COMMISSIONER OF INCOME TAX Vs. CHIRANJI LAL

JUDGEMENT

(1.) THE following question of law has been referred to us under S. 66(1) of the Indian IT Act, 1922, at the instance of the CIT, New Delhi:

(2.) THE assessee is an individual and the controversy relates to the asst. year 1960 -61 (previous year ending 31st March, 1960). The assessee purchased a motor car for Rs. 14,500 on 7th March, 1951. The ITO held that the car was not wholly used for the purposes of the assessee's business. He, therefore, restricted the depreciation allowance admissible under S. 10(2)(vi) to half the total depreciation permissible under the rules. The assessee 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 assessee sold the car for Rs. 6,000. In the assessment order dt. 14th March, 1963, the ITO computed the profit under S. 10(2)(vii), second proviso, arising out of the sale of the motor car, at Rs. 3,716, which represented the difference between the sale price and the written down value of the car (Rs. 2,284). The said written down value was arrived at on the basis of the depreciation admissible under S. 10(2)(vi) on the car and not on the depreciation actually allowed. By a subsequent order made under S. 154 of the INCOME TAX ACT, 1961, the ITO rectified the original order and fixed the written down value at Rs. 2,123. The assessee appealed before the AAC and contended that the written down value of Rs. 2,284 had not 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. The AAC accepted the assessee'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 S. 10(2)(vii) should be the difference between the sale price and the correct written down value. The Revenue appealed to the Tribunal. The contention of the Revenue before the Tribunal and its findings may best be put in the words of the Tribunal: "The Departmental Representative has not disputed the proposition that the written down value means the 'actual cost' less depreciation actually allowed to the assessee, namely, 50% of the total depreciation admissible as laid down S. 10(5)(b) of the Act. He has, however, contended that in view of S. 10(3) of the Act, 50% of the original cost should be taken as the cost of the motor car to the assessee and the depreciation actually allowed to the assessee 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 S. 10(2)(vii), second proviso. It has been contended that as the ITO virtually has followed this method, there was nothing wrong and the AAC should not have interfered with the computation of profit under S. 10(2)(vii), second proviso made by the ITO. 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 assessee'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 ITO over all these years is to be deducted in arriving at the written down value. In our opinion, this view is untenable." In coming to this conclusion, the Tribunal relied upon a decision of the Andhra Pradesh High Court in Vankadam Lakshminarayana vs. CIT (1961) 43 ITR 526 (AP) : TC18R.130. Dealing with a similar argument, the High Court observed: "We have 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 S. 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 the asset into two. On the other hand, the language of S. 10(3) makes it plain that such a theory cannot be sustained. It is not 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 not detain us any longer as we are not convinced that such a proposition can be sustained either on the language of any section or on authority."

(3.) MR . Kirpal, the learned counsel for the Revenue, relied on S. 10(3) which provides that where any plant or machinery is not 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 not wholly used for the purpose of the business and does not modify the meaning of the written down value in S. 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 S. 10(2)(vii) if the sale proceeds exceed the written down value the excess is taxed as profit to 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. Sec. 10(2)(vii) applies to "such building, machinery or plant" which has been sold. The word "such" relates back to S. 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 S. 10(2)(vii) has to be based on the definition of the written down value as given in S. 10(5)(b). There are various difficulties in giving effect to the contention of the Revenue. It cannot 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 S. 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 S. 10(2)(vi)(c) the depreciation allowance can in no case exceed the original cost. There is no provision in S. 10 for the division or splitting up of an asset into two parts. In my opinion, the Tribunal was right in taking the view it took and I would answer the answer accordingly in favour of the assessee. There will be no order as to costs.