DEPRECIATION: DEEMING NOTIONAL DEPRECIATION AS DEPRECIATION ACTUALLY ALLOWED IS AGAINST WELL SETTLED LEGAL POSITION AND CAN BE CONSIDERED CONTRARY TO GENERAL LAW OF TAX ON REAL INCOME.

[C.A. DEV KUMAR KOTHARI]

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. However we find some provisions in which it is deemed that some amount of depreciation is considered as deductible from actual cost to determine WDV, although no such allowance has actually been allowed against taxable income under the income-tax Act,1961.

Some of the provisions are as follows:

Sub-section (6) of section 10A which reads as follows:

Special provision in respect of newly established undertakings in free trade zone, etc.

6) Notwithstanding anything contained in any other provision of this Act, in computing the total income of the assessee of the previous year relevant to the assessment year immediately succeeding the last of the relevant assessment years, or of any previous year, relevant to any subsequent assessment year,—

(iv) in computing the depreciation allowance under section 32, the written down value of any asset used for the purposes of the business of the undertaking shall be computed as if the assessee had claimed and been actually allowed the deduction in respect of depreciation for each of the relevant assessment year.

Sub-section (6) of section 10B reads as follows:

Special provisions in respect of newly established hundred per cent export-oriented undertakings

(6) Notwithstanding anything contained in any other provision of this Act, in computing the total income of the assessee of the previous year relevant to the assessment year immediately succeeding the last of the relevant assessment years, or of any previous year, relevant to any subsequent assessment year,—

(iv) in computing the depreciation allowance under section 32, the written down value of any asset used for the purposes of the business of the undertaking shall be computed as if the assessee had claimed and been actually allowed the deduction in respect of depreciation for each of the relevant assessment year

Sub-section (8) of section 10AA adopts provisions from S.10A(6) and the S.10AA (8) is reproduced below:

Special provisions in respect of newly established Units in Special Economic Zones.

8) The provisions of sub-sections (5) and (6) of section 10A shall apply to the articles or things or services referred to in sub-section (1) as if—

(a) for the figures, letters and word "1st April, 2001", the figures, letters and word "1st April, 2006" had been substituted;

(b) for the word "undertaking", the words "undertaking, being the Unit" had been substituted.

However, in case of S.10BA we do not notice similar deeming provision.

In section 10C we find subsection (4) in this regards and that reads  as follows:

Special provision in respect of certain industrial undertakings in NorthEastern Region.

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4) Notwithstanding anything contained in any other provision of this Act, in computing the total income of the assessee of any previous year relevant to any subsequent assessment year,—

(i) section 32, section 35 and clause (ix) of sub-section (1) of section 36 shall apply as if deduction referred to therein and relating to or allowable for any of the relevant assessment years, in relation to any building, machinery, plant or furniture used for the purposes of the business of the industrial undertaking in the previous year relevant to such assessment year or any expenditure incurred for the purposes of such business in such previous year had been given full effect to for that assessment year itself and, accordingly, sub-section (2) of section 32, sub-section (4) of section 35 or the second proviso to clause (ix) of sub-section (1) of section 36, as the case may be, shall not apply in relation to any such deduction;

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(iv) in computing the depreciation allowance under section 32, the written down value of any asset used for the purposes of the business of the industrial undertaking shall be computed as if the assessee had claimed and been actually allowed the deduction in respect of depreciation for each of the relevant assessment years.

Explanation (6) to Section 43 which was inserted By the Finance Act,2008 which was inserted w.r.e.f.  01.04.2003 reads as follows:

Explanation 6.—Where an assessee was not required to compute his total income for the purposes of this Act for any previous year or years preceding the previous year relevant to the assessment year under consideration,—

(a) the actual cost of an asset shall be adjusted by the amount attributable to the revaluation of such asset, if any, in the books of account;

(b) the total amount of depreciation on such asset, provided in the books of account of the assessee in respect of such previous year or years preceding the previous year relevant to the assessment year under consideration shall be deemed to be the depreciation actually allowed under this Act for the purposes of this clause; and

(c) the depreciation actually allowed under clause (b) shall be adjusted by the amount of depreciation attributable to such revaluation of the asset.

CLARIFICATORY AMENDMENTS

Clarification regarding definition of written down value under section 43(6)

Clause (ii) of sub-section (1) of section 32 provides that depreciation shall be allowed at the prescribed percentage on the Written Down Value (WDV) of any block of assets. Sub-clause (b) of clause (6) of section 43 provides that written down value in the case of assets acquired before the previous year means the actual cost to the assessee less all depreciation actually allowed to him under the Income-tax Act.

Some persons were exempt from tax and, therefore, not required to compute their income under the head "profits and gains of business or profession". Upon withdrawal of exemption, such persons became liable to income-tax and hence, required to compute their income for income-tax purposes. In this context, dispute has arisen on the basis for allowing depreciation under the Income-tax Act in respect of assets acquired during the years when it enjoyed exemption.

The Income-tax Appellate Tribunal has held that since there was no liability to tax, there was no occasion to compute the income of such person under the provisions of the Income-tax Act. Therefore, the depreciation provided in the books in the years when the income was exempt can not be treated as the depreciation "actually allowed". Accordingly, it was held that the actual cost of the asset was the written down value for the purposes of claiming depreciation under the Income-tax Act in the previous year in which such person first ceases to enjoy the income-tax exemption. This interpretation is not in conformity with the intent and purpose of the provisions of depreciation. Accordingly, it is proposed to amend section 43(6) to provide that,—

(a) the actual cost of an asset shall be adjusted by the amount attributable to the revaluation of such asset, if any, in the books of account;

(b) the total amount of depreciation on such asset provided in the books of account of the assessee in respect of such previous year or years preceding the previous year relevant to the assessment year under consideration shall be deemed to be the depreciation actually allowed under the Income-tax Act for the purposes of section 43(6);

(c) the depreciation actually allowed as above shall be adjusted by the amount of depreciation attributable to such revaluation.

This amendment will take effect retrospectively from 1st April, 2003 and will accordingly apply in relation to assessment year 2003-04 and subsequent assessment years.

[Clause 10]

Thus this amendment is to provide that in some circumstances depreciation provided in books of account against actual cost, will be deemed to have been actually allowed and deducted to determine WDV. However, this explanation has very limited scope and purpose to serve. By writing back depreciation in books of account, one can claim actual cost as WDV when he was not required to submit return and compute income for the purpose of the I.T.Act.  

Relevant judgments on S. 32, 43(6) when  Rule of apportionment of income  is applied:

CIT, Dibrugarh versus Doom Dooma India Ltd. 2009 -TMI - 32437 - SUPREME COURT  

CIT v. Suman Tea & Plywood Industries Pvt. Ltd. (1993) 204 ITR 719(Cal.) - accepted by revenue, appeal was not filed.

CIT V Suman Tea and Plywood industries P. Ltd. 226 ITR 34 (Cal)- SLP of  revenue was dismissed for lack of merit and delay both. In these judgments the following were considered:

Madeva Upendra Senai V UOI 1974 -TMI - 6436 - (SUPREME Court).

CIT V Nandlal Bhandari Mills Ltd 1965 -TMI - 49240 - (SUPREME Court), Hukumchand Mills Ltd V CIT 1966 -TMI - 39897 - (SUPREME Court). 

CIT V Dharampur Leather Co. Ltd 1965 -TMI - 49238 - (SUPREME Court).

CIT  v. Willamson Financial Services and Others - (2008) 297 ITR 17(SC) on the issue of deductions under Chapter VIA in case of tea income computed under Ruled 8.

Parry Agro Industries Ltd  2006 -TMI - 32463 - (KERALA High Court) - took a contrary view because  Boards Circulars in relation to tea companies, and  judgments of Calcutta high Court were not referred to and held that total amount of depreciation shall be deducted from WDV. This is now no longer good law in view of recent judgment of the Supreme Court.

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.

Definition meaning  of WDV

For a ready reference  meaning/ definition of WDV as per S. 43 (6)  is reproduced below with high lights and catch words:

Definitions of certain terms relevant to income from profits and gains of business or profession.

43. In sections 28 to 41 and in this section, unless the context otherwise requires⁷—

(6) "written down value" means—

(a) in the case of assets acquired in the previous year, the actual cost to the assessee;

(b) in the case of assets acquired before the previous year, the actual cost to the assessee less all depreciation actually allowed⁴¹ to him under this Act, or under the Indian Income-tax Act, 1922 (11 of 1922), or any Act repealed by that Act, or under any executive orders issued when the Indian Income-tax Act, 1886 (2 of 1886), was in force:

[Provided that in determining the written down value in respect of buildings, machinery or plant for the purposes of clause (ii) of sub-section (1) of section 32, "depreciation actually allowed" shall not include depreciation allowed under sub-clauses (a), (b) and (c) of clause (vi) of sub-section (2) of section 10 of the Indian Income-tax Act, 1922 (11 of 1922), where such depreciation was not deductible in determining the written down value for the pur-poses of the said clause (vi);]

[(c) in the case of any block of assets,—

(i) in respect of any previous year relevant to the assessment year commencing on the 1st day of April, 1988, the aggregate of the written down values of all the assets falling within that block of assets at the beginning of the previous year and adjusted,—

(A) by the increase by the actual cost of any asset falling within that block, acquired during the previous year;

(B) by the reduction of the moneys payable in respect of any asset falling within that block, which is sold or discarded or demolished or destroyed during that previous year together with the amount of the scrap value, if any, so, however, that the amount of such reduction does not exceed the written down value as so increased; and

⁴⁴[(C) in the case of a slump sale, decrease by the actual cost of the asset falling within that block as reduced—

(a) by the amount of depreciation actually allowed to him under this Act or under the corresponding provisions of the Indian Income-tax Act, 1922 (11 of 1922) in respect of any previous year relevant to the assessment year commencing before the 1st day of April, 1988; and

(b) by the amount of depreciation that would have been allowable to the assessee for any assessment year commencing on or after the 1st day of April, 1988 as if the asset was the only asset in the relevant block of assets,

so, however, that the amount of such decrease does not exceed the written down value;]

(ii) in respect of any previous year relevant to the assessment year commencing on or after the 1st day of April, 1989, the written down value of that block of assets in the immediately preceding previous year as reduced by the depreciation actually allowed in respect of that block of assets in relation to the said preceding previous year and as further adjusted by the increase or the reduction referred to in item (i).]

Explanation 1.—When in a case of succession in business or profession, an assessment is made on the successor under sub-section (2) of section 170 the written down value of [any asset or any block of assets] shall be the amount which would have been taken as its written down value if the assessment had been made directly on the person succeeded to.

[Explanation 2.—Where in any previous year, any block of assets is transferred,—

(a) by a holding company to its subsidiary company or by a subsidiary company to its holding company and the conditions of clause (iv) or, as the case may be, of clause (v) of section 47 are satisfied; or

(b) by the amalgamating company to the amalgamated company in a scheme of amalgamation, and the amalgamated company is an Indian company,

then, notwithstanding anything contained in clause (1), the actual cost of the block of assets in the case of the transferee-company or the amalgamated company, as the case may be, shall be the written down value of the block of assets as in the case of the transferor-company or the amalgamating company for the immediately preceding previous year as reduced by the amount of depreciation actually allowed in relation to the said preceding previous year.]

[Explanation 2A.—Where in any previous year, any asset forming part of a block of assets is transferred by a demerged company to the resulting company, then, notwithstanding anything contained in clause (1), the written down value of the block of assets of the demerged company for the immediately preceding previous year shall be reduced by the ⁴written down value of the assets] transferred to the resulting company pursuant to the demerger.

Explanation 2B.—Where in a previous year, any asset forming part of a block of assets is transferred by a demerged company to the resulting company, then, notwithstanding anything contained in clause (1), the written down value of the block of assets in the case of the resulting company shall be the ⁴⁹[written down value of the transferred assets of the demerged company immediately before the demerger.

Explanation 3.—Any allowance in respect of any depreciation carried forward under sub-section (2) of section 32 shall be deemed to be depreciation "actually allowed".

Explanation 4.—For the purposes of this clause, the expressions "moneys payable" and "sold" shall have the same meanings as in the Explanation below sub-section (4) of section 41.

Explanation 5.—Where in a previous year, any asset forming part of a block of assets is transferred by a recognised stock exchange in India to a company under a scheme for corporatisation approved by the Securities and Exchange Board of India established under section 3 of the Securities and Exchange Board of India Act, 1992 (15 of 1992), the written down value of the block of assets in the case of such company shall be the written down value of the transferred assets immediately before such transfer.]

Explanation 6.—Where an assessee was not required to compute his total income for the purposes of this Act forany previous year or years preceding the previous year relevant to the assessment year under consideration,—

(a) the actual cost of an asset shall be adjusted by the amount attributable to the revaluation of such asset, if any, in the books of account;

(b) the total amount of depreciation on such asset, provided in the books of account ofthe assessee in respect of such previous year oryears preceding the previous year relevant to the assessment year underconsideration shall be deemed to be the depreciation actually allowed under this Act for the purposes of this clause; and

(c) the depreciation actually allowed under clause (b) shall be adjusted by the amount of depreciation attributable tosuch revaluationof the asset.

From reading of the above provision with relevant highlights it is seen that:

As per beginning of the section 43 there is a definition which is subject to contextual requirement. However, sub-section (6) which is about WDV, actually gives a meaning of the term. Therefore, the meaning of WDV as given in S. 43(6) is to be strictly interpreted and it can be said that it is not subject to contextual requirements. The portions which are highlighted and which are self explanatory are not discussed in details and crux of the subject matter is discussed in this paragraph.

From the actual cost only depreciation actually allowed is to be deducted in all cases where a computation is made under the income-tax Act. Even in case of succession, merger, demerger etc. the WDV in hands of previous owner / transferor is considered as WDV in hands of new owner/ transferee. The concept of 'actually allowed' is similarly applicable in case of any asset prior to 01.04.1988 and in case of block of assets from 01.04.1988.The explanations are in respect of change in ownerships as specified  legal consequences and specified circumstances. In other cases these are not applicable. In case of sale of assets by previous owner to new owner (purchaser) the actual cost of the asset to the new owner shall be the WDV in first year and not the WDV in hands of transferor who sold the asset. In this regard it is also worth to mention that actual sale price shall be deducted from the WDV of asset/ block of asset in hands of the previous owner and on that basis, short-term capital gains will be taxable in his hands. Therefore, in case of sale of assets by one person to other, the revenue will have no justification to blame that the price charged is excessive and therefore the A.O. should not exercise his discretion to re determine actual cost of assets in hands of buyer.     

The Explanation 6 provides an exception and states that in some cases depreciation not actually allowed will also be deducted from actual cost to determine WDV. This Explanation was inserted vide the Finance Act, 2008 w.r.e.f.01.04.2003 that is assessment year 2003-04. However, this is applicable only in cases where the assessee was not required to compute his income for the purposes of the income tax act,1961. And not in other cases. Where an assessee has filed return of loss or return of income not taxable or below tax free limit or where a return is filed to claim refund or in cases where a return is required to be filed, this explanation will not be applicable because in such cases the assessee is required to compute his income for the purposes of the Act. Even when income is exempt, assessee who are required to file return are required to compute income, and therefore this explanation will not be applicable. Therefore, in practical manner this explanation will be applicable only in case of low income earner individuals , HUF, BOI, AOP who are not required to file return where income is below threshold limit. In such cases also if depreciation is not provided in books of account then any depreciation shall not be deductible to determine WDV.   Even if deprecation was provided in accounts in earlier years, one has option to write it back and state the assets at actual cost to avoid deduction of notional depreciation. For example suppose a professional person has started practice, his earnings are below threshold basic exemption. He is not required to file return of income for first three years. Therefore, he is not required to compute his income for the purpose of the Act.  He does not provide depreciation in books of account and state the fixed assets like furniture, office space, office equipments, books etc. at actual cost. Therefore, in fourth year when he is required to file return of income and compute income, he can claim depreciation on actual cost of assets. Suppose he provided depreciation in books of account in some year, then he can write back such depreciation to state the assets at actual cost.   

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 1974 -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 1965 -TMI - 49240 - (SUPREME Court), Hukumchand Mills Ltd V CIT 1966 -TMI - 39897 - (SUPREME Court). 

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 1965 -TMI - 49238 - (SUPREME Court).

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 -TMI - 20686 - (CALCUTTA High Court) 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 (2004) 266 ITR 99 (SC), 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. 1997 -TMI - 17682 - (CALCUTTA High Court).  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 2004 -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 assesses 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 -TMI - 26384 - (GUJARAT High Court) 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 2000 -TMI - 40296 - (SUPREME Court), CIT V. Narendra Doshi 2001 -TMI - 6071 - (SUPREME Court) and CIT v. Shivsagar Estate 2002 -TMI - 40337 - (SUPREME Court) held that the Revenue cannot dispute the correctness of the judgment of Gujarat High Court in case of another assessee.

About the issue relating to WDV when Rule 8 is applied, the Supreme Court has also dismissed SLP of revenue against the second judgment of the Calcutta high Court. In view of the above position, it appears that filing of an appeal or reference petition against order of Tribunal before Kerala high Court and Guwahati high Court was not proper on an issue already settled by other high. Not only that the revenue again preferred appeal before the Supreme Court against the judgment of Guwahati high Court in the case of

CIT, Dibrugarh versus Doom Dooma India Ltd. 2009 -TMI - 32437 - SUPREME COURT Appeal No. - 1094 OF 2009 with 1093, 1095-97 of 2009. This appeal has been decided on 18 February 2009 in favor of assessee and against the Revenue. The judgment of the Supreme Court is analyzed as follows:

       1. This batch of civil appeals  u/s 260A of the I.T.Act  were  against judgments dated 22.11.06 and 8.1.07 of the High Court of Guwahati, Assam, in respect of assessment years 1988-89, 1989-90, 1990-91 and 1991- 92. ( Per author this judgment  covers period after block of assets came into statute book w.e.f. 01.04.1988 and the law is still same and the ruling is still applicable).

  2.  The issues were  shat is the meaning of the expression "depreciation actually allowed" in Section 43(6)(b) of the 1961 Act (as it stood at the relevant time)? How is the depreciation to be computed in cases falling under Rule 8 of the Income-tax Rules, 1962, which deals with taxability of composite income? These are the two questions which arise for determination in this batch of civil appeals.( per author- the same legal position will be applicable when income is computed under Rule 7, 7A or 7B also)

  3.  The facts in all these civil appeals are similar. assessee, at the relevant time, was in the business of growing and manufacturing of tea. Rule 8 was applicabile and there is no dispute.

4. Assessee raised additional grounds before CIT(A) at the time of hearing of the appeal inter alia stating that the AO had erred in determining the opening "written down value" of the block of assets without following the provisions of Section 43(6)(b) of the 1961 Act. According to the assessee for arriving at the opening "written down value" of the block of assets, the AO erred in deducting 100 per cent of the depreciation for the preceding year calculated at the prescribed rate from the opening "written down value". However, the assessee claimed that only 40 per cent of the depreciation allowed at the prescribed rate ought to have been deducted and not 100 per cent as done by the AO. In this connection reliance was placed by the assessee on Section 43(6)(b) of the 1961 Act. Accordingly, by additional grounds which were allowed to be raised, the assessee sought a direction from CIT(A) to the AO to determine the "written down value" in accordance with the provisions of Section 43(6)(b) by deducting only 40 per cent of the depreciation computed at the prescribed rate, being depreciation actually allowed. This argument of the assessee came to be rejected by CIT (A). (per author- additional ground could be taken before the CIT(A) because the subject matter was depreciation allowance which was well within the assessment records of assessee).

5. The assessee carried the matter in appeal before the Tribunal. The Tribunal, followed the first decision of the  Calcutta High Court  referred to earlier by author held  that since 40 per cent of the assessee's composite income is chargeable under Section 28 of the 1961 Act, for the purposes of computing the "written down value" of depreciable assets used in the tea business, only 40 per cent instead of 100 per cent of depreciation allowable at the prescribed rate shall be deducted in the case of the assessee.

6. The decision of the Tribunal has been affirmed by the impugned judgment of the Guwahati High Court. And therefore the civil appeal(s) by way of special leave petition(s) is filed by the Department before the Supreme Court.

7. Answer to Question No.(1) - meaning of the expression "depreciation actually allowed" in Section 43(6)(b) of the 1961 Act is considered by the Supreme Court as follows;

a. Deductions by way of depreciation allowance have been specifically recognized and dealt with in Sections 32, 34 and 43(6) of the 1961 Act (which deals with the definition of the words "written down value").

b. Section 32 adopts two methods in allowing depreciation. In the case of ocean-going ships, depreciation is allowed, year after year, at the fixed percentage on the original cost of the asset [See: Section 32(1)(i)]. This is called the straight-line method. In the case of non-ocean-going ships and buildings, machinery, plant or furniture, the prescribed percentage of depreciation is to be computed on the basis of "written down value" of the asset [See: Section 32(1)(ii)]. This is known as "written-down value" method.

c. Both these methods seek to ensure that the total depreciation allowance(s) granted, year after year (under I.T.Act- added by author), does not exceed 100 per cent, of the original cost of the asset.

d. In the straight-line method, the entire depreciation is written off sooner than in the "written down value" method, if the figures of the actual cost and the prescribed percentage are the same in either case. Section 32 (2) allows the carry forward and unabsorbed depreciation allowances to any subsequent year, without any time limit, where such non-absorption is "owing to there being no profits or gains chargeable for that previous year, or owing to the profits or gains being less than the allowance".

e. The definition of "actual cost" is to be found in Section 43(1) and the definition of "written down value" is to be found in Section 43(6) of the 1961 Act. The latter defines "written down value" under Section 43(6) to mean -

(a) in the case of assets acquired in the previous year, the  actual cost to the assessee;

(b) in the case of assets acquired before the previous year, the actual cost to the assessee less all depreciation(s) actually allowed under the 1961 Act.

f. The key word in Section 43(6)(b) of the 1961 Act is "actually". On the meaning of the words "actually allowed" in Section 43 (6)(b) The Supreme Court has, in the case of Madeva Upendra Sinai v. Union of India and Others - 1974 -TMI - 6436 - (SUPREME Court) at pages 223 & 224, which reads as under:

"The pivot of the definition of "written-down value" is the "actual cost"' of the assets. Where the asset was acquired and also used for the business in the previous year, such value would be its full actual cost and depreciation for that year would be allowed at the prescribed rate on such cost. In subsequent year, depreciation would be calculated on the basis of actual cost less depreciation actually allowed. The key word in clause (b) 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 it 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 incomings of the business in computing the taxable income of the assessee; it cannot be stretched to mean "notionally allowed" or merely allowable on a notional basis."

"From the above conspectus, it is clear that the essence of the scheme of the Indian Income-tax Act is that depreciation is allowed, year after year, on the actual cost of the assets as reduced by the depreciation actually allowed in earlier years. It follows, therefore, that even in the case of assets acquired before the previous year, where in the past no depreciation was computed, actually allowed or carried forward, for no fault of the assessee, the "written-down value" may, under clause (b) of Section 43(6), also, be the actual cost of the assets to the assessee."

g. Therefore, it was  clearly laid down that the meaning of the words "actually allowed" in Section 43(6)(b) to mean - "limited to depreciation actually taken into account or granted and given effect to, i.e. debited by the Income-tax Officer against the incomings of the business in computing the taxable income of the assessee".

While considering answer to Question No.(2) relating to  computation of depreciation in cases covered by Rule 8 which deals with taxability of composite income thesupreme Court considered earlier rulings of the Supreme court which dealt with similar situations involving 'world income' which is similar to situation of 'composite income. The court in this regard observed as follows;

In the case of CIT v. Nandlal Bhandari Mills Ltd. - 1965 -TMI - 49240 - (SUPREME Court), which judgment was in the context of composite income (world income) , the question inter alia arose whether depreciation "actually allowed" would mean depreciation deducted in arriving at the taxable income or the depreciation deducted in arriving at the world income (composite income).

  Briefly stated in that case the assessee was a company  deriving income which was partly taxable ( in taxable territory)  and partly not taxable ( non taxable territory). Further  until 1.4.1950, when Income-tax Act, 1922 was extended to Part B States including Madhya Bharat of which Indore became a part, the assessee was assessed at Bombay under the Income-tax Act, 1922 as a non-resident and for some years as resident. The assessee was also assessed in Indore under the Indore Industrial Tax Rules, 1927. For those years in which it was assessed as a non-resident under Income-tax Act, 1922, only that part of its profits attributable to the sale proceeds of goods received in British India were brought to tax.

  In ascertaining the "written down value" of the building, machinery and plant, under paragraph 2 of the Taxation Laws Order, 1950, only the greater of the two depreciations "actually allowed" in British India and in Indore could be taken into account. The ITO took into account the depreciation allowances for the years up to 1944 as computed under Income-tax Act, 1922 for the purposes of ascertaining the world income of the assessee, and for the years 1945 to 1948, he took into account the income as computed under Indore Industrial Tax Rules 1927; and on that basis the ITO arrived at the "written down value" as on January 1, 1949.

  The assessee contended, inter alia, that in regard to the years up to 1944 only the proportionate depreciation attributable to the taxable income came within the meaning of the words "actually allowed" in the old section corresponding to Section 43(6)(b) of the 1961 Act. This contention of the assessee was accepted by the majority judgment which held that in fixing the depreciation allowances for the years in which the assessee was assessed as a non-resident under the Income-tax Act, 1922, the ITO had "actually allowed" only a portion of the amount towards depreciation allowable in assessing its world income. It was further held that the mere fact that in the matter of calculation, the total amount of depreciation was first deducted from the world income (composite income) and thereafter a proportion was struck did not amount to an actual allowance of the entire depreciation in ascertaining the taxable income that accrued in British India. Therefore, it was held, that, the depreciation deducted in arriving at the taxable income alone could be taken into account and not the depreciation taken into account for arriving at the world income (composite income).

The Court held that the above judgment of the Supreme Court squarely applies to the present case when Rule 8 is applied while computing tea income from cultivation, manufacture and sale of tea by assessee. As per the provisions of Section 10(1) of the 1961 Act read with Rule 8, 40 per cent of the business income derived from the sale of tea grown and manufactured in India by the assessee was liable to tax (income tax under I.T.Act - added by author). In the above judgment of the Supreme Court, the Court was concerned with the world income, in case of tea we are concerned with the composite income. Therefore, the judgment of the Supreme Court, above referred to, is squarely applicable to the present case of tea. Therefore, the Supreme Court did not find any infirmity in the impugned judgment of the High Court.

 Supreme Court further illustrated the concept by computing tea income by following two different methods as follows:

 Illustration `A'

Gross income from sale of tea	Rs. 1000
Less: Expenses -
Depreciation	(100)
Others	(300)
Business Profit	600
Income subject to charge under the Income      Tax Act by application of Rule 8 (40% of 600)	240

 

Illustration `B'

	Rs.
Proportionate  income from sale of tea (40% of 1000)	400
Less: Expenses -
Depreciation  40% of 100	(40)
Others (40% of 300)	(120)
Business Profit subject to charge of income tax (40% of 600)	240

The Court held that on analysing the above two charts, it is found that  at the end of computation the income chargeable to tax by applying Rule 8 comes to Rs.240. Under Illustration `A', the normal depreciation is Rs.100 which is deductible from Rs.1000 being the income from sale of tea. On the other hand, under Illustration `B', we have taken 40 per cent of each of the items, namely, income from sale of tea, depreciation and other expenses. Accordingly, on comparison it may be noted that whereas income from sale of tea is Rs.1000 under Illustration `A', proportionately it comes to Rs.400 under Illustration `B'. Similarly, depreciation under Illustration `A' which is normal depreciation is Rs.100 whereas in Illustration `B' at 40 per cent the pro rata depreciation is 40. What is important to be noted is that at the end of computation under both the Illustrations, the income taxable by applying Rule 8 comes to Rs.240 in both the cases. The only difference is that in Illustration `B' we have gone by pro rata basis.

g. The court held that the important thing to be noted is that according to the Department, in the succeeding year, the opening "written down value" of the assets would be Rs.900 (Rs.1000 for the cost of the assets less Rs.100) as indicated in Illustration `A' whereas, if one goes by Illustration `B' the "written down value" comes to Rs.960 (Rs.1000 for the cost of the asset(s) minus 40), being the depreciation in Illustration `B'.

h. According to the assessee, in view of the law laid down by the judgment of this Court in the case of Madeva Upendra Sinai (supra), the "written down value" should be computed at Rs.960 and not at Rs.900 as claimed by the Department.

i. Concluding on the aspect of WDV the Court held that where Rule 8 applies, the income which is brought to tax as "business income" is only 40 per cent of the composite income and consequently proportionate depreciation ( that is 40%) is required to be taken into account because that is the depreciation "actually allowed".

Depreciation vis a vis deductions under chapter VIA:

The Supreme court also took note of its judgment in relation to deductions under Chapter VIA which are allowed from Gross Total Income (GTI) of assessee. The court held that we may state that the judgment   in  CIT v. Willamson Financial Services and Others - (2008) 297 ITR 17, has no application to the present cases. That decision was rendered in the context of deduction under Section 80-HHC of the 1961 Act. Section 80-HHC comes under Chapter VIA. Chapter VIA refers to special deductions. It is a separate Code by itself. There is a distinction between "deductions/allowances in Section 30 to Section 43D" and "deductions admissible under Chapter VIA". Deductions/allowances provided in Sections 30 to 43D are allowed in determining Gross Total Income and are not chargeable to tax because the same constitute charge on profit, whereas, deductions under Chapter VIA are allowed from Gross Total Income chargeable to tax. Therefore, the judgments rendered in the context of Section 80-HHC of the 1961 Act, both by this Court and by the Kerala High Court, stand on different footing. ( this is because in case of tea income computed under rule 8 only 40% of tea income goes into computation of GTI- added by author).

Therefore, the Supreme Court did not find  merit in the civil appeals filed by the Department and dismissed the appeal on the  issue of WDV. Therefore we can say that decisions of Calcutta high Court and Guwahati high Court stands affirmed and that of Kerala high court on the issue of WDV stands overruled.

18. For the aforestated reasons, we find no merit in the Department's civil appeals which are accordingly dismissed with no order as to costs.

Authors views:

The above judgment of the Supreme Court reconfirms the fundamentals of 'actual cost' and 'written down value'. However, the author feels that the counsels of the Revenue should have brought the decision on SLP of revenue in the case of Suman Tea & Plywood industries P.Ltd. and also  admitted position by several circulars of the CBDT to the effect that in case of tea companies where Rule 8 applies, it is admitted that only 40% of deductions like development rebate, development allowance and  investment allowance are considered as allowed under I.T.Act and accordingly the Board has taken consistent view that it will be sufficient compliance if the reserves are created to the extent of 40% of 75% of such allowances allowable. Therefore, in fact on this issue the revenue should not have raised any objection. However, as usual the revenue is interested to indulge in un-necessary litigation and also in unsettling the settled legal position. Let us hope that now the revenue will not try to again unsettle the recently reiterated settled legal position by the Supreme Court about WDV. 

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, rubber and coffee companies can also make correction in their WDV by deducting from actual cost only deprecation actually allowed under I.T.Act.

When income is computed as per Rule 7 also, depreciation actually allowed will be deductible to compute WDV of assets used in activities of cultivation of agricultural produce and also in some business activities. When agricultural income is merely computed for the purpose of aggregation to determine average rate of tax applicable, it cannot be said that deprecation is actually allowed under I.T. Act, therefore, such depreciation should not be deducted from actual cost to determine WDV.

The Rule apply in other situations also:

The rule that depreciation actually allowed is to be deducted from actual cost / WDV is also applicable when a part of depreciation is disallowed for reasons like personal use or use for non business purposes, assets not used etc. Therefore, suppose depreciation on motor car of a doctor is disallowed to the extent of 50% for personal use, then only deprecation actually allowed that is 50% of other wise allowable depreciation shall be deducted to determine WDV for allowing depreciation in future.

Miscarriage of justice in case before Kerala high Court:

Judgment of Kerala High Court in CIT v. PARRY AGRO INDUSTRIES LTD 2006 -TMI - 32463 - (KERALA High Court) a case of miscarriage of justice due to apparently  policy of hiding settled legal  position adopted by counsels of Revenue:

It is unfortunate to note that the counsels of the revenue did not bring out settled legal position before the kerala high court and that lead to a wrong decision, contrary to already settled legal position.

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

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

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

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

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.

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%.

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 for the revenue should have, in all fairness 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 -TMI - 20686 - (CALCUTTA High Court) 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)

Thus Kerala High Court's judgment is contrary to settled legal position and the law of land and now it is no longer good law even for the state of Kerala and the decision of the Supreme Court must be followed.

As discussed above none 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 committed a mistake in its judgment.

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 and the recent judgment of the Supreme Court on the point of WDV.

Options available to assesses in Kerala:

After judgment of Supreme Court in the case of Doom Dooma Tea now assessees in Kerala State are also not bound by the judgment of Kerala high court. Even in case where Kerala High Court's judgment has been applied, the assessee can make an application for rectification of orders to make them confirming to the law laid down by the Supreme Court in the case of Doom Dooma.

The assessee Parry Agro can also make a petition before the kerala High Court for recalling and deciding afresh the issue as earlier Kerala high Court did not consider various judgments of Supreme court and now judgment of the Supreme court is available which is directly on the point of WDV in case of Tea income where Rule 8 is applied.