COMMISSIONER OF INCOME TAX, MADRAS vs MOTORS AND GENERAL STORES LTD.

LEACH, C.J. - The assessee is a limited liability company. During the whole of the year of account (1942-43) it carried on business in electrical stores and in the distribution of electricity. For part of the year, namely, from the 23rd January, 1942, to the 31st March, 1942, it also carried on an oil mill business. Although the oil mill had only worked for two months and seven days in the year of account, the company claimed to be entitled to deduct the full allowance for depreciation contemplated by Section 10(2)(vi) of the Income Tax Act. The Income Tax Officer held that the company was only entitled to a proportionate allowance and this decision was accepted by the Appellate Assistant Commissioner. On appeal by the assessee to the Income Tax Appellate Tribunal, the decision of the Appellate Assistant Commissioner was reversed. The Tribunal held that on the wording of the section, the assessee was entitled to an allowance as if the machinery had been worked throughout the year.

At the instance of the Commissioner of Income Tax, Madras, the Tribunal has, u/s 66(1) of the Act, referred to this Court the following question :-

"Whether on the facts and in the circumstances of the case when the assessee actually used the plant and machinery for the purposes of his business in the previous year only for a period of two months and seven days, the assessee can be granted a depreciation allowance u/s 10(2)(vi) for the whole period of the previous year in question ?"

While conceding that there is no indication in clause (vi) of sub-section (2) of Section 10 that the allowance for depreciation is dependent on a time factor and that if the clause stood alone the assessee would be entitled to the full allowance. Mr. Rama Rao Saheb on behalf of the Commissioner says that sub-section (3) of Section 10 and sub-section (2) of Section 26 govern the clause and make it necessary to read it as the department has read it.

We can find nothing in sub-section (3) of Section 10 or in sub-section (2) of Section 26 to support this argument. Sub-section (3) of Section 10 reads as follows :-

"Where any building, machinery, plant or furniture in respect of which any allowance is due under clause (iv), clause (v), clause (vi) or clause (vii) of sub-section (2) is not wholly used for the purposes of the business, profession or vocation, the allowance shall be restricted to the fair proportional part of the amount which would be allowable if such building, machinery, plant or furniture was wholly so used."

This sub-section only makes provision to meet a situation where the machinery is used in part for the business of the assessee and in part for other purposes. In this case the machinery of the oil mill was used wholly for the assessees business. The word "wholly" does not mean wholly throughout the year. Clearly sub-section (3) cannot deprive the assessee of what he is entitled to under clause (vi) of sub-section (2). Section 26(2) is merely a provision to meet the case where a person carrying on a business, profession or vocation is succeeded in the course of the year of account by another person who carries on the same business, profession or vocation. The Privy Council pointed out in Indian Iron & Steel Co., Ltd. v. Commissioner of Income Tax, Bengal, that this sub-section (2) of Section 26 is not concerned with the computation of tax, but with the person upon whom the liability is imposed. When one wants to compute what is payable by way of tax, one has to go to Section 10.

Mr. Rama Rao Saheb has suggested that the judgment in this case supports his argument, but we do not agree. There the appellant company had taken over the business of another company as and from the 2nd December 1936. The company whose business was taken over had worked at a loss and its unappropriated depreciation allowance stood at a very large figure. The contract between the two companies contained a clause assigning to the appellant company, so far as was capable of being assigned, any claim which the old company had in respect of unabsorbed depreciation allowance. By virtue of this assignment, the appellant company claimed to be entitled to set off against its profits the unabsorbed depreciation allowance of the old company, but the Privy Council held otherwise. This was the sole question in the appeal. The question now before us was not even raised before their Lordships. Inasmuch as their Lordships did hold that Section 26(2) as it was before its amendment was not concerned with the computation of tax, their judgment, if anything, is against the argument now advanced on behalf of the Commissioner.

We hold that the Income Tax Appellate Tribunal rightly decided the case and consequently answer the question referred in the affirmative. We may add that this interpretation of the section will not affect the Income Tax authorities detrimentally. The depreciation can only be allowed to the extent of the cost of the machinery and the allowance of the full amount for the year of account will mean that the benefit conferred on the assessee by Section 10(2)(vi) will be more quickly worked out. The Commissioner must pay the costs of the assessee, Rs. 250.

Reference answered in the affirmative.