Full Judgment Text
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PETITIONER:
COMMISSIONER OF INCOME-TAX, PUNJAB JAMMU & KASHMIR &
Vs.
RESPONDENT:
M/S. ALPS THEATRE, PATIALA
DATE OF JUDGMENT:
15/03/1967
BENCH:
SIKRI, S.M.
BENCH:
SIKRI, S.M.
SHAH, J.C.
RAMASWAMI, V.
CITATION:
1967 AIR 1437 1967 SCR (3) 181
CITATOR INFO :
D 1992 SC1782 (10)
ACT:
Indian Income-tax Act, 1922 (11 of 1922), s. 10(2)(4)-
Depreciation--If land included.
HEADNOTE:
The Revenue authorities did not allow depreciation on the
cost of land alongwith the cost of building standing
thereon. The Appellate Tribunal accepted the assessee’s
appeal and the High Court answered the question in favour of
the assessee. In appeal to this Court by the Revenue:
HELD: The appeal must be allowed.
Building under s. 10(2), does not include the site because
there cannot be any question of destruction of the site.
[183 E]
The word used in s. 10(2)(vi) is "depreciation" and
"depreciation" means "a decrease in value of property
through wear, deter oration, or obsolescence, and allowance
made for this in book-keeping, accountings etc." In that
sense land cannot depreciate. [183 H]
By r. 8 of the Indian Income-tax Rules the rate of
depreciation is fixed on the nature of the structure. It
would be difficult to appreciate why the depreciation of
land would be dependant on the class of structures. [184 D-
E]
The whole object of s. 10 is to arrive at the assessable
income of a building after allowing necessary expenditure
and deductions. If depreciation on land was allowed it
would give a wrong picture of the true income. [184 F-G]
Corporation of the City of Victoria and Bishop of Vancover
[1921] 2 A.C 384, distinguished.
JUDGMENT:
CIVIL APPELLATE JURISDICTION: Civil Appeal No. 26 of 1966.
Appeal from the judgment and order dated October 28, 1964 of
the Punjab High Court in I. T. Reference No. 28 of 1962.
S. K. Mitra, Gopal Singh, S. P. Nayyar and R. N.
Sachthey,. for the appellant.
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Veda Vyasa and B. N. Kirpal, for the respondent.
The Judgment of the Court was delivered by
Sikri, J. At the instance of the Commissioner of Income
Tax,, the Appellate Tribunal, Delhi Bench "C", referred the
following question
"Whether the cost of land is entitled to
depreciation under the schedule to the Income-
tax Act alongwith the cost of the building
standing thereon.?"
182
This question arose out of the following facts : The respon-
dent, M/s Alps Theatre, hereinafter referred to as the
assessee, carries on business as exhibitor of films. The
Income Tax Officer initiated proceedings under s. 34(1)(b)
of the Indian Income Tax Act, 1922, on the ground that in
the original assessment depreciation was allowed on the
entire cost of Rs. 85,091/-, shown as cost ,of the building
which included Rs. 12,000/- as cost of land. The Income Tax
Officer, by his order dated February 22, 1959, recomputed
the depreciation, excluding cost of land. The assessee ap-
pealed to the Appellate Assistant Commissioner. The
Appellate Assistant Commissioner upheld the order of the
Income Tax Officer. The assessee then appealed to the
Appellate Tribunal which accepted the appeal. In accepting
the appeal it observed as follows :
"You cannot conceive of a building without the
land beneath it. It is not possible to
conceive of a building without a bottom. What
Section (10) (2) (vi) of the Act says is that
depreciation will be allowed on the building.
The word "building" itself connotes the land
upon which something has been constructed. It
was, therefore, wrong on the part of the
authorities below to exclude the value of the
land upon which some construction was made.
The true meaning of the word ’building’ means
the land upon which some construction has been
made. The two must necessarily go together."
The High Court answered the question referred to it against
the Department. Mahajan, J., observed that in Section
10(2)(vi) of the Income Tax Act, a building is placed at par
with machinery and furniture and is treated as a unit, and,
therefore, for the purposes of depreciation a building
cannot be split up into building material and land. He
further observed that if the Legislature wanted to exclude
land from the building for purposes of depreciation it could
have said so. He then added :
"Moreover, depreciation is allowed on the
capital. The capital here is a unit building.
If later on it is sold and it fetches more
than its written down value the surplus is
liable to tax [see in this connection Section
10(2) (vii) proviso.]"
He felt that "the crux of the matter is that the building is
treated as a unit for purposes of depreciation or repair,
and there is no warrant in the Act which would permit us to
split the unit for the purposes of section IO." He further
felt that at any rate two equally plausible interpretations
are possible and the one in favour of the assessee should be
adopted.
183
Dua, J., in a concurring judgment, felt that the question
was not free from difficulty, but he answered the question
in favour of the assessee on the ground that much could be
said for both points of view and the view in support of the
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assessee’s submission had found favour with the Tribunal
which had not been shown to be clearly erroneous.
The answer to the question depends upon the true interpreta-
tion of S. 10(2)(vi), and in particular whether the word
"building" occurring in it includes land. Section 10 deals
with the profits and gains derived from any business,
profession or vocation. Section 10(2) provides that such
profits or gains shall be computed after making certain
allowances. The object of giving these allowances is to
determine the assessable income. The first three allowances
consist of allowance for rent paid for the business
premises, allowance for capital repairs and allowance for
interest in respect of capital borrowed. Sub-clauses (iv),
(v), (vi), (vi-a) and (vii) of S. 10(2) deal with allowances
in respect of buildings, machinery, plant or furniture. The
word "building" must have the same meaning in all these
clauses. Sub-clause (iv) runs as under :
"in respect of insurance against risk of
damage or destruction of buildings, machinery,
plant, furniture,stocks or stores, used for
the purpose of the business,profession or
vocation, the amount of any premium paid."
"Building" here clearly, it seems to us, does not include
the site because there cannot be any question of destruction
of the site. Clause (v) reads :
" in respect of current repairs to such
buildings, machinery, plant or furniture, the
amount paid on account thereof."
This again cannot include the site. Then we come to sub-cl.
(vi), the relevant portion of which reads as under :
"in respect of depreciation of such buildings,
machinery, plant or furniture being the
property of the assessee, a sum
equivalent .... as may in any case or class of
cases be prescribed."
It would be noticed that the word used is "depreciation" and
"depreciation" means :
a decrease in value of property through wear,
deterioration, or obsolescence the allowance
made for this in book-keeping, accounting,
etc." (Webster’s New World Dictionary’).
In that sense land cannot depreciate. The other words to
notice are "such buildings". We have noticed that in sub-
cls. (iv) and
184
(v), "building" clearly means structures and does not
include site. That this is the proper meaning is also borne
out by r. 8 of the Indian Income Tax Rules, 1922. Rule 8
has a schedule, and as far as buildings are concerned, it
reads as under :
Class of asset Rate per- Remarks
centage
1.Buildings -
(1) First class substantial
buildings of materials.. 2.5 Double these numbers
(2)Scond class building will be taken for factory
of less substantial con- 5 buildings excluding
struction.... offices,godowns,officer’s
(3)Third class building 7.5 and employees quarters.
of construction infeior
to that of second class
building,but not inclu-
ding purely temporory
erection.
(4) Purely temporary No rate is prescribed:
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erection such as wooden renewals will be allowed
structure. as revenue expenditure.
The rate of depreciation is fixed on the nature of the
structure. If it is a first class substantial building, the
rate is less. In other words, first class building would
depreciate at a much less rate than a second class building.
It would be noticed that for purely temporary erections,
such as wooden structures, no rate of depreciation is
prescribed and instead renewals are allowed as revenue ex-
penditure. But if the contention of the respondent is
right, some rate for depreciation should have been
prescribed for land under the temporary structures. Further
it would be difficult to appreciate why the land under a
third class building should depreciate three times quicker
than land under a first class building.
One other consideration is important. The whole object of
s. 10 is lo arrive at the assessable income of a business
after allowing necessary expenditure and deductions.
Depreciation is allowable as a deduction both according to
accountancy principles and according to the Indian Income
Tax Act. Why’? Because otherwise one would not have a true
picture of the real income of the business. But land does
not depreciate, and if depreciation was allowed it would
give a wrong picture of the true income.
The High Court relied on Corporation of the City of Victoria
and Bishop of Vancouver Island(), but in our view this case
is distinguishable and gives no assistance in determining
the meaning of the ’word ’buildings’ in the context of S.
10(2)(vi). In this case the Privy Council had to construe
S. 197(1) of the Municipal Act, British Columbia, which
exempted from municipal rates and taxes
(1) [1912] 1 2 A.C. 384.
185
"every building set apart and in use for the public worship
of God." The Privy Council held that the above exemption
applied to the land upon which a building of the description
mentioned above was erected as well as to the fabric. The
Privy Council was not concerned with the question of
depreciation but with the question of exemption from
Municipal rates.
In the result the appeal succeeds, the judgment of the High
Court set aside and the question referred is answered in the
negative and against the assessee. In the circumstances
there will be
Y.P Appeal allowed.
L4SupCI/67-13
186