PANDHYAN INSURANCE CO. LTD. vs. COMMISSIONER OF INCOME-TAX, MADRAS

CIVIL APPEAL No. 816/1963Supreme Court[1965] 1 S.C.R. 36729 September 1964Bench: 3 JudgesAuthor: K. SUBBA RAO, J.C. SHAH, S.M. SIKRI B8 pages
AI SummaryAllowed

What did the Supreme Court hold?

The Supreme Court allowed the appeal. It held that Rules 3(b) and 6 of the Schedule to the Income-tax Act should be read in conjunction with the Insurance Act, 1938, which ensures accurate asset valuation and profit determination. The Court clarified that the Income-tax Officer can only exclude expenditure not allowable under Section 10. The word 'expenditure' in Rule 6 refers to disbursement and does not encompass depreciation. Regarding 'depreciation', the Court found it covers both actual and notional depreciation. Consequently, under Rule 3(b), the Income-tax Officer has no discretion but to allow depreciation written off, and cannot demand proof of actual depreciation. The Court followed its earlier decision in Life Insurance Corporation of India v. Commissioner of Income-tax. The question was answered in the affirmative, allowing the deduction.

What were the facts?

The assessee, Pandhyan Insurance Co. Ltd., a general insurance company, constructed a building costing approximately Rs. 12,00,000. For the accounting year 1953, it wrote off Rs. 1,00,000 as depreciation. The Income-tax Officer disallowed 4/5ths of this depreciation, arguing that only 1/5th was used for business, and the remaining 4/5ths were let out, with rental income exempted under Section 4(3)(xii). The Appellate Assistant Commissioner disallowed the entire depreciation, citing Rule 3(b) of the Schedule to the Income-tax Act, which he interpreted as requiring actual depreciation. The Appellate Tribunal partially restored the Income-tax Officer's order, allowing 1/5th depreciation but agreeing with the AAC on the 4/5ths. The High Court, on reference, ruled against the assessee, holding that the Income-tax Officer could examine the quantum of depreciation.

What were the issues?

1. Whether, under Section 10(7) and the rules in the Schedule to the Income-tax Act, 1922, four-fifth of the sum written off as depreciation for the calendar year 1953 is allowable as a deduction. Assessee's contentions: - The Insurance Act, 1938, makes detailed provisions for the true valuation of assets and determination of profits of an insurance business. - Rule 6 of the Schedule allows the exclusion of only expenditure not allowable under Section 10. 'Expenditure' means disbursement and does not include depreciation. - Rule 3(b) covers both actual and notional depreciation, and the Income-tax Officer has no option but to allow depreciation written off, without requiring proof of actual depreciation. - Relied on the Supreme Court decision in Life Insurance Corporation of India v. Commissioner of Income-tax (1964) 51 I.T.R. 773. Revenue's contentions: - The Income-tax Officer disallowed 4/5ths of depreciation because the rental income from that portion was exempt under Section 4(3)(xii), implying no allowance for depreciation. - The Appellate Assistant Commissioner argued that Rule 3(b) requires actual depreciation, which was not present as the building was new. - The High Court held that the Income-tax Officer has the power to examine the quantum of depreciation claimed. - Argued that in Rule 6, 'depreciation' might not include notional depreciation, and in Rule 3(b), notional depreciation of property is not included.

Which sections of the Income-tax Act were involved?

Section 10(7),Section 4(3)(xii),Section 10

AI-generated summary — verify with the full judgment below

A B c D E F G H 367 PANDHY AN INSURANCE CO. LTD. v. COMMISSIONER OF INCOME-TAX, MADRAS September 29, 1964 (K. SUBBA RAO, J. C. SHAH ANDS. M. SIKRI JJ.) lnco111e Tax Act (I I of 1922) Schedule, rr. 3(b) and 6-Scopc oj l"he appellant ( assessee) was a company carrying on the business of general insurance. It erected a substantial modern building at a cost of about Rs. 12.00.000 towards the end of 1952. For the account- ing year 1953 it wrote off a sum of about Rs. 1,00,000 as represent- ing ~he depreciation with respect to various items. The Income-tax Officer disallowed 4/ 5 of the depreciation on the ~i:ound that only a fifth part of the building was utilised for the purpose of the appellant's busi- ness and the remaining 4/ 5 part was let out. and that the rent thereon was exempted under s. 4(3) (xii) of the Income-tax Act. 1922. On appeal by the assesscc, the Appellate Assistant Con1missioner dismissed

the appeal and enhanced the assessment by disallowing even the 1/5 of the depreciation allowed by the Income Tax Officer, on the ground that under r. 3 (b) of the Schedule to the Act, the allowable deprecia- tion was an actual depreciation of the value

The order continues below.

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