1. In this reference which is at the instance of the Commissioner under s. 66(1) of the Indian I.T. Act, 1922, the following three questions are referred to the High Court for its opinion :
'(1) Whether the assessee was entitled to deduction of Rs. 11,712 on account of contribution to the insurance fund against third party risk
(2) Whether it was rightly held that there was a clear conflict between the substantive section of the Act, viz., section 10(2) (vi) and rule 8 of the Indian Income-tax Rules, 1922
(3) Whether on the facts and in the circumstances of the case, the assessee was entitled to depreciation of Rs. 2,80,363 for the period April 1, 1960, to April 30,1960, in respect of assets transferred to the Gujarat State Road Transport Corporation ?'
2. As far as question No. 1 is concerned, Mr. Joshi who appears for the Commissioner has drawn our attention to a decision of this court in Income-tax Reference No. 20 of 1966 (decided by Kantawala C.J. and Tulzapurkar J. on August 7, 1975 (since reported as CIT v. Bombay State Transport Corporation : 106ITR303(Bom) . In the said reference question No. 1 pertains to similar contributions by this very assessee to the insurance fund. These contributions which were then considered by the said Division Bench were for the assessment years 1956-57, 1957-58, 1958-59 and 1959-60. In the reference before us we are concerned with the assessment year 1961-62. Mr. Joshi has fairly conceded that question No. 1 will be required to be answered in the affirmative and in favour of the assessee in view of the aforesaid decision of the Division Bench of this court. Accordingly, the facts pertaining to the said question need not be set out in this judgment.
3. In this reference, we are concerned with the assessment year 1961-62, the relevant accounting year being the financial year ended March 31, 1961. The assessee before us is The Bombay State Road Transport Corporation (now known as The Maharashtra State Road Transport Corporation) and, as its name suggests, carried on the business of road transport originally within the State of Bombay as it existed prior to May 1, 1960, and now it carries on the said business within the State of Maharashtra. The State of Bombay became divided into two separate States as from May 1, 1960, one part known as the State of Maharashtra and the other known as the State of Gujarat. Accordingly, the Bombay State Road Transport Corporation also came to be split into two Corporations. The Bombay State Road Transport Corporation was to operate in the new State of Maharashtra and the other Transport Corporation, which came to be known as the Gujarat. The two Corporations came into being also from May 1, 1960. In view of the setting up of the two Corporations and the division of assets between the two, the accounts of the assessee-corporation were made up for two periods, i,e., for one month from April 1, 1960, to April 30, 1960 which meant up to the last date before the date of the transfer of the assets and thereafter for eleven months from May 1, 1960, to March 31, 1961. The assessment made by the ITO shows that the business income of the assessee-corporation has been determined for these two periods separately and then clubbed together. The two questions which remained to be answered pertain to the claim of depreciation on the assets which were handed over to the Gujarat State Road Transport Corporation with effect from May 1, 1960. In connection with the division of assets and the depreciation to be claimed thereon, a joint letter dated January 17, 1964, was addressed by the two Corporations to the respective Commissioners of Income-tax being the CIT, Bombay City III, as far as the assessee-corporation was concerned and the CIT, Northern Division, Ahmedabad, so far as the Gujarat State Road Transport Corporation was concerned. The joint letter is annexed as annexure 'F' and the two replies by the two respective Commissioners are annexed as annexures 'G' and 'I', respectively, to the statement of case.
4. So far as the assets which went over to the Gujarat State Road Transport Corporation were concerned, it appears that depreciation was claimed by the Bombay State Road Transport Corporation, i,e., the assessee-corporation for one month, i,e., for the period April 1, 1960, to April 30, 1960. This was about 1/12th of the depreciation allowable for the whole year. The ITO, however, who finalised the assessment of the assessee-corporation for that assessment year, negatived the assessee's claim for the allowance. However, it appears from the order that no reason was furnished for the said disallowance. The assessee carried the matter in appeal to the AAC. The AAC upheld the assessee's claim observing :
'The reasons for disallowing the depreciation are not clear from the assessment order. In view of the facts explained by the counsel, it is quite clear that the assets have been used in business the income of which has been included in the total income and I do not see any reason for disallowing depreciation for one month. The ITO is directed to allow the same. There would be a reduction of Rs. 2,80,362 subject to verification of actual figures by the ITO.'
5. The department thereafter carried the matter in appeal to the Income-tax Appellate Tribunal. The contention advanced on behalf of the revenue before the Tribunal was that the so-called agreement between the two corporations to claim such depreciation proportionately, i,e., for a period of one month by the assessee-corporation and for a period of the subsequent eleven months by the Gujarat S.R.T. Corporation was not binding on the department. It was contended further that under the rules framed in this respect no depreciation was at all allowable in respect of the assets which were used by the assessee for a period of only 30 days and less. Another argument that was advanced by the department was that since the assets had been transferred to the Gujarat S.R.T. Corporation and were no longer the assets of the assessee-corporation at the end of the relevant accounting year, no claim for depreciation could be entertained within the meaning of s. 10(2)(vi) of the Indian I.T. Act, 1922. For the purposes of this argument, the department relied on the provisions contained in s. 10(4B) of the Indian I.T. Act, 1922.
6. On the other hand, the stand of the assessee's representative before the Tribunal was founded on the basic concept of depreciation. It was urged that the application of s. 10(4B) sought for by the departmental representative was improper as there was no sale of assets by one Corporation to the other. It was finally urged that for the allowance of depreciation only two conditions were essential under s. 10(2) (vi), viz., that the assets should be the property of the assessee and that they should be utilised for the purpose of the business of the assessee. It was accordingly contended that the rule framed which had the effect of depriving depreciation to the assessee for a period of 30 days was invalid and beyond the rule-making powers conferred on the rule-making authority by the Act. The Tribunal upheld the contentions advanced on behalf of the assessee. It held that s. 10(4B) had no application. It may be mentioned that Mr. Joshi has not even mentioned this point before us. The Tribunal further upheld the submission made on behalf of the assessee that the portion of r. 8(2) which provides that nil per cent depreciation will be allowable on building, machinery, plant or furniture held for a period of 30 days or less than 30 days, went beyond the rule-making power conferred on the rule-making authority by s. 59 as the said rule or at least that portion thereof with which we are concerned, could not be said to have been made for carrying out the purposes of the Act. In the view of the Tribunal that portion of the rule amounted to totally withdrawing depreciation in respect of the four class of assets for which depreciation was specifically to be provided for under s. 10(2)(vi). Accordingly, it was held that there was a conflict between the section and the rule and to the extent of that the rule was required to be struck down and the case was governed by the section. In the view that it took the Tribunal chose not to rest its decision on the alternative contention of the assessee based upon the letters exchanged by the two corporations with the respective Commissioners. It is from the decision of the Tribunal in Income-tax Appeal No. 5533 of 1966-67 that the reference has been made to the High Court at the instance of the Commissioner.
7. Mr. Joshi first drew our attention to the relevant statutory provision. The word 'prescribed' is defined under s. 2(10) in the following manner :
'2. (10) 'prescribed' means prescribed by rules made under this Act.'
8. He then drew our attention to the relevant portions of s. 10 :
'10. (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 plying on inland waters, 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 case or class of cases be prescribed;....'
9. We have finally for consideration the power to make rules for carrying out the purposes of this Act. Sub-section (5) of s. 59 provides that the rules made under this section shall be published in the Official Gazette and shall thereupon have effect as if enacted in this Act.
10. Mr. Joshi also drew our attention to the schedule of depreciation for buildings, furniture, fittings, machinery and plant provided under the Indian I.T. Rules, 1922.
11. It was submitted by Mr. Joshi that it was open to the rule-making authority to prescribe a nil rate of depreciation on the assets mentioned in s. 10(2)(vi), if the assets were held for a period of 31 days or less, and it was submitted that such a provision would be in harmony with what was provided by s. 10(2)(vi) as the assets held for 30 days or less could be regarded as a class of cases for which percentage was required to be prescribed by the section itself. It was pointed out that even in the Schedule of depreciation under r. 8 of the Indian I.T. Rules, 1922, a nil rate of depreciation was provided for in respect of certain types of assets. It was accordingly submitted that a nil percentage of depreciation was within the competence of the rule-making authority and that it was permissible for the rule-making authority to prescribe this percentage, viz., nil for the class of cases, viz., of the four types of assets mentioned in s. 10(2)(vi) if they were held by the assessee for a period of thirty days or less.
12. The submission was met by Mr. Dastoor in the following manner. He drew our attention to the classification of assets to be found in the schedule of percentages of depreciation and he submitted that the phrase or expression 'class of cases' contained in s. 10(2)(vi) was equipment to a class of assets for which different percentages were prescribed in the Schedule. The class of assets found in the Schedule refers to different types of buildings, different types of furniture and fittings and different types of machinery and plant. It was pointed out that for all these four types of assets some percentage of allowable depreciation had been prescribed in the Schedule and that the rate was mentioned as nil only for certain types or parts of machinery or plant and the reason for this was made clear in the remarks column of the Schedule which makes it clear that the full cost of replacement of the assets was allowable as a revenue expenditure. Where 100 per cent. of the cost of replacement of the assets was allowable as a revenue expenditure bearing in mind the nature of the assets, it will be clear that the item, although technically part of plant and machinery and, therefore, a capital assets, was not to be treated as such for special considerations pertaining to the nature of the asset and the fact of its probable short life and duration. We do not find in the Schedule any other provision for nil rate of depreciation on any item of buildings, plant, machinery or furniture or fittings (except in the special cases mentioned just above where the full cost of replacement is allowable as a revenue expenditure). Thus, where any class of these assets is to be treated as a capital asset for which depreciation is to be allowed, some positive rate of depreciation is prescribed by the Schedule.
13. It will have to be conceded that the matter is not as simple as it appeared to the Tribunal and there is much to be said in favour of the position canvassed for acceptance by Mr. Joshi. It is possible to urge that 'class of cases' mentioned in s. 10(2)(vi) of the Indian I.T. Act, 1922, is not identical with the 'class of assets' mentioned in the Schedule under r. 8 and there could conceivably be a classification based upon the duration of use of the asset by the assessee. If the decision of the Tribunal has rested on this point by itself, then perhaps we might have been required to uphold the submissions made by Mr. Joshi. There is, however, considerable difficulty in accepting Mr. Joshi's submission that a nil percentage of depreciation may be prescribed in the manner that it has been done by the rules and such rule would still be in harmony with s. 10(2)(vi).
14. On behalf of the assessee before the Tribunal emphasis had rightly been placed on the nature of allowance by way of depreciation. In the case of such assessees as we have before us, the true profit of the assessee has to be ascertained for tax purposes. For the purposes of determining the true profits in the business sense or under the proper principles of accountancy, the wear and tear of the assets utilised by the assessee for the purpose of earning his profits will have to be considered and allowance will have to be made for this wear and tear. This is what is notionally understood as depreciation on the assets utilised in business. Section 10(2) requires certain deductions to be made and allowances to be given for computing the profits or gains of business assets of an assessee on which tax is payable and we are concerned with the allowance in s. 10(2)(vi) which is given the generic name of depreciation.
15. Now, it would be permissible for the rule-making authority to provide different percentages of depreciation on the four types of assets as are mentioned in s. 10(2)(vi), viz., buildings, machinery, plant or furniture as the property of the assessee. But the question is whether it is permissible for the rule-making authority in view of the language of s. 10(2)(vi) to provide for a nil rate of depreciation irrespective of whether this is for a class of asset or a class of cases based on the period for which the asset is held by the assessee. It would appear to us that there is much to be said in favour of the view that this is not within the competence of the rule-making authority. To put it in other words, a rule made in this manner which provides for a nil percentage of depreciation on a certain class of asset, or a class of cases, to use the language of s. 10(2)(vi), cannot be accepted as a rule made for carrying out the purposes of the Act; indeed, such a rule may be regarded as patently violative of the purposes of the Act, i,e., of s. 10(2). The purpose of s. 10(2)(vi) is to make allowance for some depreciation on these four types of assets and a rule which provides a nil percentage of depreciation cannot be regarded as having been made for carrying out the purposes of the Act. As stated earlier, there is something to be said for the contentions advanced on behalf of the Commissioner by Mr. Joshi, but on the second branch of the argument which we have dealt with above, we are inclined to accept the view of the Tribunal and uphold the same. We may end by saying that even if two views were possible on this question, we would be required to take the view favourable to the assessee and hold that the portion of r. 8(2) which makes provision for nil percentage of depreciation in respect of buildings, machinery, plant or furniture held by the assessee for a period of thirty days or less than thirty days, would be in conflict with the provisions contained in s. 10(2)(vi) and would be required to be ignored for the purposes of deciding the allowance to be made to the assessee at the time of computing its profits. In this view of the matter, on questions Nos. 2 and 3 also the answer will have to be given in favour of the assessee. Accordingly, the questions referred to us are answered as follows :
Question No. 1 : In the affirmative and in favour of the assessee.
Question No. 2 : In the affirmative, but it being made clear that in our opinion the conflict with which we are concerned, pertains to the portion of r. 8 set out in para. 8 of the statement of case which provides for nil per cent. of depreciation for the four types of assets if they are held for 30 days or less by the assessee. We are not required to consider and have not considered the question of any possible conflict between the other portions of r. 8(2), viz., cases (i) and (ii).
Question No. 3 : In the affirmative and in favour of the assessee. This is a fit matter in which, in our opinion, the parties should be asked to bear their own costs of the reference. There will be an order accordingly.