TMI Blog1974 (2) TMI 7X X X X Extracts X X X X X X X X Extracts X X X X ..... e illustrates once again what a bewildering variety of questions arise for consideration under the income-tax law. The question which falls for determination in this reference is rather unusual, namely, whether drawings and patterns received by an assessee from a foreign company under a collaboration agreement can be said to be " plant " on which depreciation is allowable under section 32 of the Income-tax Act, 1961 (hereinafter referred to as " the Act "). It is a very debatable question which is not easy of answer and though we have taken one view which appears to us more plausible, the other view is not altogether impossible. The assessee is a public limited company engaged in the manufacture of elevators. The controversy in the present reference arises out of two agreements entered into by the assessee with foreign collaborators. The first is an agreement dated October 5, 1960, entered into by the assessee with Alfred Wiseman Co. Ltd., Birmingham, and the second is an agreement dated October 7, 1960, entered into by the assessee with Spencer (Melksham) Ltd., Wiltshire. For the purposes of this reference, it would be necessary to set out only such terms of each of the said a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... design and specifications comprised in the designation SM/2/60 and described in the leaflet and drawing attached to the agreement. Spencer (Melksham) Ltd. undertook under the agreement : (a) to impart to two engineers nominated by the assessee all data and information relevant to the manufacture of the said Idlers within its knowledge and for that purpose to permit such engineers to attend regularly its factory for a continuous period of three months and to provide them with boarding and lodging during such period and for the like purpose, to provide in India at the expense of the assessee the services of a suitably qualified member of its engineering staff for a period, exclusive of travelling time, of one calendar month ; and (b) not to " knowingly supply any of the drawings or other things or matter " referred to in the agreement to any person other than the assessee with a view to enabling such other person to manufacture the said Idlers in India. The assessee, in consideration of these and other benefits received under the agreement, undertook : (a) to pay free of Indian tax the sum of ten thousand pounds to Spencer (Melksham) Ltd. in two instalments, one instalment of five th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ities, what was acquired was a result of such expenditure and would be a capital asset in respect of which the assessee was entitled to depreciation allowance under section 32 of the Act. The argument in terms was that drawings and information received by the assessee under the licence agreement with Alfred Wiseman Co. Ltd. and drawings, specifications and patterns acquired by the assessee under the sale agreement with Spencer (Melksham) Ltd. should be treated as " plant " within the meaning of section 32 of the Act and depreciation allowance worked out on the basis of the pro rata cost incurred on the acquisition of those assets must be granted to the assessee. The revenue resisted the claim of the assessee on two grounds : first, that the assessee could not be permitted to raise at the second appellate stage a totally new claim for depreciation allowance and, secondly, that drawings, specifications and patterns acquired by the assessee from its foreign collaborators were not " plant " within the meaning of section 32. A subsidiary contention was also raised to the effect that even if drawings and information received by the assessee from Alfred Wiseman Co. Ltd. were treated a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... books " and since " books " were " plant " according to the inclusive definition of the latter word as contained in section 43(3) of the Act, those two articles were " plant " and, secondly, that even otherwise since drawings and patterns formed " the basis of the business of manufacturing the machinery in question ", they were comprehended within the ordinary meaning of the word " plant ". The Tribunal then considered as to what final order was required to be passed in the appeals before it and observed that since only a part and not the whole of the amount of consideration paid by the assessee to the two foreign collaborators was attributable to the acquisition of drawings and patterns and since there was no evidence on record on the basis of which the portion of the amount expended by the assessee on the acquisition of the said assets could be ascertained with certainty, it was not possible to dispose of the appeals before it on merits. The Tribunal, therefore, remitted the matter to the Appellate Assistant Commissioner with a direction to give an opportunity to both the parties to lead proper evidence on the point and " to give deduction on account of depreciation allowance acc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... heads of income enumerated in the said section is " profits and gains of business or profession ". Section 28 enumerates different kinds of income chargeable to income-tax under the head " profits and gains of business or profession ". Section 29 as it stood at the relevant time provided that the income referred to in section 28 shall be computed in accordance with the provisions contained in sections 30 to 43. Out of the fasciculus of sections mentioned in section 29, the only two sections which are relevant for the purpose of the present reference are sections 32 and 43 and relevant parts thereof may be fully set out : " 32. Depreciation.-(1) In respect of depreciation of buildings, machinery, plant or furniture owned by the assessee and used for the purposes of the business or profession, the following deductions shall, subject to the provisions of section 34, be allowed- . .............. " " 43. Definitions of certain terms relevant to income from profits and gains of business or profession.--In sections 28 to 41 and in this section, unless the context otherwise requires,- ........ (3) 'plant' includes ships, vehicles, books, scientific apparatus and surgical equipment us ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed other varieties of objects satisfying the above description would be books. For the purpose of ascertaining the true meaning of the word " books " in section 43(3) in which it occurs in conjunction with the expression " used for the purposes of the business or profession ", however, one must have regard not only to the physical but also to the functional characteristics of a " book ". A book within the meaning of section 43(3) must in addition to conforming to its physical form denoted by the above definition, be functionally useful for the purposes of the assessee's business or profession. It must be a tool of his trade---an article which is a part of the apparatus with which his business profession is carried on. It must have the utility value enabling its owner to pursue his business or profession with greater advantage. In the ultimate analysis, therefore, it would appear that a book within the meaning of section 43(3) must be an object or article which must satisfy a dual test ; it must bear both physical and functional characteristics of a book. It must be a collection of a number of sheets of paper or of other substance, having suitable size, shape and value, bound togeth ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ht not to be considered in the character of books ; and it has been contended, that under these words, nothing would pass but such printed books as are in the habit of being sold in booksellers' shops. Recollecting, however, that in this case the legatee to whom these books were given was a medical gentleman engaged in the like branch of the profession as the testator was a person, therefore, to whom books of this sort would of necessity be most peculiarly valuable--a person who might be placed in precisely the same circumstances as the testator was, and, if he should be so, that these books would be of more value to him than they could be to any other person in existence ; and taking these circumstances into consideration, which I think I cannot avoid doing, in the construction of this will, and seeing the words are sufficient to comprise these books, and that the great probability is, the testator, if his attention had been drawn to them, would have passed those books by specifically naming them, I think (the words being sufficient), I must consider that those books passed under that clause. " There was no dispute in that case that the manuscript journals were books presumably ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... referred to the decision in In re Plowden in which a volume containing manuscript music by Beethoven and Mozart, the sheets of music being bound together with an outer cover with considerable care by a bookbinder, passed under the description of the word " book ". He also referred to the decision of Lord Langdale M.R. in Willis v. Curtois and to the decision in In re Barratt, where a manuscript book described as the log book of a ship containing the original log entries in manuscript (not consisting of several sheets of paper afterwards bound up but book in which entries were made from time to time by the proper officer) was held to pass under a bequest of books. After referring to one more case, Maugham J. observed : " In the present case I have come to the conclusion that these three volumes are books. The factors leading me to that conclusion are these : The volumes are in book form ; to the outward eye they look like books, and in the ordinary course they can be, and are, handled like books. Next, I observe that they can be used like books, in the sense that, as one turns over the sheets, one can, if able to decipher the handwriting, read the various letters as a collection o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d on the fact that the sheets of paper were not permanently fastened together so as to form a material whole. The decisions referred to above bring into limelight the point that whenever the question has arisen before courts whether a particular article or object was book, the test which was commonly applied was whether it had the physical characteristics of a book. In other words, the test applied was : Is it a collection of sheets of paper, fairly securely fastened together at one end, and protected by two covers ? Is it in a book form and does it look like a book ? If this test was satisfied, the article or object was held to be a book no matter that its utility was only for the person who owned it and it was not in the nature of an ordinary book available in the market. This is the very test which we too have indicated should be applied in judging whether a particular article or object is book within the meaning of section 43(3) of the Income-tax Act, 1961, and to that extent the decisions cited support our view. The next question which must necessarily arise for consideration is whether drawings and patterns acquired by the assessee satisfy the aforesaid dual test and it i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s on numerous occasions in the context of different statutes and the catena of judicial decisions shows that it is a word of wide and varied import susceptible of diverse meanings depending upon its setting in the scheme of the statute. Almost all cases bearing upon the interpretation of the word " plant " decided in England and in this country were cited before us and the following enumeration would show as to what an amazing variety of articles, objects or things have been held to be plant or not plant : PLANT (i) Horse, Yarmouth v. France ; (ii) knives and lasts used in manufacture of shoes, Hinton v. Maden Ireland Ltd. ; (iii) aircraft engine which was being dismantled, Watts v. Enfield Rolling Mills (Aluminium) Ltd ; (iv) movable office partitions, Jarrold v. John Good Sons Ltd. ; (v) concrete dry dock, Inland Revenue Commissioners v. Barclay, Curle Co. Ltd. ; (vi) electrical fans and other office appliances, Sundaram Motors Pvt. v. Commissioner of Income-tax ; (vii) poles, cables conductors and switch boards for distribution of electricity, Commissioner of Income-tax v. Indian Turpentine and Rosin Co. Ltd. ; (viii) light-fittings, ceiling and pedestal fans and water ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... inciples can be deduced which might guide us in deciding the question on hand. For the reasons stated above, we hope that we shall not be taken as neglecting the arguments advanced before us if we make no special reference to each and every case cited before us. With this prefatory remark, we proceed to refer to the relevant decisions. The locus classicus for the definition of plant is in the words of Lindlay L.J. in Yarmouth's case, which despite the great technological advances since those days is still of great help and has been adopted for the purposes of the income-tax law. The question in that case was whether a horse could be regarded as plant and the main issue was whether the word " plant " must be confined to inanimate objects or whether it would also include animate objects. The learned judge said at page 658 of the report : " There is no definition of plant in the Act : but, in its ordinary sense, it includes whatever apparatus is used by a businessmen for carrying on his business,--not his stock-in-trade which he buys or makes for sale ; but all goods and chattels, fixed or movable, live or dead, which he keeps for permanent employment in his business " : see Blake ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mechanical operations or processes and that the place in which a businessman carried on his business was not included within the meaning of the word " plant ". This would indicate that although Lord Reid does not in terms say so, he adopted the definition of the word " plant " given by Lindley L.J. with the gloss put on it by Uthwatt J. He went on to say : " Subject to one point, I have no doubt that these knives and lasts are plant in the ordinary sense of the word. It is true that they are numerous, small and cheap. But one trader may have to use a few large articles while another may have to use a large number of small articles, and I see no good ground for distinguishing between them as regards investment allowance. The one point is the durability of these articles. When Lindley L. J. used the phrase 'permanent employment in his business' he was using it in contrast to stock-in-trade which comes and goes, and I do not think that he meant that only very long-lasting articles should be regarded as plant. But the word does, I think, connote some degree of durability, and I would find it difficult to include articles which are quickly consumed or worn out in the course of a few o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the ultimate decision on this point and, therefore, they must also be deemed to have agreed with this view. Lord Reid in his speech also approved-- of course by implication the gloss put on the definition of Lindley L.J. by Uthwatt J. and further indicated that articles or objects, although they might be " numerous, small and cheap ", might still qualify as plant. Next we must refer to the decision of the Court of Appeal in Jarrold's case. The question in that case was whether certain movable office partitions installed in the office of the assessee could be regarded as plant for the purposes of initial allowance and annual allowance under the relevant provisions of the Income-tax Act, 1952. The principal contention on behalf of the revenue in that case was that movable office partitions were not apparatus or instruments used by the assessee in carrying on its business but they were merely the " setting " in which the businesses were carried on. A subsidiary contention was that " plant " would only comprise an apparatus or instrument used in carrying out the actual operations of the trade, that is, such parts of the equipment of the works as perform something more than a passive ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lowed by the argument that there can be no " plant " among the passive assets. The heating installation of a building may be passive in the sense that it involves no moving machinery, but few would deny it the name of 'plant'. The same thing could no doubt be said of many air-conditioning and water softening installations. All that the Income-tax Acts require in this context is that the plant shall have been provided 'for the purpose of the trade'---an expression wide enough to cover assets which play a passive as well as an active role in the accomplishment of that purpose. " Pearson L.J., who also delivered a concurring judgment, referred to the definition of the word " plant " given in Yarmouth's case and in J. Lyons Co. Ltd.'s case and made the following observations : " There can be no doubt, therefore, as to the main principles to be applied, and the short question in this case is whether the partitioning is part of the premises in which the business is carried on, or part of the plant with which the business is carried on. Either view could have been taken ...... I think the Commissioners have, in effect, preferred the second view, and it cannot be said that there was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o be made as to what operation it performs. The functional test is, therefore, essential at any rate as a preliminary. " Lord Donovan referred to the tests formulated in Yarmouth's case, J. Lyons Co. Ltd.'s case and by Pearson L.J. in Jarrold's case and proceeded to observe : " All these definitions are helpful, but in the nature of things they cannot be exact, and so provide an answer incapable of reasonable dispute in every case. Resort, then, is had to analogies ...... At the end of the day I find the functional test propounded by Lindley L.J. and by Lord Pearson L.J. to be as good as any, though, as was said in Jarrold (Inspector of Taxes) v. John Good Sons Ltd., some plant may perform its function passively and not actively... Thus the dry dock is, despite its size, in the nature of a tool of the taxpayer company's trade and, therefore, in my view, 'plant'. " Lord Hodson and Lord Upjohn dissented from the view taken by the other Law Lords and since the opinion expressed by them represents the minority view, it is not necessary to refer to their speeches in detail. This decision is important in so far as it again approves of the definition of plant in Yarmouth's cas ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... te is dealing, would attribute to it'. In the present case, section 10(5) enlarges the definition of the word 'plant' by including in it the words which have already been mentioned before. The very fact that even books have been included shows that the meaning intended to be given to 'plant' is wide. " The Supreme Court then made reference to the decision in J. Lyons Co. Ltd.'s case on which reliance was placed on behalf of the revenue and observed that, apart from being distinguishable, it hardly supported the contention of the revenue. It was pointed out that in deciding that case the meaning of the word " plant " as given in Yarmouth's case was accepted as correct and that according to that meaning plant included whatever apparatus or instruments as are used by a businessman in carrying on his business. These observations would go to show that the Supreme Court was not inclined to accept the proposition that the meaning of the word " plant " was confined to an apparatus used in mechanical or industrial business or manufacture of finished goods from raw goods. The Supreme Court then approvingly referred to the decision in Jarrold's case and particularly adverted to the decisi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re dealers in motor cars and other allied articles and engineering contractors. The court took into account the genesis of development rebate and the ordinary meaning of the word " plant " and held : " It is indisputable that in these days of advanced commercial enterprise it is difficult to draw a line as to which of the plant or machinery engaged in trade by a businessman could with reasonable certainty be said to be not for carrying on its trade or for purposes of its business or intended to earn income therefrom. The conservative view expressed by the Tribunal that such plant or machinery should be such that income can be deemed to be derived by the direct use of such plant or machinery is, to our minds, a proposition which cannot be warranted having regard to the historic development of law in the grant of such concessions to industries with a view to afford an impetus and an encouragement to them to secure more and more of such machinery and plant so that they could be an aid to the developing economy of our country. " It is true that in that case the word " plant " had to be construed in the context of development rebate. Those observations would, however, apply with equ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g of the word " plant ". Now, it appears to us that this decision is not in accord with the trend of later decisions. In the first place, the primary meaning it assigned to the word " plant " is too narrow and constricted, that it must be an article having connection with mechanical or industrial business or manufacture of finished goods from raw products. Secondly, even the extended meaning of the word " plant " was there confined merely to capital invested in the manufacturing trade or business. This interpretation is not justified having regard to the decision in Taj Mahal Hotel's case as well as in Hinton's case which in its turn approved the decision in J. Lyon's Co. Ltd. Thirdly, it ignores the " functional test " which, according to the ratio of the decision of the House of Lords in Barclay's case as also of the Supreme Court in Taj Mahal Hotel's case, is the material test. In this connection it is worthwhile to note that there is a close parallel between this decision and the decision of Finlay J. in Margrett v. Lowestoft Water and Gas Company's case, where a water tower constructed for the purpose of increasing the pressure of supply of water to certain parts of a town w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... et us consider whether they qualify as plant. There is no doubt that they have a vital function to perform in the manufacture of Gear Units and Conveyor Idlers which are the articles which the assessee produces. It is with the aid of these drawings and patterns that the assessee was able to commence its manufacturing activity and they amongst other things constituted the technical data which lay at the root of the assessee's production venture. In the agreements entered into by the assessee with its foreign collaborators, this aspect is brought into bold relief by the use of the expressions that the assessee would receive " all existing and up-to-date patterns, drawings and information which the authorised manufacture requires " (see clause 4 of the Alfred Wiseman agreement) and " complete drawings...... adequate and reasonably necessary...... to manufacture the said Idlers in accordance with the...... designs and specifications ". [see clause 2 of the Spencer (Melksham) agreement] (underlining supplied for emphasis). The Tribunal has also found as a matter of fact that drawings and patterns formed " the basis of the business of manufacturing the machinery in question ". It is true ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erns of papers currently in stock. In order to qualify for investment allowance, the assessee had to establish two distinct facts : first, that the expenditure was capital expenditure and, secondly, that the article on the provision of which the expenditure had been made was plant. Pennycuick J., who decided the case, found in the first place that the expenditure did not represent capital expenditure. He then proceeded to observe that on the view that he had taken as to capital expenditure, the question whether the pattern books were plant did not survive. Still, however, he proceeded to make " certain brief observations " on the point at page 409. He referred to the definition of " plant " in Yarmouth's case as explained ir Hinton's case and adverted to the fact that plant must accordingly have some degree of durability. He further observed that one must taken into account all the circumstances including the character and the function of the chattel in judging whether it was plant. He then said that the taxing authorities had attributed the right meaning to the word " plant " and that, on the facts of the case before him, their conclusion that pattern books did not constitute plan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . Minister of National Revenue, Earl of Derby v. Aylmer and Norman v. Golder. Reference was also made to the decision of the Supreme Court in Sitalpur Sugar Works v. Commissioner of Income-tax which, in the submission of counsel, broadly supported his argument. We shall deal with both the aspects of the argument separately. Before we do so, however, we might refer to the decision in the case of Sitalpur Sugar Works. The assessee-company in that case, with a view to improving its business, shifted its factory from one place to another and in the process of dismantling and refitting exisiting plant at the new site incurred certain expenditure. In the course of its assessment to income-tax, the assessee claimed, inter alia, that that expenditure was a permissible deduction under section 10(2)(vi) of the Indian Income-tax Act, 1922. The contention was that depreciation was allowable on the amount of expenditure thus incurred in the same way as depreciation was allowed on capital. The said claim was negatived by the income-tax authorities and, on reference, by the High Court. The Supreme Court also refused to uphold the claim, inter alia, on the ground that " no such depreciation coul ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ose of information " were not comprehended within the " commonsense meaning of the word 'plant' notwithstanding the fact that allowance in respect of wear and tear and cost incurred in replacing obsolete plant, which was ordinarily allowed to traders and manufacturers, was by a legislative enactment extended also to professions and vocations. It is pertinent to note that in McVeigh v. Arthur Sanderson Sons Ltd. Cross J. doubted this line of reasoning and in terms observed (even though the point was not directly before him) : " If a barrister has to buy a new edition of a textbook in order to help him to write his opinions, I cannot see as a matter of principle why the book should not be regarded as a tool of his trade just as much as the typewriter on which his opinions are typed. " It is true that he ultimately followed the ratio of the decision in Daphne's case because he felt that it was binding on him but the discordant note is clearly audible and to that extent it erodes the persuasive value of this decision in Daphne's case. That apart, it appears to us that the real basis of that decision was that books were not plant since they were not used as " implements in the dir ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aff. An important and valuable part of the consideration was, I think, the undertaking by the company, to communicate, so far as it was permitted to do so, future improvements and developments. Can these things be regarded as a fixed capital asset and the communication of them as the disposal of that asset ? I do not think so. " Lord Reid observed at page 491 : " I do not find it necessary to decide whether that fund was a capital asset : I shall assume that it was. " Lord Radcliffe made pertinent observations on the point and since his speech has been heavily relied upon on behalf of the revenue it would be necessary to set out copious extracts from his speech (at pages 493 and 494). Said he : " First, as to 'know-how', I see no objection to describing this as an asset. It is intangible : but then so is goodwill ............ But it is a reality when associated with production and development such as that of Rolls-Royce, and a large part, though not the whole of it, finds its material record in all those lists, drawings and manufacturing and engineering data that are specified in the various licence agreements. It is fundamental to the company's case that we should categ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat the item is disposed of by several separate transactions divided from each other by time intervals .......... No doubt the things to be supplied are tangible objects, but then, so are text books, formulae or recipes. The company is teaching at long range. " Lord Morris of Borth-y-Gest did not express any opinion on the question. He proceeded on the footing that whatever description was given to that which was denoted in that case as know-how, the licensing agreements amounted to a trading activity whereby know-how was put to the most advantageous available use. The agreements did not involve sales of successive portions of a fixed capital asset, since the assessee did not part with or get rid or its know-how (vide pages 496-497). Lord Guest too in his speech did not make any specific observations on the question whether know-how was a part of the capital asset of the assessee. In Musker v. English Electric Co. Ltd., the assessee-company, in the course of carrying on of its trade of engineering manufacturers, acquired a fund of specialised knowledge, information and technique in engineering processes. In 1949, 1950 and 1952 it entered into three agreements under which it, in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... only by an analogy and that it would not be right to confuse know-how with its material record in the shape of drawings, lists, etc. But these observations must not be taken in isolation and will have to be read in the context in which they were made. It cannot be overlooked that in the two cases before the House of Lords the real question under consideration was much different from that with which we are concerned in the present case. The question there was as to the nature of the receipts arising from agreements under which the owner of the know-how, while retaining the knowledge and intending to go on using it himself by producing goods with its aid, agrees to impart or teach it to others so that they can manufacture their own material by exploiting it and gets in return certain lump sum payments. We are not concerned in the present case with any such situation or question. Indeed, this is not the case of the importer of know-how at all but of its recipient for value and the question here is whether know-how in the purchaser's hands is a tool of his trade so as to qualify as plant. All the observations in those two cases cannot, therefore, be applied wholesale in such a differe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not lost to the owner thereof who still continues to retain it for his own use and, therefore, income arising from an agreement under which such record is parted with cannot properly be termed as capital receipt. The observations, which may be apposite in that context, cannot be pressed into service in a case where the question is of a wholly different nature and has to be viewed from a different angle, namely, the angle of the person who acquires the know-how by transfer, for, to the recipient, for all practical purposes, know-how finds its manifestation mainly in its material record handed over to him. So far as he is concerned, know-how largely exists in its physical record and the finer emphasis on the intangible nature of know-how and the nice distinction between know-how and its material record would be to some extent unreal and illusory in his case. Know-how which he acquires does not exist except to a large extent in its material record which he receives. Unlike the owner of the know-how, it has no formless existence for the recipient who gains access to it primarily through its material record. For him, know-how and its medium form a single entity and in his case to make ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... v. Minister of National Revenue : " The term 'depreciation' apparently is here used in its commercial sense to apply only to wasting fixed assets, such as plant, machinery and equipment, which inevitably diminish in value while applied to the purpose of seeking profits, or advantage otherwise than by purchase and sale. In measuring annual depreciation in such cases the nearest approach to accuracy will ordinarily be obtained by estimating the whole-life period, in years, of such class of industrial plant, with due regard to all known facts, as well as to future probabilities, and distributing the cost, less the estimated remainder or scrap value, to future revenue accounts, in equal instalments over each year of the estimated whole-life period. "(Underlining supplied for emphasis). We are unable to read this definition as laying down that depreciation in its ordinary meaning is confined to diminution in value year after year by wear and tear only. The underlined words in the extracted portion on the contrary indicate that the word is to be understood in a commercial sense and that in estimating the life period of an asset, all known facts and future probabilities must be take ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ance once the conditions laid down therein are satisfied irrespective of whether there has in fact been any depreciation in the value of the asset by wear and tear or otherwise. The allowance can be claimed if the asset in question is shown to be capable of diminishing in value on account of any factor known to the prevailing accounting or commercial practice. It is now a recognised fact that the principal factors responsible for the retirement of capital asset and, therefore, responsible for depreciation are : (i) ordinary wear and tear, (ii) unusual damage, (iii) inadequacy, and (iv) obsolescence. The factors listed above include not only those relating to physical deterioration but also those referring to the suitability of the asset as an economically productive unit after a period of time. In depreciation accounting, the cost of the asset is spread over the years of its usefulness in a systematic and sensible manner and in so doing all the aforesaid agents or causes of depreciation are taken into account before the true profits are ascertained (vide Accountancy by William Pickles, third edition, page 168, Accountant's Hand Book by Dickson, fourth edition, section 17.2 and Prin ..... X X X X Extracts X X X X X X X X Extracts X X X X
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