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Commissioner of Income-tax Vs. Jasrup Baijnath Bahety and Sons Pvt. Ltd. - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtKolkata High Court
Decided On
Case NumberIncome-tax Reference No. 37 of 1967
Judge
Reported in[1972]86ITR390(Cal)
ActsIncome Tax Act, 1922 - Section 10(2) and 10(5)
AppellantCommissioner of Income-tax
RespondentJasrup Baijnath Bahety and Sons Pvt. Ltd.
Appellant AdvocateB.L. Pal and ;C.K. Banerjee, Advs.
Respondent AdvocateLeila Sah, amicus curiae
Cases ReferredBurmah Shell Refineries Ltd. v. G. B. Chand
Excerpt:
- p. b. mukharji, c.j. 1. the following question is raised in this income-tax reference under section 66(1) of the indian income-tax act, 1922, for an answer :'whether, on the facts and in the circumstances of the case, in arriving at the written down value for the purpose of computing the profits of the assessee under the second proviso to section 10(2)(vii) of the indian income-tax act, 1922, the sum of rs. 61,553 which had been allowed to the assessee as the initial depreciation under section 10(2)(vi) of the said act was liable to be excluded?''2. the facts giving rise to this question are as follows : the assessee; jasrup baijnath bahety & sons (p.) ltd., is a private limited company which owned an electricity generating plant at khandwa, madhya pradesh. the assessment year under.....
Judgment:

P. B. Mukharji, C.J.

1. The following question is raised in this income-tax reference under Section 66(1) of the Indian Income-tax Act, 1922, for an answer :

'Whether, on the facts and in the circumstances of the case, in arriving at the written down value for the purpose of computing the profits of the assessee under the second proviso to Section 10(2)(vii) of the Indian Income-tax Act, 1922, the sum of Rs. 61,553 which had been allowed to the assessee as the initial depreciation under Section 10(2)(vi) of the said Act was liable to be excluded?''

2. The facts giving rise to this question are as follows : The assessee; Jasrup Baijnath Bahety & Sons (P.) Ltd., is a private limited company which owned an electricity generating plant at Khandwa, Madhya Pradesh. The assessment year under reference is 1956-57 for which the relevant previous year is the calendar year ending on the 31st December, 1955. During the relevant accounting year the assessee carried on the business up to 31st March, 1955. Thereafter, according to agreement with the Madhya Pradesh State Electricity Board the assessee sold most of its plant and machinery as installed at the generating centre for a total sum of Rs. 3,27,689. In the relevant assessment year the question arose what should be considered as the assessee-company's profits within the meaning of the second proviso to Section 10(2)(vii) of the Act. The Income-tax Officer determined the same at Rs. 1,53,569. The assessee was aggrieved by the order of the Income-tax Officer and preferred an appeal before the Appellate Assistant Commissioner. The Income-tax Officer found that the assessee had derived profits assessable under Section 10(2)(vii) of the Income-tax Act on the sale of its plant and machinery in respect of which the depreciation has been allowed, The actual question raised in the reference was not argued expressly before the Income-tax Officer. This particular question in fact cropped up before the Appellate Assistant Commissioner. It will be, therefore, appropriate to set out here the reasons and facts as given by the Appellate Assistant Commissioner in his order.

3. The order of the Appellate Assistant Commissioner makes the following points clear. The sale price that has to be considered in determining the profit under Section 10(2)(vii) would be Rs. 3,20,000. There is no dispute regarding the correctness of the written down value figures arrived at by the Income-tax Officer at Rs. 2,06,767 and the retention of machinery thereof by the appellant at Rs. 32,647 The Appellate Assistant Commissioner then points out that the dispute is with regard to the initial depreciation which the Income-tax Officer took into consideration while working out the written down value of the machinery sold. That is the crux of this controversy. The Appellate Assistant Commissioner then proceeds to say that the written down value determined by the Income-tax Officer at Rs 2,06,767 is after considering the initial depreciation that has been allowed to the appellant at Rs. 61,553 for different years from 1949-50 to 1955-56. It was contended before the Appellate Assistant Commissioner that the initial depreciation could not go to reduce the value of the asset in view of the wording used in Section 10(2)(vi) and the definition of the 'written down value' given in that section. The Appellate Assistant Commissioner was impressed by the words 'which shall, however, not be deduttible in determining the written down value for the purpose of this clause [section 10(2)(vi)]'. He came to the conclusion thatit was only for the purpose of that clause that initial depreciation does not go to reduce the value of the asset but for all other purposes, i.e., for determining the profit or loss under Section 10(2)(vii) the initial depreciation stands on the same footing as any other allowances under Section 10(2)(vi). On that ground and on that reasoning the Appellate Assistant Commissioner dismissed the appeal of the assessee on this point.

4. The assessee then went in appeal before the Tribunal. The contention of the assessee before the Tribunal was that there was a clear contradiction between the provisions of Section 10(2)(vi) and Section 10(5)(b) of the Act, The argument for the assessee was that the general definition of the expression 'written down value' in Section 10(5)(b) could only be interpreted in such a manner as to harmonise with all other sections of the Act. The mainspring of the argument for the revenue before the Tribunal was that in respect of the second proviso to Section 10(2)(vii), which applied in the present case, the meaning of the expression 'written down value' should be taken from the general definition given in Section 10(5)(b) of the Act. The reasons which were found acceptable by the Tribunal may be briefly set out here. The Tribunal decided that the expression 'a further sum' in Section 10(2)(vib) is more in the nature of development rebate which was allowed to new industries as an incentive and, therefore, could not be called depreciation which is normally allowed on account of wear and tear at rates much below the rates prescribed for the 'further sum'. The Tribunal regarded this 'further sum' as being obviously allowed as an item of extraordinary expenditure along with other items of expenditure deductible under Section 10(2). By making this approach the Tribunal pointed out that there was really no contradiction between Section 10(5)(b) and Section 10(2)(vi) because according to the Tribunal by the expression 'all depreciation actually allowed' used in Section 10(5)(b) the legislature qould not have contemplated the words 'further sum' mentioned in Section 10(2)(vi) of the Act. According to the Tribunal this interpretation was the most harmonious interpretation of the two apparently conflicting provisions of law.

5. The net result of the Tribunal's decision was that the Tribunal held that the written down value of the asset should be enhanced by Rs. 61,553 and the profits liable to assessment under the second proviso to Section 10(2)(vii) of the Act had to be correspondingly reduced by the same figure. Thereupon the Commissioner of Income-tax called upon the Tribunal to refer the above question for determination by this court.

6. This apparently simple, question raises many considerations concealed within it. No one appeared for the assessee. Having regard to the importance of the question and its complexity in law we thought it fit to have the assistance of a counsel. We requested Mrs. Leila Seth, learnedcounsel, to act as amicus curiae to assist the court. She has been good enough to render that assistance as amicus curiae. We, therefore, had the full benefit of arguments both for the revenue and for the assessee in coming to our conclusion on this reference.

7. Mr. Pal for the revenue advanced his arguments on the following lines to suggest that the decision of the Tribunal is wrong. In the first place, Mr. Pal argues that under the second proviso to Section 10(2)(vii) the difference between the original cost and the written down value shall be the assessable profits. Then he proceeds to his second step in the argument by suggesting that the written down value under section 10(5)(b) is of general application and is fully applicable to profits under the second proviso to Section 10(2)(vii) of the Income-tax Act, 1922. He advanced this argument next by his contention that there is no warrant for whittling down the scope of Section 10(2)(vi) introduced in 1946 whereby 'a further sum' by way of appreciation was allowed in respect of certain new assets. In other words, he says that the second branch of Section 10(2)(vi) of the Act has no effect on the definition of written down value in Section 10(5)(b) Of the Act. According to Mr. Pal for the revenue it only provides additional allowance which will not be taken into account for calculating depreciation at the prescribed rate for subsequent assessment years. He follows up this logic by two further propositions : one is that there is no justification for curtailing the scope of Section 10(5)(b) of the Act because the legislature while introducing the second branch in 1946 added a proviso to Section 10(5)(b) modifying the written down value in such cases. His second proposition on this branch of the argument is that there is also no justification for considering this second branch of Section 10(2)(vi) introduced in 1946 in the light of Section 10(2)(vib) inserted in 1955. This, in brief, is the substance of the arguments advanced by Mr. Pal for the revenue to criticise the Tribunal's decision as wrong,

8. Section 10 of the Income-tax Act, 1922, is notorious for its numerous sub-sections with still more numerous sub-clauses, historically introduced in different years and presenting an area of confusion and complexity, whose total canvas is difficult to keep in mind and yet which is a need for coming to a correct interpretation of some of its various sub-sections and sub-clauses. This is an area of law where we think it is better to follow the procedure of considering the case law and the authorities in the first instance before coming to our interpretation of the actual clauses, with which this reference is concerned, instead of the usual procedure of putting forth our own interpretation in the first instance and then testing it in the light of the decisions.

9. It will be appropriate to mention straightaway that there are certain authorities which directly support the contention of the revenue in thismatter. They are, therefore, our first consideration in this reference. The decisive authority is of the Bombay High Court in Motor House (Gujarat) Ltd. v. Commissioner of Income-tax, [1963] 48 I.T.R. 419 (Bom.). This was a case which considered Section 10(2)(vi) and the second proviso of Clause l,0(2)(vii) and Section 10(5)(b) of the Act, being the sections with which we, in this reference, are concerned. The central conclusion of this decision is that in computing the written down value, for the purposes of charging to tax, the excess over the written down value up to the actual cost of building, machinery or plant sold by the assesses under the second proviso of Section 10(2)(vii) of the Income-tax Act, 1922, an initial depreciation' allowed under the latter part of Section 10(2)(vi) has to be deducted from the actual cost. The question before the Bombay High Court was almost exactly the same as the question before us. The question before the Bombay High Court was 'whether in computing the written down value for the purposes of the 2nd proviso to Section 10(2)(vii) the initial depreciation is to be deducted ?' The observations by Tambe J., who delivered the judgment for the Division Bench of the Bombay High Court on that reference, are to be found in pages 424 to 427 of that report. After quoting the second proviso of Section 10(2)(vii), the learned judge interprets that proviso to mean that the profits determined would be the sale price minus the written down value, but not exceeding the original cost minus the written down value. Therefore, he was of the view that the la'rger the written down value the smaller would be the ma'rgin of profits. Then after quoting Section 10(5)(b) of the Act, Tambe J. observed as follows at page 425 of the report :

'It would be noticed that the larger the amount of depreciation allowed the smaller will it be of the written down value. Clauses (vi) and (via) of Sub-section (2) of Section 10 of the Act relate to depreciation. It is not in dispute that under these clauses depreciation of 3 kinds is allowed as deduction in the computation of the income of the assessee from business. They are : (1) normal depreciation which is allowed every year till the cost price is wiped out by the amount of depreciation, in other words, till the written down value is reduced to zero. It is. provided in the first part of Clause (vi) ; (2) initial depreciation, which is allowed only in the first year of the new construction or the first year of the use of the new plant or machinery ; this is commonly understood as initial depreciation and is provided in the latter part of Clause (vi) ; (3) additional depreciation provided in Clause (via) which is allowed for the first 5 years of a building which is newly erected or for the first five years of the use of the plant or machinery. Now, according to the department, all these 3 kinds of depreciation were liable to be included in computing the written down value, while according to the assessee-company the amountof initial depreciation was not liable to be included in the computation of the written down value.'

10. This is the whole point of controversy both before the Bombay High Court whose decision We are now noticing and also on this reference before us.

11. The ratio of the Bombay decision appears at pages 426-427 of the report. This may be stated in a few broad propositions. The true interpretation of the latter part of Clause (vi) of Sub-section (2) of Section 10 of the Act and specially of the words 'which shall however not be deductible in determining the written down value for the purposes of this clause' is decisive on this point. The clear terms of the latter part of Clause (vi) read together with Clause (b) of Sub-section (5) of Section 10 of the Act indicate that the initial depreciation will not be deductible in determining the written down value for the purposes of Clause (vi) and that means that it will be deductible in determining the written down value under other sub-sections of Section 10. The point for determination in that case or in the reference before us is not of the written down value under Clause (vi), but the determination of the quantum of the written down value under the second proviso of Clause (vii) of Sub-section (2) of Section 10. The result follows that the latter part of Clause (vi) of Sub-section (2) of Section 10 of the Act does not come in the way of the revenue authorities to include the initial depreciation in determining the written down value under the second proviso of Clause (vii) of Sub-section (2) of Section 10. The plain indication in Clause (b) of Sub-section (5) of Section 10 of the Act in express terms is that the written down value means the actual cost to the assessee less all depreciation actually allowed to him under the Act. It is not in dispute in the present reference, nor was it before the Bombay case, that the initial depreciation had been actually allowed to the assessee nor is it in dispute that initial depreciation is allowed under the Act. It follows, therefore, and we respectfully agree with the Bombay decision on that point, that the provision made for not deducting the initial depreciation in determining the written down value under Clause (vi) is to safeguard the interest of the assessee, in the matter of his getting normal depreciation in the subsequent years and it is for that reason that it has been provided that it should not be deductible in determining the written down value under Clause (vi). The whole object of the scheme under Clause (vii), therefore, appears to be that when a building or machinery or plant is sold, what the revenue seeks to do is to recover back the tax on the amount of depreciation allowed in the event the price obtained by the assessee on sale allows it.

12. We have carefully studied and scrutinised the facts of the Bombay decision and also the reasons and we have come to the conclusion that thatcase is on all fours with the present reference before us. We see no reason to disagree with the conclusion of the Bombay authority.

13. For the revenue reliance was. placed also on the decision of the Madras High Court in Popular Ltd., Madurai v. Commissioner of Income-tax, [1955] 28 I.T.R. 309 (Mad.) where Rajagopalan J., at page 314 (of 28 I.T.R.) interpreting Section 10(2)(vi) of the Income-tax Act, 1922, expressed the view :

'In our opinion, the proper construction to be placed upon this clause is that the further depreciation allowance of 20 per cent. should not be deducted in determining what the written down value is for the purpose of Clause 10(2)(vi), that is the first paragraph thereof, but it could and should be taken into account for any of the other purposes specified in the Act.'

14. The same view was expressed by the Bombay High Court in Asoka Mills Co. Ltd. v. Commissioner of Income-tax, [1958] 33 I.T.R. 377 (Bom.) where again the same opinion was expressed that although initial depreciation was not taken into account for the purpose of determining the written down value of the assessee for any year for the purpose of proviso (c) of Section 10(2)(vi) of the Income-tax Act, the initial depreciation should be taken into account to ascertain whether the aggregate of all allowances with respect to depreciation exceeded the original cost to the assessee of the assets for the obvious reason that initial depreciation did not cease to be depreciation for the purpose of that proviso merely because it was provided that it should not be taken into account in arriving at the written down value. See the observations of Tendolkar J. in that case at pages 381 to 382 (of 33 I.T.R.).

15. The other case which supports the contention of the revenue is to be found in Esthuri Aswathiah v. Commissioner of Income-tax, [1963] 50 I.T.R. 764 (Mya) which is a direct authority on the point to say that the initial depreciation allowed under Section 10(2)(via) should be taken into account in ascertaining the written down value for the purpose of computing the profit under Section 10(2)(vii) of the Income-tax Act, 1922. An attempt was made in that case on behalf of the assessee to distinguish the cas of Popular Ltd. v. Commissioner of Income-tax and Asoka Mills Co. Ltd. v. Commissioner of Income-tax by suggesting that those decisions did not notice the impact of the portions of Section 10(2)(vi) and the expression 'in respect of depreciation' and (2) that if Section 10(2)(vi) only dealt with the depreciation allowances, Clause (e) of the proviso would have mentioned 'the aggregate of allowances provided under the clause'. But the Mysore High Court rejected both these grounds of attempted distinction. Hegde J., delivering the judgment of the Division Bench of the Mysore High Court in that case, observed at pages 7.68-69 (of 50 I.T.R.) as follows :

'Now coming to the main part of Section 10(2)(vi) the words 'in respect of depreciation' not only governs the first part of that clause butalso the second part. It must be remembered that the first part and the second part of that clause are only separated by a colon and not by a full-stop. On a plain reading of Section 10(2)(vi) it is clear that that provision deals with the allowances to be given towards depreciation. Now coming to Clause (c) of the proviso, the proviso had to be worded in the manner it has been done because the legislature wanted to include within that proviso not only the depreciation allowances provided under Section 10(2)(vi) but also the depreciation allowances provided under Clause (via) or under any Act repealed hereby or under the Indian Income-tax Act, 1886. Hence, the ingenious construction tried to be placed by Shri Srinivasan cannot be accepted.'

16. Apart from these authorities on which Mr. Pal for the revenue relies in support of his argument, he has also relied on certain observations of the Supreme Court in Commissioner of Income-tax v. Bipinchandra Maganlal & Co. Ltd., : [1961]41ITR290(SC) appearing in the judgment of Shah J., at page 295 (of 41 I.T.R.) saying :

'In computing the profits and gains of the company under Section 10 of the Act, for the purpose of assessing the taxable income, the difference between the written down value of the machinery in the year of account and the price at which it was sold (the price not being in excess of the original cost) was to be deemed to be profit in the year of account, and being such profit, it was liable to be included in the assessable income in the year of assessment. But this is the result of a fiction introduced by the Act. What in truth is a capital return is by a fiction regarded for the purposes of the Act as income. Because this difference between the price realised and the written down value is made chargeable to income-tax, its character is not altered, and it is not converted into the assessee's business profits. It does not reach the assessee as his profits ; it reaches him as part of the capital invested by him, the fiction created by Section 10(2)(vii), second proviso, notwithstanding. The reason for introducing this fiction appears to be this. Where in the previous years, by the depreciation allowance, the taxable income is reduced for those years and ultimately the asset fetches on sale an amount exceeding the written down value, i.e., the original cost less depreciation allowance, the revenue is justified in taking back what it had allowed in recoupment against wear and tear, because in fact the depreciation did not result. But the reason of the rule does not alter the real character of the receipt. Again it is the accumulated depreciation over a number of years which is regarded as income of the year in which the asset is sold. The difference between the written down value of an asset and the price realised by sale thereof though not profit earned in the conduct of the business of the assessee is notionally regarded as profitin the year in which the asset is sold, for the purpose of taking back what had been allowed in the earlier years.'

17. Against this array of authorities supporting the revenue Mrs. Seth as amicus curiae has placed before us for our consideration certain points of interpretation and approach which we shall now notice.

18. The argument advanced by the amicus curiae is, first that, the word 'depreciation' has a specific connotation which should be emphasized. The real connotation of the word 'depreciation' is 'natural wear and tear'. It really indicates diminished value due to such wear and tear. It is noticeable, for instance, in Section 280 of the English Income Tax Act of 1952, dealing with annual allowance, it uses this expression 'wear and tear'. In the Indian Income-tax Act there is no definition of depreciation.

19. The next step in this argument is that in the scheme of allowance in Sub-clauses (via), (vib) and (vii) of Section 10 of the Indian Income-tax Act, 1922, there is an apparent difference made between 'depreciation' as such and other kinds of 'allowance' on the ground of development rebate in the case of sale. This apparent distinction is clear, according to Mrs. Seth, and follows from a comparison of these different sub-clauses of Section 10. For instance, Sub-clauses (vi) and (via) expressly mention the word 'depreciation'. But Sub-clause (vib) speaks of 'development rebate' and not 'depreciation' and Sub-clause (vii) of Section 10 of the Indian Income-tax Act speaks of the case of sale or discarding, demolition or destruction of any building, machinery or plant. Therefore, it was argued by the amicas curiae that the word depreciation under Section 10(5)(b) should be confined to what is described in Sub-clauses (vi) and (via) as depreciation and not to the cases of. development rebate under Sub-clauses (vib) or to a case of sale under Sub-clause (vii) as in the present reference.

20. There is a good deal of force in the above argument. But the authorities which we nave discussed do not seem to justify acceptance of this argument. The scheme of Section 10(2) of the Indian Income-tax Act, 1922, appears to put all allowances on the same pedestal. The reason for saying so is also plain from the opening words of Section 5 where the meaning appears to be given to different words used only in Sub-section (2) of Section 10 of the Indian Income-tax Act. That being so, the word 'depreciation' in Section 10(5)(b) would seem to include also other allowances Which may not be depreciation in its ordinary connotation.

21. It will also be appropriate to notice the decision in Burmah Shell Refineries Ltd. v. G. B. Chand, Income-tax Officer, Company Circle II(i), Bombay, [1968] 67 I.T.R. 653 (Bom.).which was cited by Mrs. Seth, The ratio of that decision is that prima facie initial depreciation is not to be deducted from the written downvalue for the purposes of computing capital employed in an industrial undertaking for giving relief under Section 15C of the Indian Income-tax Act which was the matter for consideration before that court. It was laid down there that the question whether initial depreciation was so to be deducted was a question of substance and complexity. Kotval C.J., delivering the judgment of the Division Bench in that case, made the following observation at page 663 :

'Where an express provision is made not permitting deduction from written down value, we can hardly hold upon the provisions of Section 10(5) that, notwithstanding that provision, it must be included in the written down value.'

22. The learned Chief Justice went on to make a further observation at page 664 :

'Thus a clear distinction is drawn between the provisions of Clause (vi) and Clause (vii) and the reasons given as to why initial depreciation is taken into account when a capital asset is sold.'

23. Later on, the learned Chief Justice also proceeded to point out at page 665 as follows :

'We cannot, therefore, hold upon the authority of any of these decisions that the construction of either Clause 10(2)(vi) or of Section 10(5) is any different from the one which we have shown on the words of those sections prima facie. We say prima facie expressly because we are not called upon to determine all the questions of interpretation or construction which have been pressed upon us, for the petitioners have come before us against notices under Section 154 of the Income-tax Act, 1961.'

24. As against these observations, there are the two following other observations of the learned Chief Justice at page 663 :

' (1) The provisions of Section 10(2)(vi), second part, must be read along' with those provisions and so far as the initial depreciation is concerned, it is clearly not to be deducted in determining the written down value for the purposes of Clause (vi). Therefore, to that extent the provisions of Section 10(5) must be deemed not to apply to initial depreciation.

(2) We do not think that the provisions of Section 10(2)(vi) can be read so that Section 10(5) would override or control its provisions. On the other hand, it seems to us that a specific provision was made in Section 10(2) because of the special nature of the allowance granted by that clause and the bracketed words are not limited only to that sub-section.'

25. It has been pointed out to us that there are some apparent contradictions in these observations. But it will be needless to pursue them having regard to the view that we have already expressed our conclusion on the authorities discussed. Besides, as Kotval C.J. himself said in that decision that all these observations on the sub-clauses of Section 10(2) really wereobiter as that was not the subject-matter for decision in that Bombay case which was only concerned with what was an error apparent from the record in dealing with a notice under Section 154 of the Income-tax Act, 1961.

26. The only other case to which we shall make a bare reference is the decision of the Supreme Court in Commissioner of Income-tax v. Express Newspapers Ltd., : [1964]53ITR250(SC) where Subba Rao J., at pages 253-54, made the following observations on Section 10(2)(vii) of the Indian Income-tax Act, 1922 :

'We are concerned with the second proviso to Section 10(2)(vii) of the Act. The substantive clause grants a balancing allowance in respect of building, machinery or plant which has been sold or discarded or demolished or destroyed. The allowance represents the excess of the written down value over the sale price. Under the proviso, if the sale price exceeds the written down value, but does not exceed the original cost price, the difference between the original cost and the written down value shall be deemed to be profits of the year previous to that in which the sale takes place ; that is to say, the difference between the price fetched at the sale and the written down value is deemed to be the escaped profits for which the asses-see is made liable to tax. As the sale price is higher than the written down value, the difference represents the excess depreciation mistakenly granted to the assessee . . . The second proviso, therefore, in substance, brings to charge an escaped profit or gain of the business carried on by the assessee. The scope of this proviso cannot be ascertained in vacuum. The conditions for its applicability can be ascertained only in its relation to the other related provisions.'.

27. This explains the concept behind Section 10(2)(vii) of the Income-tax Act, 1922. There is no observation about Section 10(5)(b) of the Income-tax Act, 1922.

28. For these reasons and on the authorities discussed above we hold that, on the facts and circumstances of this case, in arriving at the, written down value for the purpose of computing the profits of the assessee under the second proviso of Section 10(2)(vii) of the Indian Income-tax Act, 1922, the sum of Rs. 61,553 which had been allowed to the assessee as the initial depreciation under Section 10(2)(vi) of the said Act was not liable to be excluded. In other words, we answer the question in the negative and in favour of the revenue.

29. There will be no order as to costs.

T. K. Basu, J.

30. I agree.


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