COMMISSIONER OF INCOME-TAX, PUNJAB JAMMU & KASHMIR & HIMACHAL PRADESH, PATIALA vs. M/S. ALPS THEATRE, PATIALA

CIVIL APPEAL No. 26/1966Supreme Court[1967] 3 S.C.R. 18115 March 1967Bench: 3 JudgesAuthor: J.C. SHAH, S.M. SIKRI, V. RAMASWAMI COMMISSIONER OF INCOME5 pages
AI SummaryAllowed

What were the facts?

The assessee, M/s Alps Theatre, Patiala, claimed depreciation on the cost of land along with the cost of the building standing thereon. The Income Tax Officer, through an order dated February 22, 1959, recomputed the depreciation, excluding the cost of land, on the basis that the original assessment had allowed depreciation on the entire cost of Rs. 85,091, which included Rs. 12,000 for land. The Appellate Assistant Commissioner upheld the Income Tax Officer's order. However, the Appellate Tribunal accepted the assessee's appeal. The High Court, in an Income Tax Reference, answered the question in favour of the assessee. The Revenue, the Commissioner of Income-Tax, Punjab, Jammu & Kashmir & Himachal Pradesh, Patiala, appealed this decision to the Supreme Court.

What did the Supreme Court hold?

The Supreme Court allowed the appeal, setting aside the High Court's judgment and answering the referred question in the negative, against the assessee. The Court held that the word 'building' in Section 10(2) of the Indian Income-tax Act, 1922, does not include the site or land. This interpretation was derived from examining various sub-clauses of Section 10(2), where 'building' was used in contexts like insurance against destruction (sub-clause iv) and current repairs (sub-clause v), neither of which could apply to land. The Court emphasized that depreciation, as defined, refers to a decrease in value due to wear, deterioration, or obsolescence, which is not applicable to land. Rule 8 of the Indian Income-tax Rules, 1922, which prescribes depreciation rates based on the nature of the structure, further supported this view, as it would be illogical for land's depreciation to vary with the building's class. The Court also reasoned that the object of Section 10 is to ascertain true assessable income, and allowing depreciation on land would present a wrong picture of the business's real income. The case of Corporation of the City of Victoria and Bishop of Vancouver Island was distinguished as it dealt with exemption from municipal rates, not depreciation.

What were the issues?

1. Whether the cost of land is entitled to depreciation under the Indian Income-tax Act, 1922, along with the cost of the building standing thereon? (Question of law) Assessee's Contentions (as per High Court's reasoning): The assessee argued that a building cannot be conceived without the land beneath it, and the word 'building' in Section 10(2)(vi) connotes the land upon which construction has been made. They contended that the building should be treated as a unit for depreciation purposes, and the Act does not permit splitting it into building material and land. They also pointed to Section 10(2)(vii) proviso, which taxes surplus on sale of a building above its written down value, suggesting the entire unit is considered. The High Court also noted that if two equally plausible interpretations exist, the one favouring the assessee should be adopted. Revenue's Contentions (as per Supreme Court's reasoning): The Revenue contended that 'building' under Section 10(2) does not include the site because a site cannot be destroyed. They argued that depreciation, by definition, applies to a decrease in value through wear, deterioration, or obsolescence, which land does not undergo. They also referred to Rule 8 of the Indian Income-tax Rules, 1922, which prescribes depreciation rates based on the nature of the structure, implying land's depreciation would depend on the structure, which is illogical. Furthermore, they argued that allowing depreciation on land would distort the true income of the business.

Which sections of the Income-tax Act were involved?

Section 10(2),Section 10(2)(iv),Section 10(2)(v),Section 10(2)(vi),Section 10(2)(vii),Section 34(1)(b)

AI-generated summary — verify with the full judgment below

A COMMISSIONER OF INCOME-TAX, PUNJAB B c D E G H JAMMl' & KASHMIR & HIMACHAL PRADESH, PATIALA v. M/S. ALPS THEATRE, PATIALA March 15, 1967 [J. C. SHAH, S. M. S!KRI AND V. RAMASWAMI, JJ.)

Indian /ncome·tax Act, 1922 (II of 1922), s. 10(2) (4)-Depreciation -If land included.

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 tho site because there can- not be any question of destruction of the site. (183 El The word used in s. 10(2) (vi) is "depreciation" and "depreciation" means 11a decrease in value of property through wear, deterioration, or obsolescence, and allowance made for this in book-keeping, accounting etc." In that sense land cannot depreciate. (183 HJ By r. 8 of the Indian Income-tax Rules the rate of depreciation is furnJ on the nature of the structure. It would be difficult to appreciate why the depreciation of land would be dependa

The order continues below.

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