6 Section 43(6) – Depreciation – WDV – While computing written down value u/s. 43(6) for claiming depreciation, depreciation allowed under State enactment cannot be reduced

The assessee was engaged in the business of manufacture and sale of centrigued latex and rubber. For the A. Y. 2002-03, it claimed depreciation of the entire cost of the plant and machinery to the extent of 35 per cent treating it as the actual cost allowable on which the allowable deduction for depreciation is computed. The Assessing Officer found that the depreciation on assets used in the plantations, including for manufacturing activity, was found to have been claimed by the assessee-company for more than two decades. It was found that earlier the assessments had not been taken under the Income-tax Act, 1961, since the entire income was assessable under the Kerala Agricultural Income-tax Act, 1991 (AIT Act). It was found that as per section 32(1) of the IT Act, depreciation on building, machinery, etc. is to be allowed on the written down value of the assets, owned by the assessee and used for the purposes of the business. The written down value of the assets as per section 43(6) is the actual cost when the assets were acquired before the previous year. Otherwise the written down value shall be the actual cost of the assets less all depreciation actually allowed under the IT Act. The assessee had been claiming depreciation in computing the income from plantations, and if the actual cost of the assets is adopted it would lead to the assessee getting a double benefit on the same component of cost, to the extent of 35 per cent. Hence, the written down value for the previous year was only permissible to be claimed as depreciation, was the specific ground on which such claim was rejected. The Assessing Officer allowed depreciation on written down value after reducing the depreciation claimed under AIT Act from the actual cost.

The Tribunal held that there could be no claim for the assessee over and above the written down value as per the books of account and upheld the decision of the Assessing Officer.

On appeal by the assessee, the Kerala High Court reversed the decision of the Tribunal and held as under:

“i)    It is seen from the report filed by the Assessing Officer under the AIT Act that the assessee has claimed depreciation in the earlier years when filing returns under the AIT Act. The report of the Assessing Officer under the IT Act also indicates that the assets pertaining to the agricultural income has not been projected for depreciation under the IT Act for the previous years. The Assessing Officer points out that depreciation was claimed in the years 1998-99 to 2001-02 with respect to the building and plant & machinery of rubber sheeting factory, the income derived from which, being a manufacturing activity, however is not covered under the AIT Act. In such circumstances, one has to look at whether in allowing the depreciation on the basis of the written down value as available in section 43(6)(b), the entire cost of the building and plant and machinery for the purpose of generation of agricultural income has to be allowed or not.

ii)    There need not be any controversy raised on the interpretation of the provision of section 43(6) at sub-clause (b). What can be reduced from the actual cost to the assessee is all depreciation actually allowed under the IT Act, 1961 or the IT Act, 1922 or any Act repealed by that Act or any executive orders issued when the Indian Income-tax Act, 1886 was in force. The AIT Act having not been specifically noticed and the depreciation allowed with respect to the income assessed to tax under any other enactments having not been excluded, there is no reason for this Court to come to a different finding as to the written down value which could be claimed as depreciation on the first year in which the assessee is assessed under the IT Act. The assessee was earlier assessed under the IT Act, but for its manufacturing activity and not its agricultural operations, the income from which was assessed under the AIT Act. The assets employed for agricultural operations were never accounted for computing the depreciation under the IT Act, since that income, prior to rule 7A, was not exigible to tax under the IT Act.

iii)    The question arise since the entire income generated from the agricultural income was assessable to tax under the AIT Act, a State enactment. Only in the relevant assessment year i.e. 2002-03, the provision for a separate assessment under the AIT Act and IT Act came into force by virtue of the Income-tax Rules. Income from the manufacture of rubber which was earlier treated as agricultural income was made assessable under the IT Act to the extent of 35 per cent of the income derived from the business. Hence, the assessee would be entitled to claim only 35 per cent of the depreciation for the relevant assessment year. However, in computing such depreciation, should one adopt the entire cost of the plant and machinery or that shown as the written down value after reducing the depreciation allowed under the AIT Act, is the vexing question.

iv)    As noticed, the deeming provision is very clear and there is nothing to exclude from the computation of the cost of the assets; the depreciation allowed under the AIT Act. The revenue would contend that this Court has ample powers to iron out the creases and avoid a double benefit being conferred on the assessee. There is no doubt of such powers, but, whether it could be exercised in the present case is the question. In ironing out creases one should not be accused of burning the cloth, by adding words into the statute to digress from the essential unambiguous intention.

v)    The rule providing division of income to be assessed respectively under the AIT Act and the IT Act was brought in the year 2002. The Government was quite aware of the provision available in the IT Act, 1961 by which the depreciation in cases, where it was not being claimed under the enactments as specified in section 43(6)(b), can only be excluded and otherwise the written down value has to be deemed to be the cost of the assets. On apportioning the income from agriculture to be assessed under the respective enactments of the State and the Union; amendments ought to have been brought in accordingly to ensure that no double benefit accrues on an assessee.

vi)    Such amendments were brought in with prospective effect as is seen from Explanation 7 to section 43(6) of the IT Act which got inserted by the Finance Act, 2009 with effect from 1-4-2010. The Explanation takes in the specific defect of double benefit being conferred on the assessee. The legislature thought it fit to give it effect from 1-4-2010. The assessment year herein is 2002-03 relating to the income of the previous year being 2001-02. The amendment does not apply to that year. The amendment brought in without any retrospective effect, further makes it clear that the legislature cured the defect, but however, did not do so for the years previous to the amendment and not for the relevant assessment year. This is not a situation in which casus omissus could be supplied.

vii)    On the above reasoning, the disallowance of the depreciation and the computation made of the written down value cannot be accepted. The Assessing Officer is directed to employ the deeming provision for computing the written down value de hors the depreciation granted under the AIT Act and take 35 per cent of the cost of the total assets as written down value, allowing the depreciation for the relevant assessment year to that extent. The Assessing Officer shall deem the written down value to be the cost of the assets and compute the depreciation allowable at 35 per cent of such deemed written down value and apply it to the portion of the income derived from the agricultural business, that is assessable under the IT Act. The appeal is allowed with the above observations.”