MODIPON LIMITED Vs. COMMISSIONER OF INCOME TAX

JUDGEMENT

(1.) AT the instance of the assessee the following question has been referred for the opinion of this Court under S. 256(1) of the INCOME TAX ACT, 1961 (for short, the Act) :

(2.) FACTUAL position giving rise to the reference in a nushell is as follows : Modipon Ltd., hereinafter referred to as the assessee, is a public limited company, which was incorporated on 19th Aug., 1965, for manufacturing Nylon -6 yarn. However, the production started in 1968. The previous year relevant for assessment year, as noted above is from 1st March, 1968 to 28th Feb., 1969. In the return of income filed, assessee claimed initial depreciation of Rs. 4,34,774 for quarters constructed at a cost of Rs. 21,73,872 as under : The AO required assessee to submit a list showing names of employees to whom the above quarters were allotted and salary paid to them with a view to verify whether all the quarters were fully constructed and were put to use for persons drawing salary upto Rs. 7,500 annually under the head 'Salaries'. A list was submitted on 31st Jan., 1972. The AO noticed that most of the quarters had not been allotted at all and some of the quarters were allotted to employees getting salaries exceeding Rs. 625 per month. Claim of initial depreciation was accordingly disallowed partly and the allowance was restricted to Rs. 2,87,603 and the same allowed in respect of actual amount spent on quarters allotted to employees getting salaries upto Rs. 7,500 only. The matter was carried in appeal to the Appellate Assistant Commissioner (in short, AAC). AAC was of the view that the words which have been used are "used solely for the purpose of" and, therefore, the user may be one of the relevant considerations but not the only consideration. Several practical difficulties were enumerated to conclude that a pragmatic view was necessary to be taken. It was noticed that in the subsequent years when the quarters were constructed for the senior employees, the quarters which were in their occupation during the assessment year concerned, were vacated for the purpose of allotment to junior employees. As such depreciation in respect of B, C and D type quarters were liable to be granted and accordingly he directed the ITO to allow initial depreciation equivalent to 20 per cent of the cost of quarters. The matter was carried in further appeal before the Tribunal by both the assessee and the Revenue on several grounds. Present reference relates to the appeal filed by Revenue. The only point which was taken up by the Revenue in the appeal filed by it related to direction of AAC to allow initial depreciation. Tribunal was of the view that as the language used in S. 32(1)(iv) was clear, there was no scope for taking note of practical difficulties and making a consideration on equitable grounds. It was held that the language of the provision being clear, the order of AAC was not sustainable. Accordingly, order of the ITO was restored. Types of Qrs. Nos of Qrs. Total cost Rs. B Type 66 6,38,064 C Type 252 14,79,610 D Type 19 56,198 21,73,872

(3.) IN order to appreciate rival submissions, it is necessary to take note of the relevant provisions which at the time were as follows :