I grow and manufacture tea, so only part of my income is taxed under the Income-tax Act. When I carry the written down value forward, does the Assessing Officer deduct the whole year's depreciation or only the taxable proportion?
Only the taxable proportion. Under s.10(1) read with rule 8 of the Income-tax Rules, 1962, 40 per cent of the income from the sale of tea grown and manufactured in India is the part liable to tax, and the Supreme Court held that in a rule 8 case the depreciation 'actually allowed' within s.43(6)(b) is the proportionate depreciation only. The Department's appeals, which sought to reduce the written down value by 100 per cent of the depreciation computed at the prescribed rate, were dismissed.
Decided by the Supreme Court (S.H. Kapadia J and H.L. Dattu J) on 2009-02-18, reported as Civil Appeal No. 1094 of 2009 (arising out of SLP (C) No. 13070 of 2007), with Civil Appeal Nos. 1093, 1095, 1096 and 1097 of 2009. It bears on section 10(1), section 43(6)(b), section 32, section 34, section 43(1), section 260A, section Rule 8 of the Income Tax Act 1961, in Capital Gains Exemptions, Deductions & Disallowances and How Tax Law Is Read matters.
Two things worth carrying away. First, the fraction, because it is constantly misquoted: rule 8 makes 40 per cent of the composite income from growing and manufacturing tea business income chargeable under the Income-tax Act, and the balance 60 per cent is agricultural income for the State. The judgment states the 40 per cent figure twice, at paras 11 and 16. Second, the principle, which is worth more than the arithmetic: what the composite-income rules do is bring a fraction of the income to charge, and every allowance that feeds the computation must follow the same fraction. That is why the written down value carried forward is reduced by 40 and not by 100 in the Court's own illustration. The same logic is the argument for other allowances that reduce a carried-forward balance in a composite-income business, and the two illustrations at para 12 are the cleanest statement of it available. The Court also drew a line the department sometimes ignores: allowances under ss.30 to 43D are a charge on profit and go into gross total income, while Chapter VI-A deductions come off gross total income afterwards, so the s.80HHC line of cases including Williamson Financial Services does not govern a rule 8 depreciation question.
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The respondent was in the business of growing and manufacturing tea; the applicability of rule 8 was not in dispute. The batch of appeals concerned assessment years 1988-89 to 1991-92 and was directed against judgments of the Gauhati High Court dated 22 November 2006 and 8 January 2007 in s.260A appeals. In the lead matter, for assessment year 1988-89, the assessee raised an additional ground before the Commissioner (Appeals) that in arriving at the opening written down value of the block of assets the Assessing Officer had wrongly deducted 100 per cent of the preceding year's depreciation computed at the prescribed rate, whereas s.43(6)(b) required only 40 per cent — the depreciation actually allowed — to be deducted. The Commissioner (Appeals) rejected it. The Tribunal, following the Calcutta High Court in CIT v. Suman Tea and Plywood Industries (P) Ltd. (1993) 204 ITR 719, held that since only 40 per cent of the composite income is chargeable under s.28, only 40 per cent of the depreciation allowable at the prescribed rate falls to be deducted in computing the written down value. The High Court affirmed that view and the Department appealed by special leave.
The Department's civil appeals were dismissed with no order as to costs. In cases where rule 8 applies, the income brought to tax as business income is only 40 per cent of the composite income, and consequently proportionate depreciation is what has to be taken into account, because that is the depreciation 'actually allowed' within s.43(6)(b) (para 16).
The Court began with the two questions it framed at para 4 — the meaning of 'depreciation actually allowed' in s.43(6)(b), and how depreciation is to be computed in a rule 8 composite-income case. On the first, it set out the scheme of ss.32, 34 and 43(6) and adopted the passage from Madeva Upendra Sinai v. Union of India (1975) 98 ITR 209 at pages 223-224: the key word in clause (b) is 'actually', which is the antithesis of the speculative, theoretical or imaginary, and the connotation of 'actually allowed' is limited to depreciation actually taken into account or granted and given effect to, that is, debited by the Income-tax Officer against the incomings of the business in computing the taxable income; it cannot be stretched to mean notionally allowed (paras 7 to 9). On the second, the Court applied CIT v. Nandlal Bhandari Mills Ltd. (1966) 60 ITR 173, a world-income case in which the majority had held that the mere fact that the whole depreciation was first deducted from world income and a proportion then struck did not amount to an actual allowance of the entire depreciation, so that only the depreciation deducted in arriving at the taxable income could be taken into account (para 10). That reasoning was held to apply squarely to composite income, since under s.10(1) read with rule 8 only 40 per cent of the business income from the sale of tea grown and manufactured in India was liable to tax (para 11). The Court then worked the point through two illustrations: on a receipt of 1000 with depreciation of 100 and other expenses of 300, the taxable figure is 240 whether one takes 40 per cent of the composite profit or 40 per cent of each item, but the carried-forward written down value is 900 on the Department's method and 960 on the assessee's (paras 12 to 15). Finally, the Court distinguished CIT v. Williamson Financial Services (2008) 297 ITR 17 as a s.80HHC decision, drawing the distinction between deductions and allowances under ss.30 to 43D, which are a charge on profit and enter gross total income, and Chapter VI-A deductions, which are allowed from gross total income (para 17).
In our view, in cases where Rule 8 applies, the income which is brought to tax as "business income" is only 40 per cent of the composite income and consequently proportionate depreciation is required to be taken into account because that is the depreciation "actually allowed".
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Handle my notice → Ask a CA on WhatsAppOnly the taxable proportion. Under s.10(1) read with rule 8 of the Income-tax Rules, 1962, 40 per cent of the income from the sale of tea grown and manufactured in India is the part liable to tax, and the Supreme Court held that in a rule 8 case the depreciation 'actually allowed' within s.43(6)(b) is the proportionate depreciation only. The Department's appeals, which sought to reduce the written down value by 100 per cent of the depreciation computed at the prescribed rate, were dismissed. This was decided by the Supreme Court (S.H. Kapadia J and H.L. Dattu J) and bears on section 10(1), section 43(6)(b), section 32, section 34, section 43(1), section 260A, section Rule 8 of the Income Tax Act 1961. It is reported as Civil Appeal No. 1094 of 2009 (arising out of SLP (C) No. 13070 of 2007), with Civil Appeal Nos. 1093, 1095, 1096 and 1097 of 2009. Two things worth carrying away. First, the fraction, because it is constantly misquoted: rule 8 makes 40 per cent of the composite income from growing and manufacturing tea business income chargeable under the Income-tax Act, and the balance 60 per cent is agricultural income for the State. The judgment states the 40 per cent figure twice, at paras 11 and 16. Second, the principle, which is worth more than the arithmetic: what the composite-income rules do is bring a fraction of the income to charge, and every allowance that feeds the computation must follow the same fraction. That is why the written down value carried forward is reduced by 40 and not by 100 in the Court's own illustration. The same logic is the argument for other allowances that reduce a carried-forward balance in a composite-income business, and the two illustrations at para 12 are the cleanest statement of it available. The Court also drew a line the department sometimes ignores: allowances under ss.30 to 43D are a charge on profit and go into gross total income, while Chapter VI-A deductions come off gross total income afterwards, so the s.80HHC line of cases including Williamson Financial Services does not govern a rule 8 depreciation question. If it applies to you, the first step is this: Recompute the opening written down value of the block on the proportionate basis and put the Court's two illustrations from para 12 in front of the Assessing Officer — they show the taxable figure is the same either way and that only the carried-forward WDV differs.
The respondent was in the business of growing and manufacturing tea; the applicability of rule 8 was not in dispute. The batch of appeals concerned assessment years 1988-89 to 1991-92 and was directed against judgments of the Gauhati High Court dated 22 November 2006 and 8 January 2007 in s.260A appeals. In the lead matter, for assessment year 1988-89, the assessee raised an additional ground before the Commissioner (Appeals) that in arriving at the opening written down value of the block of assets the Assessing Officer had wrongly deducted 100 per cent of the preceding year's depreciation computed at the prescribed rate, whereas s.43(6)(b) required only 40 per cent — the depreciation actually allowed — to be deducted. The Commissioner (Appeals) rejected it. The Tribunal, following the Calcutta High Court in CIT v. Suman Tea and Plywood Industries (P) Ltd. (1993) 204 ITR 719, held that since only 40 per cent of the composite income is chargeable under s.28, only 40 per cent of the depreciation allowable at the prescribed rate falls to be deducted in computing the written down value. The High Court affirmed that view and the Department appealed by special leave. The matter was decided on 2009-02-18 by the Supreme Court (S.H. Kapadia J and H.L. Dattu J). On those facts the Supreme Court held as follows. The Department's civil appeals were dismissed with no order as to costs. In cases where rule 8 applies, the income brought to tax as business income is only 40 per cent of the composite income, and consequently proportionate depreciation is what has to be taken into account, because that is the depreciation 'actually allowed' within s.43(6)(b) (para 16).
The Court began with the two questions it framed at para 4 — the meaning of 'depreciation actually allowed' in s.43(6)(b), and how depreciation is to be computed in a rule 8 composite-income case. On the first, it set out the scheme of ss.32, 34 and 43(6) and adopted the passage from Madeva Upendra Sinai v. Union of India (1975) 98 ITR 209 at pages 223-224: the key word in clause (b) is 'actually', which is the antithesis of the speculative, theoretical or imaginary, and the connotation of 'actually allowed' is limited to depreciation actually taken into account or granted and given effect to, that is, debited by the Income-tax Officer against the incomings of the business in computing the taxable income; it cannot be stretched to mean notionally allowed (paras 7 to 9). On the second, the Court applied CIT v. Nandlal Bhandari Mills Ltd. (1966) 60 ITR 173, a world-income case in which the majority had held that the mere fact that the whole depreciation was first deducted from world income and a proportion then struck did not amount to an actual allowance of the entire depreciation, so that only the depreciation deducted in arriving at the taxable income could be taken into account (para 10). That reasoning was held to apply squarely to composite income, since under s.10(1) read with rule 8 only 40 per cent of the business income from the sale of tea grown and manufactured in India was liable to tax (para 11). The Court then worked the point through two illustrations: on a receipt of 1000 with depreciation of 100 and other expenses of 300, the taxable figure is 240 whether one takes 40 per cent of the composite profit or 40 per cent of each item, but the carried-forward written down value is 900 on the Department's method and 960 on the assessee's (paras 12 to 15). Finally, the Court distinguished CIT v. Williamson Financial Services (2008) 297 ITR 17 as a s.80HHC decision, drawing the distinction between deductions and allowances under ss.30 to 43D, which are a charge on profit and enter gross total income, and Chapter VI-A deductions, which are allowed from gross total income (para 17). In the words reproduced by the source cited on this page: "In our view, in cases where Rule 8 applies, the income which is brought to tax as "business income" is only 40 per cent of the composite income and consequently proportionate depreciation is required to be taken into account because that is the depreciation "actually allowed"." The decision followed or applied Madeva Upendra Sinai v. Union of India (1975) 98 ITR 209 (SC) — applied on the meaning of 'actually allowed'; CIT, Madhya Pradesh v. Nandlal Bhandari Mills Ltd. (1966) 60 ITR 173 (SC) — applied; CIT v. Suman Tea and Plywood Industries (P) Ltd. (1993) 204 ITR 719 (Cal.) — approved in effect; CIT v. Williamson Financial Services (2008) 297 ITR 17 (SC) — distinguished.
It was decided by the Supreme Court on 2009-02-18 and is reported as Civil Appeal No. 1094 of 2009 (arising out of SLP (C) No. 13070 of 2007), with Civil Appeal Nos. 1093, 1095, 1096 and 1097 of 2009. Binding on every court and authority in India. A Supreme Court decision binds every assessing officer, every Commissioner (Appeals), every bench of the Income Tax Appellate Tribunal and every High Court in India. An officer who declines to follow it is acting contrary to law, and that refusal is itself a ground of appeal. On section 10(1), section 43(6)(b), section 32, section 34, section 43(1), section 260A, section Rule 8, the practical question is whether the facts of your own notice match the facts of this case closely enough for the same rule to apply.
It helps the taxpayer. The Department's civil appeals were dismissed with no order as to costs. In cases where rule 8 applies, the income brought to tax as business income is only 40 per cent of the composite income, and consequently proportionate depreciation is what has to be taken into account, because that is the depreciation 'actually allowed' within s.43(6)(b) (para 16). It arises in Capital Gains Exemptions, Deductions & Disallowances and How Tax Law Is Read matters, on section 10(1), section 43(6)(b), section 32, section 34, section 43(1), section 260A, section Rule 8 of the Income Tax Act 1961, and was decided by S.H. Kapadia J and H.L. Dattu J. Before relying on it, read the source linked on this page and check whether it has since been distinguished, overruled or overtaken by an amendment to the Income Tax Act. In practice the steps that follow from it are these. State the rule and the fraction together in the submission: rule 8, 40 per cent taxable, 60 per cent agricultural. Do not write 'rule 8' alone. If the officer relies on CIT v. Williamson Financial Services (2008) 297 ITR 17, point to para 17: that was a s.80HHC case under Chapter VI-A and stands on a different footing from allowances under ss.30 to 43D. Check the rest of the block for the same error — the point recurs in every subsequent year until the WDV is corrected. For a rubber or coffee business, run the identical argument on rule 7A (35 per cent taxable) or rule 7B (25 per cent for coffee grown and cured; 40 per cent for coffee grown, cured, roasted and ground), but state the fraction that belongs to your rule.
Validity check could not be completed. Validity check could not be completed. Later treatment of this judgment was NOT checked — indiankanoon's search endpoint returned HTTP 429 on the citator queries attempted. What WAS independently verified is the 40 per cent fraction, against the Income-tax Department's own published page on rule 8, and the exact wording of the operative sentence, through the phrase-fragment index. Rule 8 was not amended in any respect bearing on this holding so far as the material read discloses, but no amendment history for rule 8 was examined. No source could be cited for that finding. Checking whether an authority still stands matters as much as knowing what it held: a decision may be overruled on one point and survive on another, or the provision it interprets may have been amended since. Read the source and the editor's note on this page before relying on it in a reply to an Assessing Officer or in an appeal.
Read from the indiankanoon print view, which reproduced the judgment with the original page-break digits embedded in the running text ('at the 3 prescribed rate', '1 0 Supreme Court', 'There 1 3 is a distinction'). Those are artefacts of the source and have not been silently removed from the transcription relied on. The key sentence at para 16 was re-fetched through the phrase-fragment index and came back word for word. The 40 per cent figure was independently corroborated against the Income-tax Department's own page on rule 8, which states 40 per cent business income and 60 per cent agricultural income. This library shows the verification state of every entry openly. This entry has not yet been read in full by a chartered accountant. The summary reflects the sources listed on this page. Read the source before you rely on it in a reply to an Assessing Officer or in an appeal before the Commissioner (Appeals) or the Income Tax Appellate Tribunal.
The Department's civil appeals were dismissed with no order as to costs. In cases where rule 8 applies, the income brought to tax as business income is only 40 per cent of the composite income, and consequently proportionate depreciation is what has to be taken into account, because that is the depreciation 'actually allowed' within s.43(6)(b) (para 16).
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