Holding

"Depreciation actually allowed" is limited to depreciation actually taken into account in taxable income, and under Rule 8 only the proportionate depreciation corresponding to the taxable portion of composite income is to be considered.

Summary

The Commissioner of Income Tax, Dibrugarh appealed against judgments upholding the assessment of Doom Dooma India Ltd., a tea manufacturer, for assessment years 1988-89 to 1991-92. The core issues were the meaning of "depreciation actually allowed" under Section 43(6)(b) of the Income‑Tax Act, 1961 and the method of computing depreciation when Rule 8 of the Income‑Tax Rules, 1962 applies to composite income. The Supreme Court held that "depreciation actually allowed" means depreciation that is actually debited against business income in computing taxable income, not the full depreciation used for world (composite) income. Consequently, where only a proportion of composite income (40% in the tea business) is taxable, the depreciation to be considered is the same proportion of the total depreciation. Applying this principle, the Court dismissed the Department’s civil appeals, finding no merit in their contentions.

Issues considered

Interpretation of the expression "depreciation actually allowed" in Section 43(6)(b) of the Income‑Tax Act, 1961.
Method of computing depreciation for assets when Rule 8 of the Income‑Tax Rules, 1962, which deals with taxability of composite income, is applicable.

Legislation cited

Income Tax Act, 1961s. 10(1), s. 32, s. 34, s. 43(1), s. 43(6)(b)
Income Tax Rules, 1962s. Rule 8

Subjects

depreciationIncome Tax ActSection 43(6)(b)Rule 8composite incomewritten down valuetaxable incometea businessassessment

Judgment

[2009] 2 S.C.R. 733

COMMR. OF INCOME TAX, DIBRUGARH A
v
DOOM DOOMA INDIA LTD.
Civil Appeal No. 1094 of 2009
FEBRUARY 18, 2009
8
[S.H. KAPADIA AND H.L. DATTU, JJ.]
... Income Tax Act, 1961: s. 43(6)(b) - Expression
" 'depreciation actually allowed' - Meaning of - Held: Means
depreciation actually debited against the income of business
in computing taxable income - Income Tax Rules, 1962 - r. 8. C
Income Tax Rules, 1962 - r. 8 - Depreciation - Manner
of computation - Held: Depreciation deducted in arriving at
taxable income alone to be taken into account and not
depreciation taken for arriving at composite income. D
The questions which arose for consideration in these
appeals are what is the meaning of expression
"depreciation actually allowed" in Section 43(6)(b) of
Income Tax Act, 1961 and what is the manner of
computation of depreciation in cases falling under Rule 8 E
of Income Tax Rules, 1962 which deals with taxability of
composite income.
Dismissing the appeals, the Court
HELD: 1. The words "actually allowed" in Section F
43(6)(b) mean - "limited to depreciation actually taken into
account or granted and given effect to, i.e. debited by the
Income-tax Officer against the incomings of the business
in computing the taxable income of the assessee". [Para
9] [ 739-C] G
t
Madeva Upendra Sinai v. Union of India and Others
(1975) 98 ITR 209 - relied on.

733
H
734 SUPREME COURT REPORTS [2009] 2 S.C.R.

A Commissioner of Income-tax v. Suman Tea and Plywood '-7-- 4

lndusries (P) Ltd. (1993) 204 ITR 719 - referred to.
2. The depreciation deducted in arriving at the taxable
income alone could be taken into account and not the
depreciation taken into account for arriving at the world
8 income (composite income). Assessee is engaged in the
business of growing and manufacturing of tea. As per the
provisions of Section 10(1) of the 1961 Act read with Rule
8, 40 per cent of the business income derived from the
sale of tea grown and manufactured in India by the
C assessee was liable to tax. 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
D "actually allowed". [Paras 10, 11 & 16] [ 739-E; 740-G-H;
742-F-G]
Commr. of Income-tax, Madhya Pradesh, Nagpur and
Bhandara v. 'Nandlal Bhandari Mills Ltd. - ( 1966) 60 ITR 173
. .:. . relied on.
E
Commissioner of Income Tax v. Willamson Financial
Services and Others· (2008) 297 ITR 17 - held inapplicable.
Case Law Reference 1
....
F (1975) 98 ITR 209 relied on Para 8
(1993) 204 ITR 719 referred to Para 6
(1966) 60 ITR 17 relied on Para 9
(2008) 297 ITR 17 held inapplicable Para 17
G
CIVILAPPELLATE JURISDICTION: CivilAppe~J No. 1094
of 2009
t
From the Judgement and Order dated 22.11. 2006 of the
Hon'ble High Court of Assam, Na.galand, Meghalya, Manipur,
H Tripura, Mizoram; andArunachal Pradesh in LT.A. No. 28of2004
COMMR. OF INCOME TAX, DIBRUGARH V. 735
DOOM DOOMA INDIA LTD.

·-y
WITH A
Civil Appeal No. 1093 of 2009
Civil Appeal No. 1095 of 2009
Civil Appeal No. 1096 of 2009
Civil Appeal No. 1097 of 2009 B

V. Shekhar, Arijit Prasad, Arti Gupta, B. V. Balaram Das,
...; for the Appellant.
'!
Percy J. Pardiwala, Satyen Sethi, Johnson Bara,
Rameshwar Prasad Goyal, for the Respondent. c
The Judgement of the Court was delivered by
S. H. KAPADIA, J.
1. Delay condoned.
l( D
,... 2. Leave granted.
3. This batch of civil appeals is directed against judgments
dated 22.11.06 and 8.1.07 of the High Court of Guwahati,
Assam, in appeals under Section 260A of the Income-tax Act,
1961 in respect of assessment years 1988-89, 1989-90, 1990- E
91 and 1991-92.
4. What is the meaning of the expression "depreciation
~
actually allowed" in Section 43(6)(b) of the 1961 Act (as it stood
t·
at the relevant time)? How is the depreciation to be computed
F
in cases falling under Rule 8 of the Income-tax Rules, 1962,
which deals with taxability of composite income? These are the
two questions which arise for determination in this batch of civil
appeals.
Background facts in Civil Appeal No. of 2009 (Arising G
out of S.L.P(C) No.13070 of 2007)
J
5. The facts in all these civil appeals are similar.
Respondent-assessee, at the relevant time, was in the business
of growing and manufacturing of tea. In this case we are
H
736 SUPREME COURT REPORTS [2009] 2 S.C.R.

A concerned with the assessment year 1988-89. Applicability of -r--
Huie 8 is not in dispute. Assessee raised additional grounds
before CIT(A) at the time of hearing of the appeal inter alia stating
that the AO had erred in determining the opening "written down
value" of the block of assets without following the provisions of
B Section 43(6)(b) of the 1961 Act. According to the assessee
for arriving at the opening "written down value" of the block of
assets, the AO erred in deducting 100 per cent of the
depreciation for the preceding year calculated at the prescribed )...

'!
rate from the opening "written down value". However, the
c assessee claimed that only 40 per cent of the depreciation
allowed at the prescribed rate ought to have been deducted
and not 100 per cent as done by the AO. In this connection
reliance was placed by the assessee on Section 43(6)(b) of
the 1961 Act. Accordingly, by additional grounds which were
allowed to be raised, the assessee sought a direction from
D :,...
CIT(A) to the AO to determine the "written dowp value" in
accordance with the provisions of Section 43(6)(b) by deducting
...
only 40 per cent of the depreciation computed at the prescribed
rate, being depreciation actually allowed. This argument of the
assessee came to be rejected by CIT(A).
E
6. Aggrieved by the decision, the assessee carried the
matter in appeal to the Tribunal. By its decision the Tribunal,
following the decision of the Calcutta High Court in the case of
Commissioner of Income-tax v. Suman Tea and Plywood
+
~

F lndusries (P) Ltd. - (1993) 204 ITR 719, held that since 40 per
cent of the assessee's composite income is chargeable under
Section 28 of the 1961 Act, for the purposes of computing the
"written down value" of depreciable assets used in the tea
business, only 40 per cent instead of 100 per cent of
depreciation allowable at the prescribed rate shall be deducted
G
in the case of the assessee. This view of the Tribunal has been
affirmed by the impugned judgment of the High Court. Hence t
this civil appeal(s) by way of special leave petition(s) is filed by
the Department.

H Answer to Question No. (1) - meaning of the expression
_./

COMMR. OF INCOME TAX, DIBRUGARH V. 737
DOOM DOOMA INDIA LTD. [S. H. KAPADIA, J.]

"depreciation actually allowed" in Section 43(6)(b) of the 1961 A
---,..- Act.
7. Deductions by way of depreciation allowance have been
specifically recognized and dealt with in Sections 32, 34 and
43(6) of the 1961 Act (which deals with the definition of the words
"written down value"). Section 32 adopts two methods in allowing 8
depreciation. In the case of ocean-going ships, depreciation is
allowed, year after year, at the fixed percentage on the original
....
cost of the asset [See: Section 32(1 )(i)]. This is called the
f
straight-line method. In the case of non-ocean-going ships and
buildings, machinery, plant or furniture, the prescribed c
percentage of depreciation is to be computed on the basis of
"written down value" of the asset [See: Section 32(1 )(ii)]. This is
known as "written-down value" method. Both these methods
"
seek to ensure that the total depreciation allowance(s) granted,
year after year, does not exceed 100 per cent, of the original D
ll;
cost of the asset. In the straight-line method, the entire
"" depreciation is written off sooner than in the "written down value"
method, if the figures of the actual cost and the prescribed
percentage are the same in either case. Section 32(2) allows
the carry forward and unabsorbed depreciation allowances to
E
any subsequent year, without any time limit, where such non-
absorption is "owing to there being no profits or gains chargeable
for that previous year, or owing to the profits or gains being less
~ than the allowance". Depreciation loss under Section 32(2)
" stands on the same footing as any other business losses. An
assessee claiming depreciation of assets has to show that such F
assets are owned by him and are used by him in the accounting
year for the purpose of his business, the profits of which are
being charged [See: Section 32(1)(i)]. Further, the total of all
deductions in respect of depreciation under Section 32(1 )(i),
made year after year, should not, in any event, exceed the actual G
cost of the assets to the assessee [See: Section 34(2)(i)]. The
.,~ I
definition of ''actual cost" is to be found in Section 43(1) and the
definition of "written down value" is to be found in Section 43(6)
of the 1961 Act. The latter defines "written down value" under
Section 43(6) to mean - H
~-

738 SUPREME COURT REPORTS [2009] 2 S.C.R.
....
A (a) in the case of assets acquired in the previous year,
the actual cost to the assessee; ~

(b) in the case of assets acquired before the previous
year, the actual cost to the assessee less all
depreciation(s) act11al/y allowed under the 1961 Act.
B
8. The key word in Section 43(6)(b) of the 1961 Act is
"actually". We quote hereinbelow an important observation,
made by this Court on the meaning of the words "actually ~

allowed" in Section 43(6)(b) in the case of Madeva Upendra ~

c Sinai v. Union of India and Others- (1975) 98 ITR 209 at pages
223 & 224, which reads as under:
"The pivot of the definition of "written-down value" is the ..._
"actual cost"' of the assets. Where the asset was acquired ~
and also used for the business in the previous year, such
D value would be its full actual cost and depreciation for that ;;_
year would be allowed at the prescribed rate on such
cost. In subsequent year, depreciation would be calculated
on the basis of actual cost less depreciation actually .-
allowed. The key word in clause (b) is "actually". It is the
E antithesis of that which is merely speculative, theoretical
or imaginary. "Actually" contra-indicates a deeming
construction of the word "allowed" which it qualifies. The
connotation of the phrase "actually allowed" is thus limited
to depreciation actually taken into account or granted +
F. and given effect to,_i.e. debited by the Income-tax Officer -4

against the incomings of the business in computing the
taxable income of the assessee; it cannot be stretched to
mean "notionally allowed" or merely allowable on a notional
basis."
G
"From the above conspectus, it is clear that the essence t,..
of the scheme of the Indian Income-tax Act is that
depreciation is allowed, year after year, on the 'actual cost
of the assets as reduced by the depreciation actually
H
'

COMMR. OF INCOME TAX, DIBRUGARH V. 739
DOOM DOOMA INDIA LTD. [S. H. KAPADIA, J.]

allowed in earlier years. It follows, therefore, that even in A
--y-
the case of assets acquired before the previous year,
where in the past no depreciation was computed, actually
allowed or carried forward, for no fault of the assessee,
the "written-down value" may, under clause (b) of Section
43(6), also, be the actual cost of the assets to the s
assessee."
9. Therefore, this Court has clearly laid down the meaning
of the words "actually allowed" in Section 43(6)(b) to mean -
"limited to depreciation actually taken into account or granted
and given effect to, i.e. debited by the Income-tax Officer against C
the incomings of the business in computing the taxable income
of the assessee".
Answer to Question No. (2) - computation of depreciation
in cases covered by Rule 8 which deals with taxability of D
composite income
10. In the case of Commr. of Income-tax, Madhya
Pradesh, Nagpur and Bhandara v. Nandlal Bhandari Mills Ltd.
- (1966) 60 ITR 173, which judgment was in the context of
composite income, the question inter alia arose whether E
depreciation "actually allowed" would mean depreciation
deducted in arriving at the taxable income or the depreciation
deducted in arriving at the world income (composite income).
.. ~ In that case the assessee was a company incorporated in
Indore. It owned and ran a textile mill. Until 1.4.1950, when F
Income-tax Act, 1922 was extended to Part B States including
Madhya Bharat of which Indore became a part, the assessee
was assessed at Bombay under the lncome-taxAct, 1922 as a
non-resident and for some years as resident. The assessee
was also assessed in Indore under the Indore Industrial Tax G
Rules, 1927. For those years in which it was assessed as a
~~ non-resident under Income-tax Act, 1922, only that part of its
profits attributable to the sale proceeds of goods received in
British India were brought to tax. For the assessment years in
question, in ascertaining the "written down value" of the building, H
740 SUPREME COURT REPORTS [2009] 2 S.C.R.

A machinery and plant, under paragraph 2 of the Taxation Laws
-~#'
Order, 1950, only the greater of the two depreciations "actually
allowed" in British India and in Indore could be taken into account.
The ITO took into account the depreciation allowances for the
years up to 1944 as computed under Income-tax Act, 1922 for
B the purposes of ascertaining the world income of the assessee,
and for the years 1945 to 1948, he took into account the income
as computed under Indore Industrial Tax Rules 1927; and on ~
that basis the ITO arrived at the "written down value" as on ~
t
January 1, 1949. The assessee contended, inter alia, that in )(

t,

c regard to the years up to 1944 only the proportion.ate
depreciation attributable to the taxable income came within the '
meaning of the words "actually allowed" in the old section !,

corresponding to Section 43(6)(b) of the 1961 Act. This
contention of the assessee was accepted by the. majority
D
judgment which held that in fixing the depreciation allowances I
for the years in which the assessee was assessed as a non- )i
I
resident under the Income-tax Act, 1922, the ITO had "actually }.,

allowed" only a portion of the amount towards depreciation
allowable in assessirig its world ir:icome. It was further held that )

the mere fact that in the matter of calculation, the total amount of ~-

E depreciation was first deducted from the world income ~
(•
,_
(compositejncome) and thereafter a proportion was struck did
not amount to an actual allowance of the entire depreciation in
ascertaining the taxable income that accrued in British India. +
Therefore, it was held, that, the depreciation deducted in arriving .,
F at the taxable income alone could be taken into account and
not the depreciation taken into account for arriving at the world \•
income (composite income).
11. In our view the above judgment of the Supreme Court
squarely applies to the present case. Assessee is engaged in
G f-
the business of growing and manufacturing of tea. As per the I

~
provisions of Section 10(1) of the 1961 Act read with RLJle 8, 40 ..,.
per cent of the business income derived from the sale of tea
grown and manufactured in India by the assessee was liable to
tax. In the above judgment of the Supreme Court, the Court was
H
COMMR. OF INCOME TAX, DIBRUGARH V. 741
DOOM DOOMA INDIA LTD.·[S. H. KAPADIA, J.]

concerned with the world income, in this case we are concerned A
with the composite income. Therefore, in our view the judgment
of the Supreme Court, above referred to, is squarely applicable
to the present case. Therefore, we do not see any infirmity in
the impugned judgment of the High Court.
12. Be that as it may, we can give the following illustration(s) B
which will give an example of how the "written down value" needs
to be computed: ·

Illustration 'A'
Rs. c
Income from sale of tea 1000
Less: Expenses -
Depreciation (100)
Others (300) D
A

Business Profit 600
Income subject to charge under the Income
Tax Act by application of Rule 8 (40% of 600) 240
E
Illustration 'B'

'
Rs.
Income from sale of tea (40% of 1000) 400
Less: Expenses -
F
Depreciation (40)
Others (40% of 300) (120)
Business Profit subject to charge of income
tax (40% of 600) 240 G
~

"" 13. Analysing the above two charts, we find that at the end
of computation the income chargeable to tax by applying Rule
8 comes to Rs.240. Under Illustration 'A', the normal
depreciation is Rs.1 oo
which is deductibre from Rs.1 ooo
being
H
742 SUPREME COURT REPORTS [2009] 2 S. C.R.

A the income from sale of tea. On the other hand, under Illustration
'B', we have taken 40 per cent of each of the items, namely,
income from sale of tea; depreciation and other expenses.
Accordingly, on comparison it may be noted that whereas
income from sale of tea is Rs.1000 under Illustration 'A',
B proportionately it comes to Rs.400 under Illustration 'B'. Similarly,
depreciation under Illustration 'A' which is normal depreciation
is Rs.100 whereas in Illustration 'B' at 40 per cent the pro rata
d~preciation is 40. What is important to be noted is that at the
end of computation under both the Illustrations, the income
c taxable by a~plying Rule 8 comes to Rs.240 in both the cases.
The only difference is that in Illustration 'B' we have gone by pro
rata basis.
14. The important thing to be noted is that according to
the Department, in the succeeding year, the opening "written
D down value" of the assets would be Rs.900 (Rs.1000 for the
cost of the assets less Rs.100) as indicated in Illustration 'A'
whereas, if one goes by Illustration 'B' the "written down value"
comes to Rs.960 (Rs,1000 for the cost of the asset(s) minus
40), being the depreciation in Illustration 'B'.
E - 15. According to the assessee, in view of the law laid down
· by the judgment of this Court in the case of Madeva Upendra
Sinai (supra), the "written down value" should be computed at
Rs.960 and not at Rs.900 as claimed by the Department.
..
F 16. 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". Hence we find no merit in
G the civil appeals filed by the Department.
17. Before concluding, we may state that the judgment of
this Court in Commissioner of Income Tax v. Willamson
Financial Services and Others - (2008) 297 ITR 17, has no
application to the present cases. Willamson Financial Services
H case (supra) was rendered in the context of deduction under
COMMR. OF INCOME TAX, DIBRUGARH V. 743
DOOM DOOMA INDIA LTD. [S. H. KAPADIA J.]

Section 80-HHC of the 1961 Act. Section 80-HHC comes under A
Chapter VIA. Chapter VIA refers to special deductions. It is a
separate Code by itself. There is a distinction between
"deductions/allowances in Section 30 to Section 430" and
- "deductions admissible under Chapter VIA". Deductions/
allowances provided in Sections 30 to 43D are allowed in s
determining Gross Total Income and are not chargeable to tax
because the same constitute charge on profit, whereas,
deductions under Chapter VIA are allowed from Gross Total
Income chargeable to tax. Therefore, the judgments rendered
in the context of Section 80-HHC of the 1961 Act, both by this c
Court and by the Kerala High Court, stand on different footing.
18. For the aforestated reasons, we find no merit in the
Department's civil appeals which are accordingly dismissed
with no order as to costs.

D.G. Appeals dismissed.