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"Written-Down Value" in respect of Tea, Coffee and
Rubber
[Submitted by CS Uma Kothari,
BA(H), ACWA, ACS,
Kolkata, West Bengal]
January 24, 2008
A case of non consideration of settled legal position:
Depreciation 'written down value' -a recent judgment rendered by the
Kerala High Court is contrary to settled legal position apparently causing
miscarriage of justice due to failure of counsels to point out relevant
provisions and settled legal position.
Summary - It is well settled that 'written down value' means
actual cost minus depreciation actually allowed under the Income -tax Act.
There should not be any dispute on such proposition in view of several
judgments of the Supreme Court. In case of tea plantation companies also
manufacturing tea, it is accepted by the Revenue and well settled legal
position that WDV means actual cost minus 40% of notional depreciation
taken into consideration while computing composite income to determine
chargeable income under Rule 8. This proposition is also well accepted in
various circulars issued by the board, admitting that in case of tea
company only 40% of total
development rebate, development allowance, and investment allowance is
allowed. Therefore, first of all the revenue should not have raised
dispute on this issue before the Kerala High Court. In any case having
raised such undesirable dispute, at least the Counsel for the Revenue
should have pointed out settled legal position and conceded on the matter.
Unfortunately the counsel of the assessee also failed to point out
relevant provision section 43(6) and settled legal position.
This caused rendition of a judgment contrary to settled legal position.
The judgment deserves to be challenged by the assessee by way of review
petition before the High Court as well as by appeal before the Supreme
Court, in case the High Court do not admit the review petition.
Written down value:
Broadly speaking the term 'written down value', as defined in section
43(6) means the actual cost of a depreciable asset minus depreciation
actually allowed by the assessing officer while computing taxable income
under the provisions of the income-tax Act, 1961 and earlier enactments
for computation of income for the purpose of income tax levied by the
Central Government on income chargeable to the Central income-tax.
It is now very well settled that the key words 'actual cost' and
`actually allowed' are the pivot of the meaning of 'written down value'.
Any notional allowance or any allowance merely allowable will not be
deducted from the actual cost or WDV unless benefit of depreciation has
been actually given effectively in the assessment of taxable income by the
Assessing Officer it will not be deducted.
Earlier Supreme Courts judgments about WDV:
About WDV under section 43(6) the Supreme Court has rendered several
judgments. It has been held that the key word in the definition of WDV 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 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 incoming of the taxable business in computing
the taxable income of the assessee; it cannot be stretched to mean
"notionally allowed" or merely allowable on a notional basis.
- Madeva Upendra Senai V UOI (1975) 98 ITR 209 (SC).
When only a portion of gross income, or global income is taxable, then
depreciation actually allowed will be only to the extent and in proportion
of taxable income comprised in the gross income or global income and not
the full amount of depreciation considered while computing gross income or
global income. - CIT V Nandlal Bhandari Mills Ltd (1966) 60 ITR 173 (SC),
Hukumchand Mills Ltd V CIT (1967) 63 ITR 232 (SC).
Depreciation allowed or merely allowable during tax holiday period by
State Government under state tax Act was also held to be not depreciation
actually allowed under Income-tax act, and therefore such depreciation was
not to be deducted from written down value -CIT V Dharampur Leather Co.
Ltd (196) 60 ITR 165 (SC).
Earlier Judgments of Calcutta High Court on the same issue:
First judgment - accepted by the revenue:
Applying the law laid down in earlier mentioned judgments and many
other judgments of the Supreme Court first the Tribunal and then on appeal
by revenue the Calcutta High Court in CIT v. Suman Tea & Plywood
Industries Pvt. Ltd. (1993) 204 ITR 719(Cal.) held that when rule 8 is
applied for determination of chargeable income from cultivation,
manufacture and sale of tea only 40% of total depreciation notionally
taken into consideration against composite income (comprising of exempted
agricultural income-60% and taxable business income -40%) is actually
allowed under the income tax and therefore, only 40% of such depreciation
is to be deducted from actual cost to determine the written down value.
The Hon'ble High Court had relied on various judgments of the Supreme
Court on the issue of written down value. In this case, the revenue had
not filed any appeal before the Supreme Court and therefore, the judgment
attained finality. In view of the judgment of the Supreme Court in the
case Berger Paints India Limited Vs. CIT (2004) 266 ITR 99 (SC), in such
circumstances the revenue should follow the ruling and should not also
appeal against orders or judgments of other
Tribunal or high Court in which ratio laid down in earlier judgment by a
High Court is followed as because on acceptance of a judgment or by not
filing an appeal the revenue is bound to follow such judgment all over
India, because the income-tax Act is a central legislation.
The above said first judgment of Calcutta High Court was again followed
in the case of same assessee vide CIT v. Suman Tea & Plywood Industries
P.Ltd. 226 ITR 34 (Cal.). In relation to determination of written down
value u/s 43(6), which was relevant for the purpose of computing balancing
charge or terminal depreciation as the assessee had sold the tea estate.
The department had preferred an appeal against this judgment. However, the
Honorable Supreme Court for delay as well as lack of any merit dismissed
the same.
Therefore, it is clear that the law is laid down by the Calcutta High
Court in case of Suman Tea had attained finality when the department did
not file any appeal against the first judgment (204 ITR 719) and again
when the Supreme Court dismissed the Revenue's appeal against the second
judgment (226 ITR 34).
Therefore these judgments of the Calcutta High Court have attained
finality and are binding all over India.
Settled legal position should not be challenged:
In view of judgment of the Supreme Court In Berger Paints India Limited
Vs. CIT (2004) 266 ITR 99 (SC), wherein the Supreme Court held that if the
Revenue has not challenged the correctness of the law laid down by any
high Court and has accepted it in the case of one assessee, then it is not
open to the Revenue to challenge its correctness in the case of other
assessees without 'just cause'.
In this case the Supreme Court noticed that the Revenue has accepted
the judgment of Gujarat High Court in the case of Lakhanpal National
Limited Vs. ITO (1986) 162 ITR 240 (Gujarat) which was followed by Bombay
High Court, Madras High Court and Special Bench of Tribunal, Delhi. It was
also noticed that the Department has not challenged the decision of ITAT
Special Bench. About the judgment of Bombay and Madras High
Courts also the court noted that it appears to have been accepted by the
Revenue and have not been challenged before the Supreme Court at all. In
as much as this fact was
asserted before the Supreme Court by the assessee and it was not
challenged in the counter affidavit filed by the Revenue. Therefore, the
Supreme Court following its earlier judgment in case of Union of India Vs.
Kaumudini Narayan Dalal (2001) 249 ITR 219 (SC), CIT V. Narendra Doshi
(2002) 254 IT 606 (SC) and CIT v. Shivsagar Estate (2002) 257 ITR (SC)
held that the Revenue cannot dispute the correctness of the judgment of
Gujarat High Court in case of another assessee. In view of the above
position, it appears that filing of an appeal or reference petition
against order of Tribunal on an
issue already settled by other high court was wrong.
Recent Judgment of Kerala High Court:
CIT v. PARRY AGRO INDUSTRIES LTD [2007] 293 ITR 99(Ker.)
In this case there were two issues relating to depreciation allowance,
before the high Court, the first one was regarding actual user of asset.
As there was no finding of user, the matter was restored to the Assessing
officer.
The second issue was about determination of WDV of machinery used in
tea industry, where income was computed as per Rule 8. The court held as
follows:
- Rule 8 of the Income-tax Rules, 1962, deals with two types of
income, i.e., agricultural income and non-agricultural income
- Agricultural income and business income are considered in the ratio
of 60: 40 of the total income.
- After computing the total income, the same has to be bifurcated in
the above manner.
- After computing the total income, the same has to be bifurcated in
the ratio of 60:40 and the total income would necessarily mean the net
income and not gross income.
- The income from tea estate is computed applying sections 28 to 43C,
and when computing the income, depreciation of 100 per cent. is allowed
under section 32 though for the purpose of charging of income under the
Income-tax Act, rule 8 is applied and the income so computed is
apportioned in ratio of 40%.
- The depreciation actually allowed against the assessee was not 40
per cent. but 100 per cent. which was to be considered for the purpose
of written down value.
A mistake of counsel in the above case:
As discussed earlier, in view of settled legal position, even the
counsel appearing fro the revenue should have, in all fair ness pointed
out relevant provisions and case laws. In any case the counsel of assessee
must have pointed out the same. On reading of the reported judgment it
appears that in the above case, all counsels had failed to draw attention
of the Hon'ble Court on the following issues: -
- Meaning of "Written down value" - as per section 43(6)- according to
which depreciation, which is 'actually allowed' under the Income -tax
Act can be deducted form cost and any notional depreciation taken into
computation cannot be deducted.
- Board's circulars issued in connection with development rebate,
development allowance and investment allowance in which it has
consistently been held by the Board that in case of tea companies where
rule 8 applies only 40% of total composite income, is business income
chargeable under the Act, the rebate or allowance actually allowed
against business income under income-tax act is only 40% and therefore,
there will be sufficient compliance if relevant reserve is created equal
to 40% of rebate or allowance claimed.
- Judgments of Calcutta High Court in CIT v. Suman Tea & Plywood
Industries Pvt. Ltd. (1993) 204 ITR 719(Cal.) and 226 ITR 34 (Cal), as
discussed earlier.
- The fact that the revenue did not challenge the judgment of Calcutta
high Court (204 ITR 719).
- Fact that the revenue's Special leaves Petition (SLP) was dismissed
by the Supreme Court for lack of any merit, when matter against second
judgment was in appeal on behalf of the Revenue.
- Any judgment of the Supreme Court and any other High Court were also
not pointed out (so far as appears from reported judgment)
Kerala High Court's judgment is contrary to settled legal position
and the law of land:
As discussed above non of the counsels who appeared in case of Parry
Agro Industries have not pointed out settled legal position and therefore,
apparently, the Hon'ble High Court could not consider the same and
therefore, rendered a decision which is contrary to the settled legal
position.
Computation- Deductions under chapter VIA Vis a vis WDV:
It appears that honorable Kerala high Court has, considered that as
full amount of depreciation is taken into consideration while computing
gross or composite income from sale of tea cultivated and manufactured by
assessee therefore such full amount should be deducted from WDV. The court
applied general principal laid down in CIT V C.W.S.
(India) Ltd. (2000) 246 ITR 278 about computation of income by deduction
of specified deduction in Chapter IV (section 28-43D) and Chapter VIA
(section 80C - 80VV). However, in absence of reference by counsels, it
appears that section 43(6), which is specifically related to the issue,
was not at all considered. Furthermore judgments of the Supreme court in
cases of Nandlal Bhandari Mills and Hukumchand Mills (supra.) which are
specifically in relation to Rules governing computation of global income
and finding out taxable income which was only a portion of global income
were not considered. The provisions considered therein are similar to the
Rule 8 which was earlier considered by Calcutta high Court and now by the
Kerala high Court.
In view of the above discussion, it is clear that the judgment of
Kerala High Court needs to be reconsidered and it is hoped that if so
applied, the Hon'ble High Court may rectify its own judgment after taking
note of the settled legal position as discussed above. In any case the
assessee should appeal against the Judgment.
Applicability of rule in case of Rubber and Coffee Plantations:
Rules 7A and 7B were inserted in the Income Tax Rules w.e.f. 01.04.2002
to provide for computation of chargeable income from activity of
cultivation and manufacture of rubber and coffee. These rules are, on the
same lines as rule 8 except that proportion of taxable income is
different. Therefore, what is laid down in relation to Rule 8 is
principally applicable in case of application of Rule 7A for Rubber and
Rule 7B for coffee. Therefore, the judgment of the Kerala high Court
becomes more important as in the state of Kerala Rubber and Coffee are
also major plantations.
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