COMMISSIONER OF INCOME TAX Vs. HINDUSTAN ELECTROGRAPHITES LIMITED

JUDGEMENT

(1.) THE Income-tax Appellate Tribunal, Indore Bench, Indore, has referred the following question of law under Section 256(1) of the Income-tax Act, 1961, arising out of the order of the Tribunal, at the instance of the Revenue for the opinion of this court :

(2.) THE assessee is a limited company engaged in the manufacture and sale of graphite electrodes and graphite anodes, in collaboration with a French company. THE claim of the assessee for deduction under Section 80J of the Act on the amount of unabsorbed depreciation was disallowed by the Assessing Officer who did not accept the assessee's contention that only the depreciation actually allowed should be deducted from the cost of the assets to arrive at the written down value (for short "WDV"), for the purposes of working out the deduction under Section 80J. THE order of the Assessing Officer was upheld in appeal by the Commissioner of Income-tax (Appeals) and on further appeal to the Tribunal, the Tribunal took the view that the unabsorbed depreciation was an asset in the form of debt due to the assessee in accordance with Clause (iv) of Sub-rule (2) of Rule 19A of the Income-tax Rules. THE Tribunal also held that Explanation 3 to Section 43(6) of the Income-tax Act, was not applicable in the context of Section 80J and accordingly, held that the unabsorbed depreciation was not to be deducted for the purposes of working out the written down value under Section 80J of the Income-tax Act, 1961. THE Revenue then made an application under Section 256(1) for reference of the question arising out of the order of the Tribunal and, hence, the said question has been referred for the opinion of this court.

(3.) FROM the perusal of Section 80J, it is manifest that in computing the total income of the assessee derived from an industrial undertaking or a ship or the business of a hotel to which the said Section applies, the deduction from such profits and gains is to be allowed of so much of the amount thereof as does not exceed the amount calculated at the rate of six per cent, per annum of the capital employed in the industrial undertaking or ship or business of the hotel, subject to the other provisions of the said Section, in respect of the previous year relevant to the assessment year. Sub-section (1A)(I) provides that the capital employed in such industrial undertaking or the business of a hotel shall be computed in accordance with Clauses (II) to (IV) except as otherwise provided. Clause (II) provides that the aggregate of the amounts representing the values of the assets as on the first day of the computation period of the undertaking or of the business of the hotel shall be ascertained in the manner provided in Sub-clauses (i) to (v). Sub-clause (i) provides that in the case of assets entitled to depreciation, the value will be the written down value. It is with this Sub-clause that we are concerned in the present case. For the purposes of ascertaining the written down value of an asset entitled to depreciation, Explanation 3 to Sub-section (1A)(II) provides that written down value shall have the same meaning as in Clause (6) of Section 43. Thus, for the purposes of arriving at the value of the assets entitled to depreciation, the same will have to be determined in accordance with the provisions of Section 43(6) of the Act. Section 43(6) lays down that "written down value" means in the case of assets acquired in the previous year, the actual cost of the assets to the assessee and in the case of assets acquired before the previous year, the actual cost less all depreciation actually allowed to the assessee under the Act. Explanation 3 to Section 43(6) lays down that any allowance in respect of any depreciation carried forward under Sub-section (2) of Section 32 shall he deemed to be depreciation "actually allowed". It is, thus, clear that if full effect cannot be given to any allowance relevant to the depreciation under Section 32 of the Act, in any previous year, owing to there being no profits or gains chargeable for that previous year or profits or gains chargeable being less than the allowance, the same though carried forward as unabsorbed depreciation, shall count under Explanation 3 to Section 43(6) of the Act for calculating the written down value as deemed to be depreciation actually allowed.