1. On application by the assessee under section 66(1) of the Indian Income-tax Act, the Tribunal drew up a statement of case and has referred the following question of law to this court :
'Whether depreciation is allowable on the original cost of the various components of the plant and machinery and other assets of the company as acquired and used prior to July 1, 1953 ?'
2. We are concerned with the assessment year 1955-56, the relevant accounting year being ending 31st March, 1955, and the question arises thus : The assessee-company was incorporated on 15th June, 1949, as a private limited company. Later it became a public limited company in the year 1949. On its incorporation it started a factory forthwith in the former Dharampur State for manufacturing leather cloth and coated fabrics from cloth, coarse and medium, P. V. C. resin, plasticisers, pigments etc. Before its incorporation the promoters of the company for a period of seven years from the commencement of its working. However, soon after the company started working, the territories of the Dharampur State merged in the Indian Union. Section 60A of the Indian Income-tax Act empowered the Central Government to make an exemption, reduction in rate or other modification in respect of income-tax by a general or special order in regard to the income of persons residing and doing business in the merged States. In exercise of its powers under the said section, the Central Government promulgated on 3rd December, 1949, the Merged States (Taxation Concessions) Order, 1949, relating to exemptions, reductions in rates, taxes, etc. Sub-clause (1) of clause 15 of the Order thereof provided that where any industrial undertaking situate in the merged States claimed that it had been granted any exemption from or concession in respect of income-tax, super-tax or business profits tax by a Ruler of the State before 1st August, 1949, it shall submit an application to the Commissioner of Income-tax giving certain particulars. Sub-clause (2) required the applicant to attach a copy of the concession granted by the Ruler of the State with his application. Sub-clause (3) empowered the Central Government to grant such relief as it thought appropriate. The assessee made an application under clause 15, which was communicated to the assessee by the Commissioner of Income-tax, is in the following terms :
'I (Commissioner) have the honour to inform you that it has been decided by the Government of India that your company will be exempt from income-tax and super-tax for a period of five years with effect from the 1st April, 1950. The shareholders of the company will, however, be liable to pay tax on the amount of dividends received by them.'
3. In consequence of this order made by the Central Government, the assessee-company stood exempted from payment of income-tax and super-tax up to the assessment year 1954-55. The assessment year with which we are concerned was the first year in which the assessee-company has been assessed to tax. In the course of the assessment proceedings, the assessee, inter alia, contented that this being the first assessment after it commenced working its factory, depreciation should be allowed on the original cost of the various items of plant and machinery and other assets of the company inasmuch as no depreciation has been actually allowed to it in any prior years. In other words, the claim of the assessee was that the original cost should be taken as the written down value of the various items of plant and machinery and other assets of the company for the purpose of determining the quantum of depreciation allowable to it. This contention was not accepted by the Income-tax Officer. The Income-tax Officer held that the written down value of the machinery for the purpose of assessment would be computed as if the income of the assessee had been worked out properly in the years when the company was exempted from the payment of tax and the depreciation having been allowed at the usual rates. The appeal filed by the assessee before the Appellate Assistant Commissioner against the order of the Income-tax Officer failed. The assessee took a second appeal to the Tribunal. Before the Tribunal the assessee contended that the Income-tax Officer and the Appellate Assistant Commissioner were wrong in allowing depreciation on the written down value computed by him after taking into consideration the allowable depreciation in the preceding accounting years. The assessee urged and claimed that the depreciation should have been allowed on the original cost of the machinery and assets. The Tribunal affirmed the facts found by the Income-tax Officer that the machinery and other assets of the company were in use in the previous years. Having regard to that fact, the Tribunal upheld the order of the Income-tax officer and the Appellate Assistant Commissioner. The view taken by the Tribunal was that the exemption granted to the assessee was only in respect of tax and not against the computability of his income. Theoretically, therefore, computation for the various years must be deemed to have been made for each year in the manner required by the act. The depreciation allowance must, similarly, be deemed to have been claimed by the assessee in each year 'actually allowed' in section 10(5) (b), on which reliance was placed by the assessee, were wide enough to cover the present case. The Tribunal, therefore, dismissed the appeal. The case has now come to us on the aforesaid reference.
4. Mr. Kolah, learned counsel for the assessee, contends that it is an admitted position that in fact no assessment in respect of the income of the assessee had been made in any previous year. The assessee had not claimed any depreciation on the machinery and assets, etc., in any of the previous years; no depreciation on the said machinery and assets had at any time been allowed to the assessee in the previous years. The assessee, therefore, is entitled to claim the cost price as the written down value for the purpose of calculating the amount of depreciation under section 10(2) (vi) read with section 10(5) (b) of the Indian Income-tax. He also referred us to the decisions in Commissioner of Income-tax v. Kamala Mills Ltd. and Rajratna Naranbhai Mills Co. Ltd. v. Commissioner of Income-tax.
5. Mr. Joshi, on the other hand, contends that the Indian Income-tax Act was made applicable to the merged territories of the Dharampur State soon after the commencement of the business of the assessee-company. The assessee-company was, therefore, liable to pay income-tax and super-tax on its income right from the commencement of its business. The exemption granted to the assessee-company either by the Dharampur State or by the Central Government was only in respect of payment of income-tax and super-tax. The assessee-company thus was not exempted from its income being computed. It is open, therefore, to the department to deal with the case as if in the previous years the procedure required to be followed in the matter of computation of total income of the assessee had been duly followed, i.e., as if the assessee had filed returns, as if he had claimed depreciation on the machinery and assets and as if the Income-tax Officer had allowed the depreciation claimed in accordance with law, and on this footing determine the written down value of the machinery, plant and assets of the assessee and on that basis determine the amount of depreciation allowable to the assessee in the assessment year with which we are concerned. He has also referred us to a decision reported as commissioner of Income-tax v. National Electrical Industries Ltd.
6. Having regard to the unambiguous expressions used by the legislature in clause (b) of sub-section (5) of section 10 of the Act, we find out extremely difficult to accept the contentions of Mr. Joshi.
7. Section 10 relates to the computation of profits and gains of business Sub-section (1) provides that the tax shall be payable by an assessee under the head 'profits and gains of business, profession or vocation' in respect of the profits and gains of any business, profession or vocation carried on by him. The material part of sub-section (2) reads thus :
'Such profits or gains shall be computed after making the following allowances, namely :...
(vi) in respect of depreciation of such (used for the purpose of the business, profession or vocation) machinery (etc.)... being the property of the assessee... to such percentage on the written down value thereof as may in any case or class of cases be prescribed... provided that the prescribed particulars have been duly furnished...'
8. Sub-section (5) provides :
'In sub-section (2)... 'written down value' means...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, was in force.'
9. Having regard to the aforesaid provisions it is clear that the assessee is entitled to an allowance on account of the depreciation on machinery at the prescribed rate on the written down value of the machinery, etc., and the written down value of the machinery, acquired prior to the previous year, is the actual cost minus depreciation actually allowed. It necessarily follows that if in the prior years no depreciation has been actually allowed, then the actual cost incurred by the assessee for acquiring the machinery would be the written down value of the machinery. It is further clear that if the assessee desired to claim depreciation, he must supply the required particulars. In the event the particulars are not supplied by the assessee then depreciation is not allowed to him. It is an admitted position that at no time prior to the assessment year 1955-56 the assessee had filed any returns or that he had claimed any depreciation and in support of it supplied any particulars or that any depreciation on the machinery had actually been allowed. It is not shown to us that it is obligatory on the assessee to claim depreciation in every year of assessment, and in the event of his failure to do so, he forfeits the claim therefore or that the cost price gets automatically reduced by the allowable amount of depreciation. That being the position, it is difficult to hold that the assessee is not entitled to claim depreciation on the basis that the cost price of the machinery, etc., was the written down value thereof for the purpose of ascertaining the amount of depreciation allowable to him, and it was not open to the income-tax authorities to compute the depreciation on the basis that depreciation had been, as if, claimed in every year and allowed to the assessee.
10. The decision in Commissioner of Income-tax v. Kamala Mills Ltd., on which reliance has been placed by the assessee, lends support to the view taken by us. The facts in that case were : in the assessment year 1941-42 the written down value of certain assets of the assessee was Rs. 9,08,003 and the allowable depreciation was found to be Rs. 87,244. As in that year there was a resultant loss, effect could not be given to that allowance and the same was carried forward to the following year 1942-43. A question arose as to what should be the written down value of the assets for the year 1942-43. It was the contention of the assessee that the written down value should be taken at Rs. 9,08,003 inasmuch as in the prior year the allowable depreciation of Rs. 87,244 was not actually allowed. On the other hand, the contention of the department was that the written down value should be taken at Rs. 9,08,003 less Rs. 87,244, the amount of depreciation ascertained in the prior year. It was held that as there was loss in the prior year, the depreciation allowance of Rs. 87,244 was not set off and, therefore, it could not be said to have been actually allowed. It is, therefore, clear that unless and until the depreciation amount has been actually allowed in any assessment of the prior years, the written down value of the machinery continues to remain the cost price incurred by the assessee in acquiring the machinery or the assets. It is not necessary to refer to the other case on which reliance has been placed by the assessee. The decision on which reliance has been placed by Mr. Joshi, Commissioner of Income-tax v. National Electrical Industries in our opinion, has no bearing on the question we have to consider and is of little assistance to the department. The question that fell for consideration in the case related to the priority between the benefit of exemption from payment of tax under section 15C and set-off in respect of loss of the previous year under section 24(2) of the Act.
11. For reasons stated above, the answer to the question referred to will have to be in the affirmative. We answer accordingly. The Commissioner shall pay the costs of the assessee.
12. Question answered in the affirmative.