I. T. C. LIMITED v. COMMISSIONER OF INCOME-TAX — 1992 DIGILAW 154 (CAL)

AJIT K. SENGUPTA J. ( 1 ) IN his reference under Section 256 (1) of the Income-tax Act, 1961, for the assessment year 1981-82, the following questions of law have been referred to this court :whether, on the facts and in the circumstances of the case, the Tribunal is right in coming to the conclusion that the conditions laid down in Sub-clause (ix) of Clause (b) of the Explanation to Section 40a (8) were satisfied ?whether, on the facts and in the circumstances of the case, the Tribunal is right in holding that the Commissioner of Income-tax was justified in presuming that the order of the Inspecting Assistant Commissioner was erroneous in accepting that the amount of Rs. 58,96,594 was exempt under Sub-clause (ix) of Clause (b) of the Explanation, to Section 40a (8) of the Income-tax Act, 1961 ?3. Whether, on the facts and in the circumstances of the case, the Tribunal is right in holding that the initial depreciation under Section 32 (1) (v) of the Income-tax Act is required to be deducted in determining the written down values of the depreciable assets in the computation of capital employed for the purpose of Section 80j ?" ( 2 ) THE first two questions involve one matter relating to the exemption from operation of the restrictive provisions of Section 40a (8) in respect of payment of interest by a corporate assessee. The assessee in the case claimed exemption from operation of Sub-section (8) of Section 40a under Sub-clause (ix) of Clause (b) of the Explanation to the section. The facts leading to this reference are that, during the previous year relevant to the assessment year 1981-82, the appellant had accepted deposits from the public and the total amount of deposits as at March 31, 1981, was Rs. 1,464 lakhs. With effect from December 1, 1980, these deposits were secured by a charge created on the current assets of the company. The fact that a charge was created and that the deposits were secured by such charge was disclosed in the annual report of the appellant. The annual report was duly filed with the Assessing Officer along with the return of income and was in his possession in the course of assessment. During the course of assessment, the appellant filed details of interest of Rs. 1,82,01,856 paid on public deposits showing Rs. The annual report was duly filed with the Assessing Officer along with the return of income and was in his possession in the course of assessment. During the course of assessment, the appellant filed details of interest of Rs. 1,82,01,856 paid on public deposits showing Rs. 58,96,594 as the amount which fell under the exemption in Section 40a (8 ). The Assessing Officer was satisfied with the details filed and did not make any disallowance in respect of Rs. 58,96,594. The Commissioner of Income-tax, in his order dated March 19, 1987, came to a conclusion that there was nothing on record to show that the conditions laid down in Sub-clause (ix) of Section 40a (8) were satisfied. Before the Commissioner of Income-tax, the appellant filed copiesof the annual report disclosing the fact that the deposits were secured by creation of a charge on the current assets of the appellant and also furnished a copy of the consent of the Controller of Capital Issues dated November 21, 1980, for creation of such charge. These documents were not considered by the Commissioner while passing the order under Section 263 and the Commissioner came to the conclusion that, at the point of making the assessment, the Inspecting Assistant Commissioner did not examine the issue and hence presumed that the order of the Inspecting Assistant Commissioner was erroneous on this point. Accordingly, he set aside the order of the Inspecting Assistant Commissioner on this point. ( 3 ) THE matter was considered fully by the Tribunal. The learned Accountant Member agreed with the finding of the Commissioner of Income-tax that there was nothing on record to show that the conditions laid down in Sub-section (ix) of Clause (b) of the Explanation to Section 40a (8) were satisfied. The learned Judicial Member took the view that the Inspecting Assistant Commissioner had examined this issue and, therefore, was of the opinion that there was no justification for asking him to have a second round. He also noted that, from the appellant's letters, it was evident that the Inspecting Assistant Commissioner was fully alive to the issue and had accepted the claim of the appellant after full verification and examination. However, he did not dissent from the order of the learned Accountant Member as, in his opinion, it would not advance the cause of justice and would only result in delaying the finality of the appeal. However, he did not dissent from the order of the learned Accountant Member as, in his opinion, it would not advance the cause of justice and would only result in delaying the finality of the appeal. ( 4 ) HERE the question involved is the application of the provisions of Sub-clause (ix) of Explanation (b) below Sub-section (8) of Section 40a. The said provisions are extracted as under :"sub-section (8 ).-- Where the assessee, being a company (other than a banking company or a financial company), incurs any expenditure by way of interest in respect of any deposit received by it, fifteen per cent. of such expenditure shall not be allowed as a deduction. " ( 5 ) THE meaning of the provision is that the expenditure incurred by a company, with the exception of a banking company or a financial company, by way of interest on deposits received by it is disallowable to the extent of 15 per cent. thereof. Clause (b) of the Explanation below the section excludes certain borrowings from the connotation of deposits for the purpose of such disallowance. Thus, the said clause carves out certain exceptions to the restrictive provision. Sub-clause (ix) of Clause (b) excludes from deposits, the loan secured by the creation of a mortgage, charge or pledge of any assets of the company. Such secured loan shall not be treated as deposits provided the aggregate of all such secured debts owed by the company does not exceed 75 per cent. of the market price of the assets securing the debts. ( 6 ) ONE curious aspect in this case is that there was a difference of opinion between the Judicial Member" and the Accountant Member constituting the Bench of the Tribunal in deciding the issue. However, the Judicial Member did not ultimately dissent from the conclusion of the Accountant Member. The case, as stated by the Tribunal for determination of the question, refers to a letter dated September 28, 1984, addressed by the assessee to the Assessing Officer wherein the question of disallowance of interest was purportedly explained by the assessee. But, we are not aware of what the contents of the letter were since the said letter does not appear as the ground material supplied with the statement of case. But, we are not aware of what the contents of the letter were since the said letter does not appear as the ground material supplied with the statement of case. The only material fact that we are informed of is that the appellant filed copies of the annual report disclosing the fact that the deposits were secured by creation of a charge on the current assets of the appellant and also furnished a copy of consent of the Controller of Capital Issues dated November 21, 1980, for creation of such charge. ( 7 ) HOWEVER, on a reading of Sub-clause (ix) of Clause (b) of the Explanation, we find that it does not stop at merely requiring the loan to be secured by the creation of a mortgage or charge or pledge of any assets of the company. There is a further requirement in the said sub-clause. The amount of the loan secured by the creation of a mortgage or charge or pledge shall not exceed 75 per cent. of the price that the assets securing the loan would ordinarily fetch on sale in the open market on the date of creation of the mortgage, charge or pledge, as the case may be, securing the debt. Whether this aspect has been gone into or not is not spelt out by any of the authorities below. The assessment order has nothing to show that the applicability of Section 40a (8) in its substantive part or in its exception part was examined in completing the assessment. As a matter of fact, the question of disallowability of the amount out of the interest payment does not appear to have received any attention from the Assessing Officer. In the computation of the total income, the following cryptic observation appears as disallowance under Section 40a (8) :" (11) 40a (8) as per statement 18. . . . Rs. 18,45,789. " ( 8 ) THIS appears in the assessment order as an addition to the total income amongst other items of additions. There is a letter from the assessee to the Assessing Officer dated August 20, 1984, appearing at page 126 of the paper book where the assessee has made a laconic observation as under :" 7. Interest paid on public deposits to the extent disallowable. During the. year under review, we have paid a total sum of Rs. 1,82,01,856 on fixed deposits. Interest paid on public deposits to the extent disallowable. During the. year under review, we have paid a total sum of Rs. 1,82,01,856 on fixed deposits. However, for the purpose of disallowance, we have considered Rs. 1,23,05,262 under Section 40a (8) being the interest paid on unsecured deposits covered by Section 40a (8 ). The balance of Rs. 58,96,594 represents interest paid on secured deposits which fall under the exempted category in Section 40a (8 ). " ( 9 ) IT clearly shows that the assessee's bald assertion that, out of the total interest payment of Rs. 1,82,01,856, the amount of Rs. 58,96,594 represented interest paid on secured deposits falling in the exempted category in Section 40a (8), does not suffice for its acceptance. The assessee nowhere indicated as to how the conditions precedent laid down in the exemption clause were satisfied and the Commissioner of Income-tax's order under Section 263 was correctly sustained by the Tribunal. In this view of the matter, we answer both the first and second questions in the affirmative and against the assessee. ( 10 ) THE third question relates to the computation of capital for quantifying the deduction under Section 80j that in turn depends on whether the, computation of written down value of depreciable assets should include the initial depreciation under Section 32 (1) (v) in addition to the general depreciation. The answer has to be in the affirmative. ( 11 ) IT is not in dispute that the written down value of the assets should go into the computation of capital employed for the purpose of determining the deduction available under Section 80j of the Act. "written down value" is defined by Clause (6) of Section 43. The answer has to be in the affirmative. ( 11 ) IT is not in dispute that the written down value of the assets should go into the computation of capital employed for the purpose of determining the deduction available under Section 80j of the Act. "written down value" is defined by Clause (6) of Section 43. The said definition is as under :" (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 acutally allowed 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 purposes of the said Clause (vi ). " ( 12 ) IT is the contention of the Revenue that Sub-clause (b) of Section 43 (6) clearly indicates that the written down value is the actual cost of the asset less all depreciation actually allowed to the assessee. Where the Legislature intends to exclude any particular class of depreciation from the expression "depreciation actually allowed", such intention has been expressly stated in the proviso. The proviso, according to learned counsel for the Revenue, does not intend to exclude from the aggregate depreciation the initial depreciation provided for in Section 52 (1) (v ). The only exclusion it refers to is the initial depreciation which was availed of by the assessee under the repealed provisions of Section 10 (2) (vi) (a), (b) and (c) of the Indian Income-tax Act, 1922. Therefore, it is only the initial depreciation allowed under the repealed Act of 1922 that is excludible from the aggregate of depreciation actually allowed. The only exclusion it refers to is the initial depreciation which was availed of by the assessee under the repealed provisions of Section 10 (2) (vi) (a), (b) and (c) of the Indian Income-tax Act, 1922. Therefore, it is only the initial depreciation allowed under the repealed Act of 1922 that is excludible from the aggregate of depreciation actually allowed. In order to supply further support to this line of argument, our attention was drawn to Explanation 3 below Section 80j (la) (ri) which clearly says that the written down value has the same meaning as in Clause (6) of Section 43. By adverting to the said Explanation, it was contended that though Section 43 limits the definition of written down value of a depreciable asset only to its use in sections 28 to 41, it cannot be argued that the definition is of limited application and the expression "written down value" for the purpose of Section 80j is open to a separate and independent construction. The meaning of the words "written down value" for the purpose of Sections 28 to 41 is the same meaning to be attributed to the expression in applying the provisions of Section 80j. In the contentions of the Revenue shortly stated, the definition of "written down value" in Clause (6) of Section 43 merely excludes the initial depreciation under the old Act of 1922, but does not permit such exclusion of initi'al depreciation under the present Act. Therefore, as per the definition of "written down value", the initial depreciation cannot come within the ambit of the expression "depreciation actually allowed", and that the meaning of the written down value in Section 43 (6) shall be its meaning for Section 80j as well by virtue of the Explanation 3 below Section 80j (1a) (II) and thus the value of depreciable assets should be taken at the written down value determined on the basis of normal depreciation as well as initial depreciation allowed. ( 13 ) WE, however, find such contentions to be unsound. At the time, the proviso was inserted in the present Act by the Finance (No. 2) Act, 1965, with retrospective effect from April 1, 1962, there was no scheme for initial depreciation over and above the normal depreciation. ( 13 ) WE, however, find such contentions to be unsound. At the time, the proviso was inserted in the present Act by the Finance (No. 2) Act, 1965, with retrospective effect from April 1, 1962, there was no scheme for initial depreciation over and above the normal depreciation. The law re-enacted as the Income-tax Act, 1961, contemplated originally only one class of depreciation, the depreciation for the normal wear and tear of the depreciable assets. The same was the position when the proviso was inserted by the Finance (No. 2) Act, 1965. The concept of initial depreciation re-emerged and made its entry in the new Act by the Finance (No. 2) Act, 1967, with effect from April 1, 1968. But the Legislature, while reintroducing initial depreciation in the present Act, evidently omitted to note that the proviso below Clause (6) of Section 43 defining "written down value" should also be correspondingly amended conformably with the legislative policy of excluding such additional or initial depreciation from the scope of the expression "depreciation actually allowed" so that such depreciation does not go to reduce the written down value. Reduction of the written down value by such depreciation would not be at all rational since such depreciation is, in its true effect and nature, not real depreciation but an incentive with the label of depreciation. The proviso below Clause (6) of Section 43 makes it clear that the legislative policy is not to treat any depreciation other than normal depreciation for wear and tear of the assets to be included in the words "depreciation actually allowed". There should have been corresponding insertion of Clause (v) of Sub-section (1) of Section 32 in that proviso below the definition of written down value. If the initial depreciation under the old Act of 1922 is to be excluded from the aggregate depreciation actually received, there is no perceivable reason why the initial depreciation under the present Act should have differential treatment : it is a case of mere drafting omission that has gone unnoticed. Along with the initial depreciation under the repealed Act of 1922, which was an incentive given in the garb of depreciation, the initial depreciation in Section 32 (1) (v) being of the same nature should also find a place in that exclusionary proviso. Along with the initial depreciation under the repealed Act of 1922, which was an incentive given in the garb of depreciation, the initial depreciation in Section 32 (1) (v) being of the same nature should also find a place in that exclusionary proviso. In any case, the connotation of the expression "depreciation actually allowed" is intended not to take into account any depreciation other than normal depreciation. This is also manifest from the language of Clause (v) of Sub-section (1) of Section 32, which is extracted below :" (v) in the case of any new building, the erection of which is completed after the 31st day of March, 1967, where the building is owned by an Indian company and used by such company as a hotel and such hotel is for the time being approved in this behalf by the Central Government, a sum equal to twenty-five per cent. of the actual cost of erection of the building to the assessee, in respect of the previous year in which the erection of the building is completed or, if such building is first brought into use as a hotel in the immediately succeeding previous year, then in respect of that previous year ; but any such sum shall not be deductible in determining the written down value for the purposes of Clause (ii ). " ( 14 ) THE last sentence "any such sum shall not be deductible in determining the written down value for the purposes of Clause (ii)" leaves no room for doubt that it has never been in the contemplation of the lawmakers to treat such depreciation as the depreciation proper to be taken into account while determining the written down value. ( 15 ) THE foregoing survey of the related provisions throws sufficient light on the fact that the written down value of depreciable assets should not include any depreciation which is not for the wear and tear of the asset but for giving an incentive to trades and industries. ( 16 ) LEARNED counsel appearing for the assessee cited before us an earlier decision of this court on this very issue in CIT v. Texmaco Ltd. In that case also, a similar view was taken. ( 16 ) LEARNED counsel appearing for the assessee cited before us an earlier decision of this court on this very issue in CIT v. Texmaco Ltd. In that case also, a similar view was taken. It was decided that, in computing the capital employed for the purpose of Section 80j, the initial depreciation should not be deducted for arriving at the written down value of the depreciable assets because initial depreciation is additional or extra depreciation given as an incentive to instal new machinery and its true nature is that of development rebate. We follow the earlier decision of this court. The said decision drew support from the observation of the Supreme Court in P. K. Badiani v. CIT. The following passage occurring at the bottom paragraph at page 647 is worth quoting "depreciation allowance has been allowed to be deducted from the assessable profits of an assessee under Section 10 (2) (vi) of the 1922 Act, corresponding to Section 32 of the 1961 Act, It would appear from the report of the Taxation Enquiry Commission, 1953-54, Vol. II, as to what is the nature of the depreciation allowance, vide Chapter V, page 74. The normal depreciation provided in Clause (vi) and the additional depreciation mentioned in Clause (via) of Section 10 (2) of the 1922 Act, are permitted to be deducted from the 'written down value'. By and large, the cost of replacements is allowed as deduction in lieu of depreciation in respect of certain assets. By the amendments made by the Income-tax (Amendment) Act, 1946, the Finance Act, 1955, and the Finance Act, 1956, certain initial depreciation was allowed in respect of buildings newly erected or machinery and plant newly installed. Obviously, it was by way of an incentive for the new structures or the new installations. The amount of initial depreciation was not deductible in determining the 'written down value' although under proviso (c) it was to be taken into account in the aggregate of all allowances so as not to permit them to exceed the maximum limit provided therein. Obviously, it was by way of an incentive for the new structures or the new installations. The amount of initial depreciation was not deductible in determining the 'written down value' although under proviso (c) it was to be taken into account in the aggregate of all allowances so as not to permit them to exceed the maximum limit provided therein. " ( 17 ) IN our view, these observations clinch the matter and there cannot be any manner of doubt that, in determining the written down value of depreciable assets, the special allowance under Section 32 (1) (v) is not to be reckoned as the true nature of the allowance is not depreciation though it bears the appellation "initial depreciation". The enactment has not left the matter in any ambiguity, if we read all its related provisions conjointly. ( 18 ) WE, therefore, answer the third question in the negative and in favour of the assessee. There will be no order as to costs.