The judgment of the court was delivered by
MANCHANDA J. - This is a case stated under section 66(2) of the Income-tax Act, 1922 (hereinafter referred to as the Act). The question referred i :
'Whether there was any material for the finding that the sum of Rs. 10,000 added to the profits in respect of the sale of three lorries in the previous year relevant for the assessment year 1949-50 represented the difference between the original and the written down values of the three lorrie ?'
The material facts are thes : The relevant year of assessment is the assessment year 1949-50, the previous year being the financial year ending the 31st of March, 1949. The assessee, inter alia, derives income from plying of lorries. In the previous year the assessee plied eight lorries. Out of these he sold three lorries at a price of Rs. 36,100. The Income-tax Officer computed the profits on the sale of the aforesaid three lorries under the second proviso to section 10(2)(vii) at Rs. 19,728. In his assessment order he did compute or furnish the written down value of the three lorries but took the computation of written down value as made in respect of the assessment year 1948-49, which assessment was also made on the same day as the assessment for the relevant year of assessment. For the assessment year 1948-49 the initial cost of the eight lorries was estimated at Rs. 64,000, i.e., the cost in the assessment year 1944-45. In other words, the initial cost was taken for each lorry at Rs. 8,000. This was purely on an estimated basis. The assessee had not furnished any particulars under proviso (a) to section 10(2)(vi) of the Act in this respect. Having estimated the initial cost at Rs. 64,000 for the eight trucks he then proceeded to work out the written down value for the subsequent assessment years and ultimately for the 1948-49 assessment year the written down value of the eight trucks was worked out at Rs. 15,187. The written down value included the depreciation of Rs. 5,063, which was worked out for the assessment year 1948-49, and in that assessment year this sum of Rs. 5,063 was actually allowed. In the relevant assessment year the written down value of Rs. 15,187 was taken as the basis and after allowing depreciation at 25%, the written down value worked out to Rs. 3,797. This sum was again actually allowed. As three lorries had been sold during the relevant previous year the question of computing the profit under the second proviso to section 10(2)(vii) of the Act arose. The written down value of the three trucks on a proportionate basis came to Rs. 4,272. As the three trucks were sold for Rs. 36,100 the profit under section 10(2)(vii) was worked out at Rs. 19,728.
On appeal, the Appellate Assistant Commissioner upheld this add-back of Rs. 19,728 on account of a balancing charge. Aggrieved, the assessee went up to the Income-tax Appellate Tribunal which not only reduced the estimated income the plying of lorries but also the profit under section 10(2)(vii) which was estimated at Rs. 10,000 against Rs. 19,728 taken by the departmental authorities.
The assessees application under section 66(1) having been rejected he came up to this court contending, inter alia, that there did not exist any written down value in respect of the three lorries which were sold by him and since no depreciation had actually been allowed the question of determining the balancing charge under section 10(2)(vii) of the Act did not arise. The question, however, that was directed to be referred was the one stated hereinabove.
Mr. Tiwari, the learned counsel for the assessee, has contended that it is open to the assessee not to claim any depreciation allowance and even if true profits are not deductible from the accounts furnished by him and the proviso to section 13 is invoked by the department it is still not open to the department to foist a depreciation allowance upon the assessee. In the present case, according to him, no such depreciation allowance was claimed in any of the earlier years and the income was being estimated from year to year by the application of the proviso to section 13 and, therefore, it was not open to the Income-tax Officer in the assessment made on the same day for the earlier assessment year to estimate the initial depreciation and on that estimated basis to work out the written down value which he could press into service for the purpose of determining the balancing charge under section 10(2)(vii) in the assessment for the relevant assessment year which assessment also was made on the same day.
The learned standing counsel, on the other hand, contends that the question as framed will not include in its scope the larger question as to whether in a case where the income is estimated under the proviso to section 13 of the Act, the written down value can or cannot be worked out. In our judgment the question as framed includes the question as to whether the Income-tax Officer could at all compute the written down value in the circumstances of this case. The contention, as already noticed, before this court when an application under section 66(2) was moved was primarily one which related to the power of the Income-tax Officer to work out the written down value, when no such depreciation allowance was actually allowed in the earlier years. In these circumstances, there can be no warrant for restricting the question as is contended for by the learned standing counsel.
The scheme of the Act is that for determining the income from business, profession or vocation the provisions of section 10 have to be applied. Sub-section (2) of that section enjoins that such profits shall be computed after making certain allowances and one such allowance is provided in sub-section (2)(vii). This provides for a depreciation allowance on building, machinery, plant, furniture, etc., on the written down value as prescribed. The written down value for the various items of building, machinery, etc., is prescribed in the Rules. It will be noticed that under sub-clause (vi) the depreciation is to be allowed on the written down value. As to what is the 'written down value' is given in section 10(5) of the Act.
The relevant portion of section 10(5) which gives the meaning of written down value is the second proviso to section 10(5)(b). This read :
Written down value mean :
'10(5)(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.........'
Therefore, the written down value in the case of assets acquired before the previous year can only be determined on the basis of depreciation that may have been 'actually allowed' to the assessee in the earlier assessment years.
The question therefore that arises in the present case is, when no depreciation was actually allowed in any of the assessment years prior to 1948-49, when the income of the assessee was being determined on an estimated basis and no particulars as required by proviso (a) of section 10(2)(vi) of the Act had been furnished and when even for the assessment year 1948-49 the assessee had not furnished any such particulars, could the Income-tax Officer, for the obvious reason that he wanted to bring to charge the profit under section 10(2)(vii), compute the written down value by taking the initial cost at an estimated figur The best that the department can say is that depreciation was 'actually allowed' in the assessment year 1948-49 for the first time. When income is estimated under the proviso to section 13 it may be possible to take the question of depreciation into consideration, but that would not mean that depreciation was 'actually allowed'. What is required is an actual allowance which can only mean that the actual figure must have been duly worked out and factually allowed in the assessment order of the earlier year itself. The depreciation allowance must not only have been determined but should have actually been allowed to the assessee in order that the proviso to section 10(2)(vii) is attracted. This is a provision which is for the purpose of adjusting the equities between the department and the assessee. If the department has actually allowed a larger sum by way of depreciation then what the ultimate figure on sale is realised by the assessee, then the department is entitled under the provisions of this sub-section to ask that the difference be deemed to be the profits of the relevant year of account. Similarly, if a depreciation allowed by the department is found to be less than what the machinery, plant or building was ultimately sold for, then the assessee would be entitled to claim the loss. The scheme of the Act shows that, unless the amount of depreciation has actually been allowed, the question of a balancing charge will not arise.
In this view of the matter, there was only material for the finding that the sum of Rs. 5,063 and Rs. 3,797 was depreciation which was 'actually allowed' during the assessment years 1948-49 and 1949-50, i.e., a total of Rs. 8,860 and for eight trucks that sum alone can be taken into consideration in computing the excess profit under the second proviso to section 10(2)(vii) of the Act.
Our answer therefore to the question is that the actual depreciation allowed alone should be taken into consideration in computing the written down value and determining the excess under the second proviso to section 10(2)(vii) of the Act. The question is answered accordingly. In the circumstances of the case, there will be no order as to costs. Counsels fee is assessed at Rs. 200.
Question answered accordingly.