1. This income-tax reference at the instance of the Commissioner of Income-tax relates to the assessment years 1958-59, 1959-60 and 1960-61, in the case of M/s. Har Prasad & Co. P. Ltd. The question of law which has been referred for the decision of this court is :
'Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that no depreciation was disallowable under section 10 (4A) of the Indian Income-tax Act, 1922, on the assets provided in the residence of the managing director of the assessed-company ?'
2. M/s. Har Prasad & Co. (P.) Ltd., the assessed, were the managing agents of M/s. Escorts Ltd., a public limited company. THe assessed-company owned a house at Jor Bagh which was partly used as the guest house for the company's guests and partly as the residence of its managing director, Shri H. P. Nanda. This house was furnished with electrical apparatus, air-conditioner, fans, furniture and fixtures, cutlery and crockery. The question in this reference is whether the assessed-company was entitled to claim depreciation in respect of these assets belonging to it but provided in the house above mentioned which was being used as the guest house the residence of the managing director.
3. The ITO disallowed the depreciation in respect of the assets referred to above for all the three years in question In respect of the assets referred to above for all the three years in question. In doing so he followed the assessment order for the year 1956-57. On appeal, the AAC confirmed these assessment orders following his own order for the assessment year 1956-57.
4. On further appeal, the Tribunal took the view that since the assets were admittedly the properties of the appellant-company, even assuming that they were being used by the directors for their personal purposes, so far as the assessed was concerned they should be treated as having been used wholly and exclusively for the purposes of the company's business in view of the fact that the company had undertaken to provide furnished accommodation to its directors. In this view of the matter the Tribunal was of opinion that there was no justification for disallowing any part of the depreciation on the assets belonging to the company.
5. The Commissioner is aggrieved by the above order of the Tribunal. It is seen from the assessment order passed for the assessment year 1956-57 that the disallowance in question had been made by the ITO relying on the provisions of s. 10 (4A) of the Indian I. T. Act, 1922. In that assessment year, the ITO had disallowed the entire depreciation in respect of the assets in question. He had pointed out in the assessment order that these assets had originally belonged to the wife of the managing director who is also a director of the company and that these assets had been sold to the company by her on April 30, 1956, for Rs. 34,465. He referred to the nature of the assets and also referred to the fact that the assessed was a private limited company comprising of three shareholders of whom Mr. and Mrs. Nanda, between themselves, owned the majority of shares and, thereforee, had a substantial interest in the company within the meaning of s. 2 (6C) (iii) the Act. He pointed out that since these assets were used by the two directors in their place of residence and the company did not derive any benefit directly by acquiring these assets and also the possession of such costly assets were not warranted by the legitimate business needs of the company, the depreciation had to be disallowed under s. 10 (4A). Again, while discussing the matter, the AAC in his order for the assessment year 1956-57, also referred to the provisions of s. 10 (4A). From this order, it appears that the total depreciation claimed by the assessed was of Rs. 40,122 (sic) and apparently included items other than those that had been transferred by Mrs. Nanda to the company. However, the AAC was also of opinion that the furniture and furnishings was of a very luxurious nature and was excessive and an allowance in respect thereof was unreasonable having regard to the legitimate business needs of the company and the profits derived by the company there from. The grievance of the Commissioner is that while both the ITO and the AAC have proceeded on the basis of the specific provision contained in s. 10 (4A) of the 1922 Act the Appellate Tribunal has given relief without considering the provisions of this section altogether. This explains the reason why the question referred to us has been framed in the manner set out earlier when the Commissioner applied to this court under s. 66 (2) of the Indian I. T. Act, 1922.
6. Mr. Bishamber Lal, learned counsel appearing for the respondent submitted that the Tribunal had decided the matter for the assessment year 1956-57, after obtaining a remand report from the ITO. He drew our attention to the order of the Appellate Tribunal in the appeal for the assessment year 1956-57, which indicates that certain data had been obtained on remand. But this order is not very helpful for the present purpose. So far as the question of depreciation is concerned, it proceeds on the same basis as the orders passed for the assessment years which form the subject-matter of the present reference. The Tribunal has merely proceeded on the footing that since the building is used by the managing director is accordance with a contract of service under which the company was bound to provide him with furnished accommodation the entire depreciation was admissible, treating the assets as laid out wholly and exclusively for the purposes of the company's business.
7. Apart from the provisions of s. 10 (4A), there is a plausibility about the line of reasoning taken by the Tribunal. If there had not been any such statutory provision perhaps the view taken by the Tribunal that even though the property and the furniture were made use of by the managing director for his personal purposes so far as the company is concerned, the entire property and the assets should be treated as wholly and exclusively laid out for the purposes of the company's business may be correct. Butcl.(b) of s. 10 (4A) specifically lays down that in the computation of the profits and gains of the company the provisions of sub-s. (2) of s. 10 shall not be deemed to authorise the making of any allowance in respect of any assets of the company used by any person referred to in clause (a)-there is no controversy that in the present case the managing director and the director fulfill this description-either wholly or partly for his own purposes or benefit. if in the opinion of the ITO any such allowance is excessive or unreasonable having regard to the legitimate business needs of the company and the benefit derived by or accruing to it there from. In the present case, the ITO and the AAC have given a finding that an allowance in respect of the assets in question would be excessive or unreasonable within the meaning of this sub-section. The Tribunal does not appear to have adverted to the terms of this clause at all and to that extent its conclusion in the matter is vitiated. Mr. Bishamber Lal pointed out that the value of the use of these assets has been included in the total income of the managing director as a perquisite. But this is not of much help, for, the Explanationn to s. 10 (4A) provides that this sub-section would apply notwithstanding that any amount disallowed under this sub-section is included in the total income of any person referred to in the clause.
8. For the above reasons we have come to the conclusion that the Tribunal has committed an error of law in disregarding the provisions of s. 10 (4A) in coming to a conclusion in the matter. Nothing that we have said should be considered as a finding that the provisions of this clause apply nor do we say anything as to whether the finding of the ITO or the AAC in this regard are correct or not. We are of the opinion that the Tribunal committed an error in ignoring the provisions of s. 10 (4A) while considering the issue of depreciation in respect of these assets. We, thereforee, think that the the Tribunal should decide the matter taking into account also the provisions of this clause and then arrive at a conclusion as to the allow ability or otherwise of the depreciation in whole or in part. We, thereforee, answer the question which has been referred to us in the above terms by holding that the Tribunal was not right in ignoring the provision of s. 10 (4A) of the Act. This answer will mean that the Tribunal would go into the matter afresh and consider whether the depreciation is allowable in whole or in part in the light of s. 10 (4A). In the circumstances, we make no order as to costs.