Gulati, J. - (1.) A short but interesting question of law arises in this reference under Section 66(1) of the Indian Income-tax Act, 1922.
(2.) THE assessee is a company. THE assessment years involved are 1960-61 and 1961-62 of which the relevant previous years are the calendar years ending on 31st December, 1959, and 31st December, 1960, respectively. THE assessee-company is engaged in the business of production and sale of cotton textile goods and paints at Kanpur. It set up a rayon plant in a different locality at Kanpur and this new rayon plant went into production from 1st August, 1959. In its return for the assessment year 1960-61, the assessee disclosed a loss of Rs. 86,30,813 and in the return for the year 1961-62, it also disclosed a loss of Rs. 60,75,273. THE returns for both the years were accompanied by audited copies of profit and loss account and the balance-sheet. THEre was a separate balance-sheet in respect of the rayon unit which was described as J. K. Rayon branch. THE book value of buildings and machinery of the rayon factory was shown at Rs. 3,10,03,636 on which depreciation and development rebate were claimed. THE assessee-company had taken a loan of Rs, 90 lakhs from the U.P. Government for the specific purpose of setting up the rayon factory. THE total cost of Rs. 3,10,03,636 upon which depreciation was claimed included a sum of approximately Rs. 25 lakhs consisting of preliminary Expenses incurred on the installation of the machinery and interest paid to the U.P. Government and to the foreign supplies from whom the assesses had purchased machinery on deferred payment basis. THE break-up of the sum of Rs. 25 lakhs as set out in the order of the Income-tax Appellate Tribunal is as under : JUDGEMENT_153_ITR98_1975Html1.htm Rounded by the Income-tax Officer at Rs. 25,00,000. The Income-tax Officer came to the conclusion that the entire sum of Rs. 25,00,000 had to be subtracted from the total cost for purposes of depreciation and development rebate allowance. On appeal, the Appellate Assistant Commissioner of Income-tax held that only the sum of Rs. 75,000 mentioned at item No. (5) being the rewards paid to the officers and technicians for expeditious installation of the factory was to be disallowed and the remaining items totalling Rs. 24,25,000 were properly included in the total cost upon which the depreciation and development rebate was admissible. The department appealed to the Income-tax Appellate Tribunal. The Tribunal in a well-reasoned and detailed judgment agreed with the view taken by the Appellate Assistant Commissioner of Income-tax and dismissed the department's appeal. The Commissioner of Income-tax is aggrieved and, at his instance, the Tribunal has referred the following two questions for the opinion of this court: "(1) Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that the sums totalling Rs. 24,25,000 formed part of the 'actual cost' of the assets of the assessee ? (2) If the answer to question No. 1 is in the affirmative, then, whether on the facts and circumstances of the case, the assessee-company was entitled to depreciation under Section 10(2)(vi) and development rebate under Section 10(2)(vib) of the Indian Income-tax Act, 1922, on the expenses of Rs. 24,25,000."
(3.) BEFORE we proceed to answer the questions, it is necessary to notice the relevant provisions of the Indian Income-tax Act, 1922 (hereinafter referred to as "the Act"). Section 10 of the Act provides the mode of computation of profits and gains of a business. Sub-section (2) of Section 10 enumerates the allowances to be made in the computation of such profits and gains. Clause (vi) of Sub-section (2) provides for allowance, on account of depreciation of buildings, machinery, plant or furniture which are used for purposes of business and Clause (vib) provides for an allowance on account of development rebate on plant and machinery. These two provisions are extracted below ; "10(2)(vi) in respect of depreciation of such buildings, machinery, plant and furniture being the property of the assessee, a sum equivalent, where the assets are ships other than ships ordinarily plying on inland waters, to such percentage on the original cost thereof to the assessee as may in any case or class of cases be prescribed and in any other case, to such percentage on the written down value thereof as may in any case or class of cases be prescribed. " " 10(2)(vib) in respect of a new ship acquired or new machinery or plant installed after the 31st day of March, 1954, which is wholly used for the purposes of the business carried on by the assessee, a sum by way of development rebate in respect of the year of acquisition of the ship or of the installation of the machinery or plant, equivalent to--...... (ii) in the case of machinery or plant installed before the 1st day of April, 1961, twenty-five per cent. and in the case of machinery or plant installed after the 31st day of March, 1961, twenty per cent. of the actual cost of the machinery or plant to the assessee;......" A perusal of these provisions shows very clearly that depreciation is to be allowed on the written down value of buildings, machinery, plant or furniture, while the development rebate is to be allowed on the actual cost of the plant or machinery in respect of the year in which such machinery or plant is installed. Then we pass on to Section 10(5) which defines " written down value " ; the material portion of this provision reads: " 10. (5) In Sub-section (2)..,...' written down value' means- (a) in the case of assets acquired in the previous year, the actual cost to the assessee...... and (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 any Act repealed thereby, or under executive orders issued when the Indian income-tax Act, 1886, was in force." ;