The Commissioner Of Income Tax, ... vs Chairanji Lal, New Delhi
1969 Latest Caselaw 20 Del

JUDGMENT

S.K. Kapur, J.

(1) The following question of law has been referred to us under section 66(1) of the Indian Income-tax, New Delhi -

"WHETHERon the facts and in the circumstances of the case the profits u/s 10(2)(vii) second provisio should be computed by deducting depreciation actually allowed u/s 10(2)(vi) read with "section 10(3) and nto any notional depreciation allowable u/s 10(2)(vi) from the written down value of the car within the meaning of section 10(5)(b)."

(2) The assessed is an individual and the controversy relates to the assessment year 1960-61 (previous year ending 31-3-1960). The assessed purchased a motor-car for Rs. 14,500.00 on 7-2-1951. The Income-tax Officer held that the car was nto wholly used for the purposes of the assessed's business. He, therefore, restricted the depreciation allowance admissible under section 10(2)(vi) to half the total depreciation permissible under the rules. The assessed all along accepted the position that the motor-car was used only partly for the purpose of business. During the assessment year in question the assessed sold the car for Rs. 6,000.00 In the assessment order dated 14th March, 1963, the Income-tax Officer computed the profit under section 10(2)(vii) second proviso, arising out of the sale of the motor-car, at Rs. 3,716.00, which represented the difference between the sale price and the written down value of the car (Rs. 2.284.00). The said written down value was arrived at on the basis of the depreciation admissible under section 10(2)(vi) on the car and nto on the depreciation actually allowed. By a subsequent order made under section 154 of the Income-tax Act, 1961, the Income-tax Officer rectified the original order and fixed the written down value at Rs. 2,123.00. The assessed appealed before the Appeallate Assistant Commimissioner and contended that the written down value of Rs. 2,284.00 had nto been correctly arrived at inasmuch as in arriving at such value the depreciation actually allowed should have been taken into account, and when so calculated it would come to much more than Rs. 2,284.00 The appellate Assistant Commissioner accepted the assessed's contention and directed that the written down value of the car should be taken as the original cost less depreciation actually allowed and the profit under section 10(2)(vii) should be the difference between the sale price and the correct written down value. The Revenue appealed to the Income- tax Appellate Tribunal. The contention of the Revenue before the Tribunal and its findings may best be put in the words of the Tribunal:-

"THEDepartmental Representative has nto disputed the proposition that the written down value means the 'actual cost' less depreciation actually allowed to the assessed, namely 50% of the total depreciation admis down in section 10(5)(b) of the Act. He has, however contended that in view of section 10(3) of the Act 50% of the original cost should be taken as the cost of the motorcar to the assessed and the depreciation actually allowed to the assessed in all these years should be deducted and the written down value thus arrived at should be deducted from the half of the sale price and that would give the correct profit under section 10(2)(vii) second proviso. It has been contended that as the Income-tax Officer virtually has followed this method there was nothing wrong and the Appellate Assistant Commissioner should nto have nterfered with the computation of profit under section 10(2)(vii) second proviso made by the Income-tax Officer. In other words, it has been contended that as only half of the motor-car was treated to have been used for the purpose of the assessed's business, only 50%, of the original cost of the motor-car purchased in 1951 is to be taken as the original cost and the depreciation actually allowed by the Income-tax Officer over all these years is to be deducted in arriving at the written down value. In our opinion, this view is untenable."

(3) In coming to this conclusion, the Tribunal relied on a decision of the Andhra Pradesh High Court in Vankadam Lakshminarayana. v. Commissioner of Income-tax Dealing with a similar argument, the High Court observed :-

"WEhave to deal with another theory propounded by the Tribunal and which is sought to be sustained by the learned counsel for the department, namely, that the concept underlying section 10(3) is that the asset used partly for business purposes and partly for Non-business purposes should be regarded as half the asset used for business purposes and, therefore, in calculating the original cost price of the asset, only half its price should be taken into account. We find it difficult to share this view as there is no basis for such division or the splitting up of of the asset into two. On the other hand, the language of section 10(3) makes it plain that such a theory cannto be sustained. It is nto the division of the asset as being used for business and non-business purposes that is contemplated by the section but only apportionment of the depreciation allowance as between the use of it for business purposes and its use for non-business purposes. However, that need nto detain us any longer as we are nto convinced that such a proposition can be sustained either on the language of any section or on authority."

(4) The argument of the Revenue before the Tribunal was as set out hereinbefore and it was conceded that the depreciation actually allowed had to be taken into account in arriving at the written down value. The Tribunal does not, however, appear to have referred the question raised by the Revenue to this Court. The question referred by the Tribunal is different, namely, whether the depreciation actually allowed under section 10(2)(vi) or the the depreciation allowable is to be taken into account in arriving at the profits under the second proviso to section 10(2)(vii). In my opinion, the question as framed must be answered in favor of the assessed. Under the second proviso to section 10(2)(vii) where the sale price exceeds the written down value only so much of excess as does nto exceed the difference between the original cost and the written down value is deemed to be the profit of the previous year in which the sale took place. Written down value has been defined in section 10(5) and in case of assets acquired before the previous year it means the actual cost less all depreciation actually allowed to the assessed under this Act. Depreciations actually allowed cannto be equated with depreciations allowable. In Commissioner of Income-tazx v. Straw Products Ltd. (2) the Supreme Court while interpreting the expression "actually allowed" in paragraph 2 of the Taxation Laws (Merged States) Removal of Difficulties) Order, 1949, decided that it meant the depreciation actually given effect to and nto the notional depreciation allowable. In Vankudam Lakshminarayana's (2) case also the Andhra Pradesh High Court held that in computing the written down value the depreciation actually granted to the assessed had to be taken into consideration and nto the depreciation notionally allowable. Mr. Kirpal, the learned counsel for the Revenue, relied on section 10(3) which provides that where any plant or machinery is nto wholly used for the purpose of the business, the allowance shall be restricted to the fair proportional part which would be allowable if such machinery, plant etc. was wholly so used. That provision appears to be directed towards the calculation of depreciation that can be allowed in case of machinery or plant nto wholly used for the purpose of the business and does nto modify the meaning of the written down value in section 10(5)(b). Even if I were to answer the question on the basis of the contention raised before the Tribunal, my answer would be against the Revenue. Under Section 10(2)(vii) if the sale proceeds exceed the written down value the excess is taxed as profit lo the extent of total depreciation allowance granted in the past. In other words the Revenue takes back in such a case the depreciation allowance granted in the previous years. Section 10(2)(vii) applies to "such building, machinery or plant" which has been sold. The word "such" relates back to section 10(2)(iv) and, therefore, to plant or machinery "used" for the purpose of business. There can be no doubt that the car in question was. though partly, used for the purpose of business with the result that calculation under section 10(2)(vii) has to be based on definition of the written down value as given in section 10(5)(b). There are various difficulties in giving effect to the contention of the Revenue. It cannto be said, as suggested by the Revenue, that only a part of the car was used for business. The whole of the car was used though only partly. Secondly, there is a provision in section 10(3) for determining the amount of depreciation to be allowed on the basis of fair proportion but no such basis is available for determining the original cost which must be fixed at an exact figure particularly because under section 10(2)(vi)(c) the depreciation allowance can in no case exceed the original cost. There is no provision in section 10 for the division or splitting up of an asset in two parts. In my opinion. the Tribunal was right in taking the view it look and I would answer the question accordingly in favor of the assessed. There will be no order as to costs.