, their written down value on the commencing date of the said period;...'

7. Rule 19(6) has adopted for that purpose definitions of 'depreciation and 'written down value' as under :

'(6)....

(iii) 'depreciation' means the allowance admissible under clause (i) or clause (ii) or clause (iv) of sub-section (1) of section 32.

(iv) 'written down value' means the written down value computed under sub-section (6) of section 43 as if for the words 'previous year' the words 'computation period' were substituted.'

8. Section 32(1)(ii) of the I.T. Act, which is relevant for our purposes, related to deductions for the usual depreciation allowable for the buildings, machinery, plant, etc., of the company while s. 32(1)(iv), which also applies in this case, provides for deductions for what is known as the initial depreciation permissible for one year in respect of newly constructed buildings solely used for the residences of the persons employed as in this case.

9. The provisions of s. 32 of the I.T. Act, in so far as they are relevant for our purposes, were as under :

'32. Depreciation. - (1) In respect of depreciation of buildings, machinery, plant or furniture owned by that assessee and used for the purposes of business of section 34, be allowed - ...

(ii) in the case of buildings, machinery, plant or furniture, other than ships covered by clauses (i), such percentage on the written down value thereof as may in any case or class of cases be prescribed...

(iv) in the case of any buildings which has been newly erected after the 31st day of March, 1961, where the building is used solely for the purposes of residence or persons employed in the business... a sum equal to twenty per cent. of the actual cost of the buildings to the assessee in respect of the previous year of erection of the buildings; but any such sum shall not be deductible in determining the written down value for the purposes of clauses (ii) of sub-section (1).'

10. The only purposes of cl. (ii) of sub-s. (1) of s. 32 quoted above was the computation of usual depreciation which was a prescribed of the written down value.

11. Section 43 gives the definitions of various terms relating to computation of income from profits and gains in any of the provisions appearing under ss. 28 to 41, which include s. 32 quoted above.

12. Section 43(6) defines 'written down value' as applicable here as under :

''Written down value' means - ....

(b) in the case of assets acquired by the previous year, the actual cost to the assessee less all depreciation actually allowed to him under this Act, or under the Indian Income-tax Act, 1922 (XI of 1922), or any Act repealed by that Act or under any executive orders issued when the Indian Income-tax Act, 1886 (II of 1886), was in force.'

13. On these provisions, the question is whether the amounts of Rs. 35,542, which was allowable to the assessee as an initial depreciation under the provisions of s. 32(1)(iv) of the I.T. Act quoted above, was liable to be excluded for computing the capital employed by the company for the purposes of s. 84 of the said Act in the manner prescribed under the said r. 19.

14. The learned counsel for the assessee, mainly relying on the decision of this court in Burmah-Shell Refineries Ltd. v. G. B. Chand : [1968]67ITR653(Bom) , contended that by reason of the last part of s. 32(1)(iv) the said initial depreciation allowable to the assessee was to be excluded from the computation of the capital employed by the company under s. 84 read with r. 19.

15. In our view, on a proper reading of the said provisions, the said contestation of the learned counsel cannot be accepted.

16. Computation of capital employed by a company for the purposes of giving benefit to the newly establishing undertaking, as in this case, under s. 84 of the I.T. Act was to be done in a manner prescribed under the said rule 19. In this case, the company's assets, admittedly being entitled to depreciation under the said r. 19(1)(a)(i) for the purposes of s. 84, the capital employed by the company was to be taken to be the written down value of the assets on the commencement date of the said period. Rule 19 itself has adopted for that purposes certain definitions of 'written down value' and 'depreciation'. Under r. 19(6)(iv) the written down value was to be computed as provided under s. 43(6) of the I.T. Act quoted above. Under the said s. 43(6) the written down value was to be the actual cost less all depreciation actually allowed. Under r. 19(6)(iii) depreciation was to be an allowance admissible, inter alia, under cl. (i) of s. 32(1), that is, usual depreciation, and also under cl. (iv) of s. 32(1), that is, initial depreciation. The said definition of 'written down value', adopted for the purposes of s. 84 of the I.T. Act, read with the said r. 19 takes in the fold all types of depreciation actually allowed to the assessee, which would include the initial depreciation under s. 32(1)(iv) being one type of depreciation actually allowed and which was specifically included in the definition of 'depreciation' adopted under r. 19(6)(iv). Therefore, on the plain reading of the said provisions, the written down value of the assets of the company for the purposes of computing the capital employed under s. 84 read with r. 19(1) was to be determined by deducting from the actual cost of assets all depreciation, including initial depreciation, actually allowed to the assessee.

17. The learned counsel for the assessee, strongly relying on the later part of cl. (iv) of s. 32(1) of the I.T. Act (which provides for initial depreciation), has contended that by reason of the said provisions the said initial depreciation allowed to the assessee could not be taken into consideration along with the other depreciation, also for determining the written down value of the assets for computing the capital under s. 84 of the said Act.

18. Firstly, the provisions of Chap. IV of the I.T. Act under which s. 32 was to be found, and the provisions of Chap. VII of the Act in which s. 84 was to be found, operate in different fields. The Chapter that includes s. 32 relates to the computation of total income for the purposes of taxation, while s. 32 provides for certain deduction by way of depreciation permissible in cases of buildings, machinery, plant, etc., in the computation of such income. On the other hand, the Chapter which included s. 84 provides for benefit from income-tax in certain class of cases, while s. 84 provided for such benefit in cases of a newly established industry. Therefore, the provisions of s. 84 read with the said rule 19 as against s. 32 will have to be read independently of each other.

19. The later part of the provisions of cl. (iv) of s. 32(1) clearly indicates that it was only for determining the written down value for the purposes of cl. (ii) of s. 32(1), providing for deduction for usual depreciation, that the initial depreciation allowable under cl. (iv) was not to be deductible. The purposes of cl. (ii) was the determining of deductions for computation of usual depreciation, which was to be a prescribed percentage of the written down value, which but for the said later part of cl. (iv) would have been required to be calculated by taking into consideration the said initial depreciation along with the usual depreciation actually allowed, as provided under s. 43(6)(b) quoted above. The said provisions of cl. (iv) do not speak about the exclusion of the said initial depreciation for a computation of the written down value for all purposes. The said later part of the section 32(1)(iv), therefore, cannot be so read as to control the definitions of 'written down value' under 43(6)(b), which included all depreciation actually allowed, and that of 'depreciation' which included initial depreciation under s. 32(1)(iv) as well, which were specifically adopted for the purposes of s. 84 read with the said r. 19, for computing the capital employed. The said contention of the learned counsel for the assessee, therefore, cannot be accepted.

20. In our view, therefore, on a plain reading of the said provisions, the only permissible construction was that for the purposes of computation of capital employed under s. 84 of the I.T. Act read with the said r. 19, the initial depreciation allowable under s. 32(1)(iv) was to be included in determining the written down value of the assets. The language of the said provisions was too clear and unambiguous to admit of any other interpretation not was it capable of suggesting any different intention on the part of the legislature.

21. We may not refer to the two decisions relied upon by the learned counsel for the assessee in support of his contention. The first one is the decision of this court in the case of Burmah-Shell Refineries Ltd. v. G. B. Chand : [1968]67ITR653(Bom) , which has been relied upon also by the Tribunal. That was a case of rectification of an assessment order under s. 154 of the I.T. Act, 1961. In that case, initially, the ITO had completed the assessment by excluding for the purposes of determining the written down value for computing the capital employed by the company under s. 15C of the Indian I.T. Act, 1922 (equivalent to the said s. 84 of the present Act), the initial depreciation permissible under the second part of s 10(2)(vi) of the old Act (equivalent to s. 32(1)(iv) of the present Act). Thereafter, the ITO sought to rectify the assessment under s. 154 of the present Act by including the said initial depreciation along with the other depreciation actually allowed to the assessee for determining the written down value for the purposes of computation of capital under the said s. 15C. The court held that the ITO had no jurisdiction to rectify the assessment as it old not constitute an error apparent on the face of the record as required by the said section. In that case, the only question before the court was as to the jurisdiction of the ITO to rectify the assessment under the circumstance of the case. Although the question that is before us in the case was not germane for consideration, the court after considering the then relevant provisions, did observe that the initial depreciation granted under the then existing s. 10(2)(vi) (second part) was to be excluded while determining the written down value for computing the capital employed by the company for giving relief to it under the then existing s. 15C of the Act of 1922. However, the court had itself at page 661 (of 67 ITR) of the report observed :

'Prima facie, and we deliberately say that whatever we are deciding here is, only prima facie, for, we are not called upon to decide it, the contention cannot be upheld.'

22. Even the said observations of the court show that the observations of the learned judges of this court on the question before us, which they were not called upon to decide, were clearly obiter dicta. The reasoning of the court for such conclusion, to be found at pp. 660 and 661, appears to be on the basis that s. 10(5) of the Act of 1922 (equivalent to s. 43(6)(b) of the present Act) defined the expression 'written down value' with reference to sub-s. (2) of s. 10, which equally applied to both the parts of s. 10(2)(vi), namely, usual and initial depreciation, and, therefore, if the said cl. (vi) were intended to be excluded from the operation of s. 10(5), the same would not have been generally worded to apply to s. 10(2) as a whole. Nor did the words at the end of the second part of s. 10(2)(vi), namely, 'Which shall, however, not be deductible in determining the written down value for the purposes of this clause', excluded the definition of the written down value in s. 10(5). The said reasoning, perhaps as a result of the arrangement of the provisions as they stood then, which was different from the existing provisions, fails to take into consideration the importance of the last part of cl. (vi) expressly providing for exclusion of initial depreciation only for the purpose of determining the written down value in computing the usual depreciation under the first part of the said cl. (vi) of s. 10(2). It also fails to take into consideration the distinct purposes of s. 15C, that is, computation of capital employed, for which the definition of written down value under s. 10(5) was adopted without excluding any type of depreciation, as against the purpose of s. 10(2) which was only to provide for deductions in the computation of income. Even otherwise also, the said reasoning was not consent enough to persuade us to hold likewise.

23. The second decision relied upon by the learned counsel for the assessee was of the Madras High Court in the case of CIT v. Lucas-TVS Ltd. (No.1) : [1977]110ITR338(Mad) . In that case that court held that the combined reading of the said r. 19(1) and (6) read with s. 43(6) of the I.T. Act, 1961, clearly showed that initial depreciation was not to be deducted in computing the written down value of the assets for computing the capital employed by a newly established industrial undertaking for the purposes of determining the deductions under s. 84 (now s. 80J) of the I.T. Act. However, in the judgment of the court, unfortunately one does not find any reasoning for the said finding. As we have pointed out above, there was nothing in the provisions of r. 19(1) or (6) read with s. 43(6) to hold that the initial depreciation was to be excluded in determining the written down value for computing capital under s. 84. On the contrary, the said provisions indicate otherwise. The said decision, therefore, cannot take the matter for the assessee any further.

24. For the reasons stated above, therefore, the question referred to us is answered in the negative, that is, in favour of the revenue.

25. The assessee to pay the costs of this reference to the revenue.


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