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Regarding WDV in case of computation of income under Rules 7A, 7B and 8 of the income Tax Rules- recent judgment of Kerala HC- a critique

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Regarding WDV in case of computation of income under Rules 7A, 7B and 8 of the income Tax Rules- recent judgment of Kerala HC- a critique
By: C.A. DEV KUMAR KOTHARI
February 25, 2009

I have gone through the recently reported judgment dated 05.07.2006 of Kerala high Court in case of Parry Agro Industries Ltd  (2007) 293 ITR 99 (Kerala High Court) [=2009 TMI - 32463 - KERALA High Court].

Regarding written down value of assets used in tea business, the court has held that entire amount of depreciation, considered against composite income is to be deducted. This is wrong and is against settled legal position that only 40% of notional depreciation taken against composite income is to be deducted.

Unfortunately, it appears that relevant provision of section 43(6), boards circulars, and judgments of courts were not placed before the court by the counsels.

The proposition that only 40% depreciation should be deducted was first time claimed by me and it has been allowed in many cases by A.O., Commissioners and Tribunal before whom I appeared.  The same has also been allowed by the Calcutta  High Court. This is followed in West Bengal and Assam. Now there is no dispute.

The Revenue did not challenge the first judgment of Calcutta High Court on this issue and challenged only second judgment. The SLP of the revenue was  dismissed by the Supreme Court for lack of any merit in case of Suman Tea (argued by me before Tribunal in both cases).

Thus, I request you to kindly take steps that your clients do not suffer due to a wrong decision which is passed contrary to settled legal position.

In case you need further feedback, kindly inform me as I am interested to see justice and to see that we pay correct tax as per law-neither less nor more.

A brief write-up on the issue is appended below.

In this regard I would also like to mention that depreciation consequently allowed by the Agricultural ITO is not to be deducted from WDV irrespective of fact whether there is any agricultural income tax or not. An amendment on this issue will not be maintainable, that's why no amendment has taken so far on this issue though every year proposal is being sent for amendment by Calcutta wing of I.T. Department.

I am also attaching another write-up in which I have expressed view that the decision of Calcutta HC, since approved by the SC should be followed in Kerala also because the Kerala HC has not taken into consideration settled legal position.

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Depreciation 'written down value' -a recent judgment rendered by the Kerala High Court is contrary to settled legal position apparently causing miscarriage of justice due to failure of counsels to point out relevant provisions and settled legal position.

Summary- it is well settled that 'written down value' means actual cost minus depreciation actually allowed under the Income -tax Act. There should not be any dispute on such proposition in view of several judgments of the Supreme Court.  In case of tea plantation companies also manufacturing tea, it is accepted by the Revenue and well settled legal position that WDV means actual cost minus 40% of notional depreciation taken into consideration while computing composite income to determine chargeable income under Rule 8.  This proposition is also well accepted in various circulars issued by the board, admitting that in case of tea company only 40% of total development rebate, development allowance, and investment allowance is allowed. Therefore, first of all the revenue should not have raised dispute on this issue before the Kerala High Court. In any case having raised such undesirable dispute, at least the Counsel for the Revenue should have pointed out settled legal position and conceded on the matter. Unfortunately the counsel of the assessee also failed to point out relevant provision section 43(6) and settled legal position.

This caused rendition of a judgment contrary to settled legal position. The judgment deserves to be challenged by the assessee by way of review petition before the High Court as well as by appeal before the Supreme Court, in case the High Court do not admit the review petition.  

Written down value:

Broadly speaking the term 'written down value', as defined in section 43(6) means the actual cost of a depreciable asset minus depreciation actually allowed by the assessing officer while computing taxable income under the provisions of the income-tax Act, 1961 and earlier enactments for computation of income for the purpose of income tax levied by the Central Government on income chargeable to the Central income-tax.

It is now very well settled that the key words 'actual cost' and `actually allowed' are the pivot of the meaning of 'written down value'. Any notional allowance or any allowance merely allowable will not be deducted from the actual cost or WDV unless benefit of depreciation has been actually given effectively in the assessment of taxable income by the Assessing Officer it will not be deducted.

Earlier Supreme Courts judgments about WDV:

About WDV under section 43(6) the Supreme Court has rendered several judgments. It has been held that the key word in the definition of WDV is "actually". It is the antithesis of that which is merely speculative, theoretical or imaginary. "Actually' contra-indicates a deeming construction of the word "allowed" which qualifies. The connotation of the phrase "actually allowed" is thus limited to depreciation actually taken into account or granted and given effect to, i.e. debited by the Income -tax Officer, against the incoming of the taxable business in computing the taxable income of the assessee; it cannot be stretched to mean "notionally allowed" or merely allowable on a notional basis.

Madeva Upendra Senai V UOI - 2008 -TMI - 6436 - SUPREME Court

When only a portion of gross income, or global income is taxable, then depreciation actually allowed will be only to the extent and in proportion of taxable income comprised in the gross income or global income and not the full amount of depreciation considered while computing gross income or global income. - CIT V Nandlal Bhandari Mills Ltd (1966) 60 ITR 173 (SC), Hukumchand Mills Ltd V CIT (1967) 63 ITR 232 (SC). 

Depreciation allowed or merely allowable during tax holiday period by State Government under state tax Act was also held to be not depreciation actually allowed under Income-tax act, and therefore such depreciation was not to be deducted from written down value -CIT V Dharampur Leather Co. Ltd (196) 60 ITR 165 (SC).

Earlier Judgments of Calcutta High Court on the same issue:

First judgment - accepted by the revenue:

Applying the law laid down in earlier mentioned judgments and many other judgments of the Supreme Court first the Tribunal and then on appeal by revenue the Calcutta High Court in CIT v. Suman Tea & Plywood Industries Pvt. Ltd. (1993) 204 ITR 719(Cal.) held that when rule 8 is applied for determination of chargeable income from cultivation, manufacture and sale of tea only 40% of total depreciation notionally taken into consideration against composite income (comprising of exempted agricultural income-60% and taxable  business income -40%) is actually allowed under the income tax and therefore, only 40% of such depreciation is  to be deducted from actual cost to determine the written down value.  The Hon'ble High Court had relied on various judgments of the Supreme Court on the issue of written down value.  In this case, the revenue had not filed any appeal before the Supreme Court and therefore, the judgment attained finality. In view of the judgment of the Supreme Court in the case Berger Paints India Limited Vs. CIT - 2008 -TMI - 6139 - SUPREME Court, in such circumstances the revenue should follow the ruling and should not also appeal against orders or judgments of other Tribunal or high Court in which ratio laid down in earlier judgment by a High Court is followed as because on acceptance of a judgment or by not filing an appeal the revenue is bound to follow such judgment all over India, because the income-tax Act is a central legislation.

The above said first judgment of Calcutta High Court was again followed in the case of same assessee vide CIT v. Suman Tea & Plywood Industries P. Ltd. 226 ITR 34 (Cal.).  In relation to determination of written down value u/s 43(6), which was relevant for the purpose of computing balancing charge or terminal depreciation as the assessee had sold the tea estate.  The department had preferred an appeal against this judgment.  However, the Honorable Supreme Court for delay as well as lack of any merit dismissed the same.

Therefore, it is clear that the law is laid down by the Calcutta High Court in case of Suman Tea had attained finality when the department did not file any appeal against the first judgment (204 ITR 719) and again when the Supreme Court dismissed the Revenue's appeal against the second judgment (226 ITR 34).

Therefore these judgments of the Calcutta High Court have attained finality and are binding all over India.

Settled legal position should not be challenged:

In view of judgment of the Supreme Court In Berger Paints India Limited Vs. CIT - 2008 -TMI - 6139 - SUPREME Court, wherein the Supreme Court held that if the Revenue has not challenged the correctness of the law laid down by any high Court and has accepted it in the case of one assessee, then it is not open to the Revenue to challenge its correctness in the case of other assessees without 'just cause'.

In this case the Supreme Court noticed that the Revenue has accepted the judgment of Gujarat High Court in the case of Lakhanpal National Limited Vs. ITO (1986) 162 ITR 240 (Gujarat) which was followed by Bombay High Court, Madras High Court and Special Bench of Tribunal, Delhi. It was also noticed that the Department has not challenged the decision of ITAT Special Bench. About the judgment of Bombay and Madras High Courts also the court noted that it appears to have been accepted by the Revenue and have not been challenged before the Supreme Court at all. In as much as this fact was asserted before the Supreme Court by the assessee and it was not challenged in the counter affidavit filed by the Revenue. Therefore, the Supreme Court following its earlier judgment in case of Union of India Vs. Kaumudini Narayan Dalal (2001) 249 ITR 219 (SC), CIT V. Narendra Doshi - 2008 -TMI - 6071 - SUPREME Court and CIT v. Shivsagar Estate (2002) 257 ITR (SC) held that the Revenue cannot dispute the correctness of the judgment of Gujarat High Court in case of another assessee.

In view of the above position, it appears that filing of an appeal or reference petition against order of Tribunal on an issue already settled by other high court was wrong.

Recent Judgment of Kerala High Court:

CIT v. PARRY AGRO INDUSTRIES LTD [2007] 293 ITR 99(Ker.) [=2009 -TMI - 32463 - KERALA High Court]

In this case there were two issues relating to depreciation allowance, before the high Court, the first one was regarding actual user of asset. As there was no finding of user, the matter was restored to the Assessing officer.

The second issue was about determination of WDV of machinery used in tea industry, where income was computed as per Rule 8. The court held as follows:

a. Rule 8 of the Income-tax Rules, 1962, deals with two types of income, i.e., agricultural income and non-agricultural income

b. Agricultural income and business income are considered in the ratio of 60: 40 of the total income.

c. After computing the total income, the same has to be bifurcated in the above manner.

d. After computing the total income, the same has to be bifurcated in the ratio of 60:40 and the total income would necessarily mean the net income and not gross income.

e. The income from tea estate is computed applying sections 28 to 43C, and when computing the income, depreciation of 100 per cent. is allowed under section 32 though for the purpose of charging of income under the Income-tax Act, rule 8 is applied and the income so computed is apportioned in ratio of 40%.

f. The depreciation actually allowed against the assessee was not 40 per cent. but 100 per cent. which was to be considered for the purpose of written down value.

A mistake of counsel in the above case:

As discussed earlier, in view of settled legal position, even the counsel appearing fro the revenue should have, in all fair ness pointed out relevant provisions and case laws. In any case the counsel of assessee must have pointed out the same. On reading of the reported judgment it appears that in the above case, all   counsels had failed to draw attention of the Hon'ble Court on the following issues: -

a. Meaning of  "Written down value" - as per section 43(6)- according to which depreciation, which is 'actually allowed' under the Income -tax Act can be deducted form cost and any notional depreciation taken into computation cannot be deducted.

b. Board's circulars issued in connection with development rebate, development allowance and investment allowance in which it has consistently been held by the Board that in case of tea companies where rule 8 applies only 40% of total composite income, is business income chargeable under the Act, the rebate or allowance actually allowed against business income under income-tax act is only 40% and therefore, there will be sufficient compliance if relevant reserve is created equal to 40% of rebate or allowance claimed.

c. Judgments of Calcutta High Court in CIT v. Suman Tea & Plywood Industries Pvt. Ltd. (1993) 204 ITR 719(Cal.) and 226 ITR 34 (Cal), as discussed earlier.

d. The fact that the revenue did not challenge the judgment of Calcutta high Court (204 ITR 719).

d. Fact that the revenue's Special leaves Petition (SLP) was dismissed by the Supreme Court for lack of any merit, when matter against second judgment was in appeal on behalf of the Revenue.

e. Any judgment of the Supreme Court and any other High Court were also not pointed out (so far as appears from reported judgment)

Kerala High Court's judgment is contrary to settled legal position and the law of land:

As discussed above non of the counsels who appeared in case of Parry Agro Industries have not pointed out settled legal position   and therefore, apparently, the Hon'ble High Court could not consider the same and therefore, rendered a decision which is contrary to the settled legal position.

Computation- Deductions under chapter VIA Vis a vis WDV:

It appears that honorable Kerala high Court has, considered that as full amount of depreciation is taken into consideration while computing gross or composite income from sale of tea cultivated and manufactured by assessee therefore such full amount should be deducted from WDV. The court applied general principal laid down in CIT V C.W.S. (India) Ltd. (2000) 246 ITR 278 about computation of income by deduction of specified deduction in Chapter IV (section 28-43D) and Chapter VIA (section 80C - 80VV). However, in absence of reference by counsels, it appears that section 43(6), which is specifically related to the issue, was not at all considered. Furthermore judgments of the Supreme court in cases of Nandlal Bhandari Mills and Hukumchand Mills (supra.) which are specifically in relation to Rules governing computation of global income and finding out taxable income which was only a portion of global income were not considered. The provisions considered therein are similar to the Rule 8 which was earlier considered by Calcutta high Court and now by the Kerala high Court.  

In view of the above discussion, it is clear that the judgment of Kerala High Court needs to be reconsidered and it is hoped that if so applied, the Hon'ble High Court may rectify its own judgment after taking note of the settled legal position as discussed above. In any case the assessee should appeal against the Judgment.

Applicability of rule in case of Rubber and Coffee Plantations:

Rules 7A and 7B were inserted in the Income Tax Rules w.e.f. 01.04.2002 to provide for computation of chargeable income from activity of cultivation and manufacture of rubber and coffee. These rules are, on the same lines as rule 8 except that proportion of taxable income is different. Therefore, what is laid down in relation to Rule 8 is principally applicable in case of application of Rule 7A for Rubber and Rule 7B for coffee. Therefore, the judgment of the Kerala high Court becomes more important as in the state of Kerala  Rubber and Coffee are also major plantations.

 
By: C.A. DEV KUMAR KOTHARI - February 25, 2009
 
 
 

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