ORDER
T.V. Rajagopala Rao, Judicial Member
1. This is an appeal filed by the assessee against the order of the Commissioner of Income-tax (Appeals)-IV, Hyderabad dated 28-10-1988 and it relates to assessment year 1985-86. Whether terminal allowance is correctly allowed or not for assessment year 1985-86, forms the subject-matter of the appeal.
2. The assessee is public limited company, carrying on leasing and trading activities. For assessment year 1985-86, its previous year ended by 30-4-1984. The assessee filed a return disclosing a total income of Rs. 21,73,168 and after adjusting the carry forward loss arrived at ‘Nil’ income. As per the assessment order dated 16-6-1986, the terminal allowance under Section 32(1)(iii) in respect of plant and machinery sold, was taken by the Income-tax Officer at Rs. 1,18,529. The said terminal allowance was arrived at as follows:–
Rs.
The closing WDV of Plant & Machinery for the assessment year 1984-85 taken as 2,03,529 the opening WDV for assessment year 1985-86 Less : Sale value of Plant & Machinery sold during the previous year 85,000 relevant to the A.Y. 1985-86 Terminal allowance determined by the ITO for assessment year 1985-86 1,18,529 Section 32(1)(iii) as far as relevant for our purposes is as follows:--
32(1) In respect of depreciation of buildings, machinery, plant or furniture owned by the assessee and used for the purposes of the business or profession, the following deductions shall subject to the provisions of Section 34, be allowed–
(iii) in the case of any building, machinery, plant or furniture which is sold, discarded, demolished or destroyed in the previous year (other than the previous year in which it is first brought into use), the amount by which the moneys payable in respect of such building, machinery, plant or furniture, together with the amount of scrap value, if any, fell short of the written down value thereof:
Provided that such deficiency is actually written off in the books of the assessee :
Explanation : For the purposes of this clause,–
(1) ‘moneys payable’ in respect of any building, machinery, plant or furniture includes–
(a) ** ** ** (b) where the building, machinery, plant or furniture is sold, the price for which it is sold.... The definition "written down value" was given at Section 43(6). The said definition as far as relevant for all purposes stand as follows: 43(6) 'written down value' means-- (a) ** ** **
(b) in the case of assets acquired before the previous year, the actual cost to the assessee less all depreciation actually allowed to him under this Act, or under the Indian Income-tax Act, 1922 (11 of 1922), or any Act repealed by that Act, or under any executive orders issued when the Indian Income-tax Act, 1986 (2 of 1986), was in force:
Proviso not extracted as it is not necessary.
The complaint of the assessee in this case is that while determining the terminal allowance, the Income-tax Officer had taken the written down value at Rs. 2,03,529 by deducting not only the depreciation actually allowed but also the depreciation not actually allowed from the cost of Plant and Machinery sold. The particulars of depreciation actually allowed and not actually allowed over the plant and machinery held by the assessee over the assessment years stand as follows :
Asst. Cost of Plant Depreciation Depreciation not
Year and Machinery actually allowed actually allowed
in respect of in respect of
Plant and Machi- Plant and
nery Machinery
Rs. Rs. Rs.
1975-76 5,25,340 52,535 -
1976-77 - - 47,280
1977-78 - 42,553 -
1978-79 - 38,297 -
1979-80 - 34,467 -
1980-81 - 31,021 -
1981-82 - 27,919 -
1982-83 - 25,126 -
1983-84 - 22,614 -
1984-85 -
Plant and Machinery sold
5,25,340 2,74,532 47,280
Rs.
2,74,532
Depreciation not actually allowed 47,280
Total depreciation taken into account
by the ITO for purposes of WDV for 3,21,812
the A.Y. 1984-85
Closing WDV taken by the ITO for
the Assessment Year 1984-85 2,03,528
Opening WDV for the Assessment Year 1985-86
as adopted by the ITO 2,03,528
According to the assessee, the depreciation not actually allowed for assessment year 1976-77 viz., Rs. 47,280 should not also be taken as the depreciation actually allowed and the total depreciation should consequently be not taken at Rs. 3,21,812 but should be taken only at Rs. 2,74,532 and consequently the correct figure of terminal allowance which should be allowed for the assessee, is Rs. 2,50,808 instead of only Rs. 2,03,528. Thus, the contention between the assessee and the department is confined to the prayer that the terminal allowance should be further enhanced by a sum of Rs. 47,280. The circumstances under which the depreciation for assessment year 1976-77 viz., Rs. 47,280, should be deemed not to have been actually allowed within the meaning of Section 43(6), is explained to us to be the following:–
3. The assessee filed the assessment order dated 30-11-1976 which is relating to assessment year 1976-77. In the said assessment order, though the amount of Rs. 48,883 was held to be the admissible depreciation, the ITO in his assessment order, referred to above, held that this cannot be allowed to be carried forward since there was no business carried on by the assessee company. The assessment dated 30-11 -1976 was rectified under Section 154 by means of the order dated 31-8-1977. In the rectificatory order, the admissible depreciation to the assessee was rectified as Rs. 47,280 instead of Rs. 48,883, noted in the assessment order. However, in that rectificatory order also it is stated that the admissible depreciation cannot be carried forward since the assessed figure is a loss of Rs. 64,870. Therefore, while determining the correct depreciation allowance at Rs. 47,280 for assessment year 1976-77, it was not allowed to be carried forward to the succeeding assessment year for two reasons:– firstly it is said that the assessee sustained loss and also because the loss itself was determined under the head ‘Income from other sources’ and not under the head ‘business’. The assessee did not file an appeal against the order dated 31-8-1977 under which the request of the assessee to carry forward the depreciation of Rs. 47,280, was negatived. From the assessment order, the said amount of Rs. 47,280 which was refused to be carried forward as depreciation allowed for assessment year 1976-77 was neither adjusted against the income of the assessment year 1976-77 nor allowed to be carried forward to the following assessment years. Thus, according to the assessee, the amount of Rs. 47,280 was not actually allowed by the ITO while computing the written down value in any assessment year till 1985-86. It is the case of the assessee that if depreciation “actually allowed” only amounting to Rs. 2,74,532 as shown in the table above, is taken into account, the correct closing written down value for assessment year 1984-85 and the correct opening written down value for assessment year 1985-86 will Rs. 2,50,808 and consequently the correct terminal allowance under Section 32(1)(iii) therefore works out to Rs. 1,65,808 as shown below:–
Rs.
Correct opening WDV for the assessment year 1985-86 as worked out 2.50,808 Less : Sale price of Plant & Machinery sold in Asst. Year 1985-86 85,000 Correct Terminal allowance to be allowed in the assessment year 1985-86 1,65,808
Instead of following the correct figure of terminal allowance at Rs. 1,65,808, the ITO allowed the only sum of Rs. 1,18,529 and thus, the short allowance of Rs. 47,280 towards terminal allowance forms the subject-matter of the appeal.
4. The assessee filed 154 application before the ITO asking him to rectify the mistake in allowing the correct terminal allowance in the assessment order dated 16-6-1986 for assessment year 1985-86 which according to the assessee, is apparent on record. The ITO by his orders dated 9-3-1988 refused to carry out the rectification of his assessment order for assessment year 1985-86 on the ground that the depreciation of Rs. 47,280 for the assessment year 1976-77 was allowed to be carried forward and that if it was not allowed in a later year the mistake was in not giving the set-off in a later year. The ITO further stated that the assessee should approach for the modification of the assessment of the later relevant year and that the assessee cannot ask for the rectification of the current assessment year 1985-86.
5. Aggrieved against the order dated 9-3-1988 refusing to rectify the assessment and thereby grant correct terminal allowance, the assessee filed an appeal before the CIT (Appeals). The learned CIT (Appeals) by his impugned order, rejected the appeal holding that the refusal to rectify the assessment by the ITO, is on valid grounds with which he agrees. He further held that the decision of the Hon’ble Supreme Court in the case of Maharana Mills (P.) Ltd. v. ITO [1959] 36 ITR 350, does not apply to the facts of the case.
6. Against the impugned orders, the present appeal is filed by the assessee-company and thus the matter stands for our consideration. We have heard Sri M.V. Purushothama Rao, learned Chartered Accountant for the assessee-company and Sri Raghava Rao, learned Departmental Representative. Sri Purushothama Rao, learned C.A. for the assessee argued that the finding of the ITO in his rectificatory order dated 9-8-1988 that the ITO not only granted depreciation of Rs. 47,280 in assessment year 1976-77 but also allowed it to be carried forward for subsequent years, is a wrong statement of fact and because of this wrong statement of fact, the order of the lower authorities are vitiated. He filed before us copy of the assessment order dated 30-11-1976 and the rectificatory order dated 31-8-1977 passed under Section 154 for assessment year 1976-77. A reading of these orders would clearly disclose that the depreciation was held not eligible to be carried forward since there was no business for the assessee-company in that year and since the loss determined for that year was under the head ‘Income from other sources’. The assessee-company was declared N.A. for assessment year 1976-77. The assessee was only deriving income by leasing out its machinery in assessment year 1976-77 and right upto assessment year 1980-81 and the income derived from leasing out the machinery, was being assessed under the head ‘Income from other sources’. Sri M.V. Purushothama Rao, learned C.A. for the assessee, filed the assessment order dated 17-2-1982 in order to show that the lease income derived by the assessee is shown as Income from other sources’. We verified the assessment order and found it correct. The question is whether the refusal to consider the depreciation allowed viz., Rs. 47,280 as unabsorbed depreciation of the following years, on the ground that the loss determined in that year, was determined not under the head ‘business but under the head ‘Income from other sources’ and for that reason the depreciation sum of Rs. 47,280, cannot be carried forward, is unsustainable and wrong under law. While ascertaining the income under the head ‘other sources’ also, the depreciation is to be carried forward for the later years, as per the provisions of Section 57 Clause (ii), the relevant portion of which is as follows:–
Section 57: The income chargeable under the head ‘Income from other sources’ shall be computed after making the following deductions, namely:–
(ii) in the case of income of the nature referred to in Clauses (ii) and (iii) of the Sub-section (2) of Section 56, deductions, so far as may be, in accordance with the provisions of Sub-clause (ii) of Clause (a) and Clause (c) of Section 30, Section 31 [sub-sections (1), (1A) and (2) of Section 32 and subject to the provisions of Section 38].
It is enough if we keep it in mind that Clauses (ii) and (iii) of Sub-section (2) to Section 56, deal with the income obtained from the leasing out of the plant and machinery or furniture. Therefore, it is clear from the conjoint reading of Section 56(2)(ii) and (iii) and Section 57(ii), that even in a case where income is derived from letting out of plant and machinery, furniture etc., the depreciation can be claimed to be carried forward for later years under Section 32(2) of the IT Act. In view of the correct position in law, the orders of the ITO that the sum of Rs. 47,280 cannot be carried forward from assessment year 1976-77, should be held to be wrong under law. We have already seen that while computing the terminal allowance under Section 32(1)(iii) from the price at which the plant and machinery was ultimately sold, the written down value should be deducted. As already seen the definition of written down value is given in Section 43(6). Under Section 43(6) since we have to consider the written down value in a subsequent previous year than the previous year in which the plant and machinery was purchased and put to use, it should be taken to be the actual cost of that plant and machinery to the assessee less all depreciation actually allowed to him, under this Act. What is meant by ‘actually allowed’ occurring in Section 43(6) came for interpretation before the Hon’ble Supreme Court in Maharana Mills (P.) Ltd. ‘s case (supra) in which the Supreme Court held as per the head note of the decision which is as follows:–
If he doubts The written down value of the previous year it is open to him to check up the previous calculations and if he finds any mistake it is open to him to make fresh calculations in accordance with the law applicable including the rules made thereunder. If, for instance, the Income-tax Officer finds that in an earlier assessment year there was an apparent arithmetical mistake in the account of the written down value of the properties of the assessee which resulted in a corresponding mistake in the assessment of the relevant assessment year he can take the corrected figure for the purposes of the assessment and it cannot be said that the mistake was not apparent from the record. A fortiori if he discovers that the very basis of the different earlier assessments was erroneous because of an initial mistake in determining the written down value it cannot be said that this would not be a mistake apparent from the record. And if in order to determine the correct written down value the Income-tax Officer makes correct calculations, it cannot be said that that is not rectifying a mistake apparent from the record but is de hors it.
The limit to which the Income-tax Officer can go back does not stop at the written down value of the previous year but extends up to the figure of the original cost, and the method enjoined by Section 10(5)(b) of the Income-tax Act, is not that Income-tax Officer should merely scale down the written down value of the previous year, but that he should take into consideration the actual cost, determining it for himself, if necessary, take also into consideration the allowances granted in the past, and then make his own computation as to the written down value for the assessment year with which he is concerned. Thus it cannot be said that merely because under Section 35 some written down value and the depreciation amount have been determined they are a final determination binding for all times to come; nor does the determination operate as estoppel or resjudicata for the following years.
In this connection the decision of the Hon’ble Supreme Court in Madeva Upendra Sinai v. Union of India [1975] 98 ITR 209 is referred. The true meaning of the words ‘actually allowed’ occurring in Section 43(6) of the IT Act, 1961 was given as follows:–
(i) The key word in Clause (b) of Section 43(6) of the Income-tax Act, 1961, is ‘actually’. It is the antithesis of that which is merely speculative, theoretical or imaginary. ‘Actually’ contra-indicates a deeming construction of the word ‘allowed’ which it qualifies. The connotation of the phrase ‘actually allowed’ is thus limited to depreciation actually taken into account or granted and given effect to, i.e., debited by the Income-tax Officer against the incomings of the business in computing the taxable income of the assessee: it cannot be stretched to mean ‘notionally allowed’ or merely allowable on a notional basis.
7. Thus, it can be seen that for fulfilling the definition of “written down value”, the depreciation should not only be granted but should be given effect to also. If it is only a notionally allowed depreciation which was not given effect to and which was not actually taken into account while granting depreciation for other years, it should not be taken to be “actually allowed”. In this case for assessment year 1976-77 though depreciation was computed at Rs. 47,280, it was never ordered to be carried forward and therefore, it should not be taken to have been “actually allowed” as the meaning of those words bear according to the ratio oi the Hon’ble Supreme Court in the decision cited above. Therefore, if it is not “actually allowed” depreciation, it should not be taken to be part of written down value for purpose of computing the terminal allowance under Section 32(1)(iii) of the IT Act.
8. In not ordering the ascertained depreciation amount of Rs. 47,280 to be carried forward for the later years, is a mistake apparent on record and that mistake can be rectified by the ITO even while ascertaining the correct terminal allowance under Section 32(1)(iii) as per the ratio of the Supreme Court decision first cited namely Maharana Mills (P.) Ltd. ‘s case (supra). Simply because the ITO stated while passing assessment orders as well as rectificatory order for assessment year 1976-77 that the ascertained depreciation of Rs. 47,280 cannot be ordered to be carried forward, does not amount to the conclusive order and that finding does not operate as res judicata for correctly determining the legal position with regard to the said amount of depreciation in later years. Thus, the finding given in 1976-77, does not operate as res judicata for correct appreciation of the position with regard to the said sum in assessment year 1985-86 while determining the terminal allowance.
9. As against this submission of Sri M.V. Purushothama Rao, learned Chartered Accountant for the assessee, the learned Departmental Representative relied upon the orders of the lower authorities and argued that before granting rectification, there should be apparent mistake for assessment year 1985-86. When the mistake even according to the assessee, was found in the assessment order and rectificatory order concerning to assessment year 1976-77, how can such a mistake be considered as a mistake committed in assessment year 1985-86. Further, it was submitted that the assessee though, was running in losses from assessment year 1976-77 to 1980-81, its financial position turned the corner and the assessee was getting fat income at least from assessment year 1980-81 onwards. Thus, according to the learned Departmental Representative, the assessee should have moved for the rectification i.e., for carry forward of depreciation and its absorption from the incomes derived by the assessee for assessment years 1981-82 to 1985-86. The assessee did not take initiative to get any of the assessment orders of those years rectified. Having slept over its rights it is too late in the day now to agitate for rectification in the year in which the plant and machinery were sold and at a stage of determining the terminal allowance. The learned Departmental Representative relied upon the following decisions:–
Shree Ramesh Cotton Mills Ltd. v. CIT [1979] 116 ITR 366 (Cal.)
B.C.S. Kartar ChitFund & Finance Co. (P.) Ltd. v. CIT [1989] 179 ITR 1371 (Punj. & Har.).
10. After hearing both sides, we are of the view that each one of the propositions made by Sri M.V. Purushothama Rao as extracted above, are acceptable and correct under law. We also hold that the decisions in Maharana Mills (P.) Ltd.’s case (supra) and Madeva Upendra Sinai’s case (supra) do aptly apply to the facts on hand and we hold that the learned CIT (Appeals) is not correct in not applying the first among them when it is quoted before him. It can be seen that for assessment year 1976-77 a sum of Rs. 47,280 was actually allowed as depreciation. Though it was allowed, it was not permitted to be carried forward and to be adjusted from out of the incomes of later years on the ground that firstly it was a loss year and secondly that loss was determined under the head ‘Income from other sources’. This order is firstly erroneous under law under Section 57(ii). Even supposing the depreciation was determined under the head ‘other sources’, it should be allowed to be carried forward and absorbed from the income of the later years and there is no difference as far as this aspect is concerned between depreciation allowed under Section 57(ii) and depreciation allowed under Section 32. Both the kinds of depreciation should be allowed to be carried forward and adjusted from the income of the later years as per the provisions of Section 32(2). We also accept the contention that this finding given for assessment year 1976-77 does not operate resjudicata and does not prevent the ITO to correctly appreciate the legal position while determining the terminal allowance for assessment year 1985-86. The decision in Shree Ramesh Cotton Mills Ltd.’s case (supra), is clearly distinguishable. In the said case their Lordships of the Calcutta High Court was determining the computation of total income of the assessee while adjusting the losses incurred in the previous years under Sections 72 and 73 (after adjusting such losses under Sections 72 and 73 of the IT Act). They never concerned themselves with the question of terminal allowance under Section 32(1)(iii) of the IT Act. While determining the terminal allowance, only the question of written down value would become relevant. Whenever we have to determine the written down value, then its definition under Section 43(6) should be applied. The written down value has no relevance while considering either Section 72 or 73 of the IT Act. Further Maharana Mills (P.) Ltd. ‘s case (supra) or Madeva Upendra Sinai’s case (supra) were not cited or considered by the Calcutta High Court since they were not at all relevant for their purpose. That itself would disclose that the Calcutta High Court decision relied on by the learned Departmental Representative has no application to the facts of the case. Even B.C.S. Kartar Chit Fund & Finance Co. (P.) Ltd.’s case (supra) relied on by the learned D.R. deals with carry forward and set off of losses, the losses of earlier years were not claimed against profits of immediately succeeding year or years. In such a case it was said that the limitation of 8 years would operate and if the losses sustained are not set off against the profits of the immediately succeeding year or years during the limitation period of 8 years, it was held that they cannot be set off against the profits of later date. This decision is neither here nor there for our purposes and does not apply at all to the facts on hand. Maharana Mills (P.) Ltd. ‘s case (supra) clearly supports the said position and therefore, we hold that the lower authorities fell in an error in not allowing the rectification prayed for in the assessee’s 154 petition filed for assessment year 1985-86 and in not granting enhancement of terminal allowance by Rs. 47,280.
11. In the result, the appeal of the assessee is fully allowed and orders of the lower authorities are set aside.
