1988 PLP (Trib (PTD)

ABRAR HUSSAIN NAQVI (JUDICIAL MEMBER).-- It was contended firstly- that no disallowance on account of personal use can be made as all the vehicles are owned and belonged to the assessee- company and, therefore, entire depreciation has to be allowed in accordance with law. It was further submitted that all the vehicles cannot be personally used by the assessee which are meant purely for the business purposes. We have examined the contention of the learned counsel. As far as the first contention the learned counsel has relied upon clause (5) of section 23 of the Income Tax Ordinance under which it is provided that the depreciation allowance is admissible under Third Schedule in respect of the building, machinery, plant, furnitures, fittings being the property of the assessee. It was further contended that since all the vehicles were the property of the assessee-company, therefore, entire depreciation was admissible and no disallowance could be made on account of personal use. This contention is devoid of, any force as subsection (2) of section 23 makes an exception to this rule wherein it is provided that where any such building, machinery, etc. are not wholly used for the purposes of - business or profession the allowance or deduction admissible under section 23 would be restricted to the fair proportional part of the amount which would be allowable if such building, plant, machinery etc. were wholly so used. Therefore, if any vehicle was partly in personal use of any of the Directors it could not be said that the vehicle was used wholly for the purposes of the business. Therefore, the I.T.O. was justified in making the proportional disallowance. However, the second point has considerable force. The Assessing Officer can make a disallowance out of the depreciation in regard to only those vehicles, which can possibly be in personal use of any of the Directors. In regard to vehicle like Pick-up etc. which could not be in personal use of any of the Directors, no disallowance out of the depreciation could be made by the Assessing Officer. Since the I.T.O. had made the disallowance at random, we set aside the assessment on this issue and remit the case back to the I.T.O. with the direction to make an inquiry and to make disallowance in; regard to those vehicles, which could possibly be in personal use of any of the Directors. The second argument of the learned counsel for the assessee that the written down value should have been taken after reducing the allowance for depreciation allowed in the earlier years is also correct. The word 'written down' value has been defined in sub-para. (7) of para. 8 of the Third Schedule. Clause (b)(ii), the sub-para, which is relevant provides that the written down value of class of asset acquired before the income year would be 'the l actual cost thereof to the assessee as reduced by the aggregate of the allowance for depreciation allowed to him under this Ordinance or the Repealed Act in respect of the assessment for earlier years'. Therefore, while working out the written down value it is not the claim of the assessee in the earlier years but from the actual cost the aggregate of the allowance for depreciation actually allowed had to be reduced. Since in the earlier years, the Assessing Officer had allowed the depreciation at the rate of 10%, therefore, written down value should be worked out on this basis. We, therefore, direct that the written down value should be worked out on this principle. A.A. ZUBERI (ACCOUNTANT MEMBER).-- I find myself in agreement with the reasons and conclusions reached by my learned brother the Judicial Member in respect of issue adjudicated for the assessment years 1977-78 to 1980-81. In the assessment years 1981-82 to 1984-85 with the exception of adjustment in W.D.V., I concur with his decision on all other matters. I humbly disagree with his finding for working out depreciation and set forth below my own view and conclusion. Car and other means of conveyance are commonly used by assessees for business as well for private purposes. The practice prevalent in the Department has throughout been that depreciation is allowed at the prescribed rate but out of the quantum so arrived at, curtailment is made proportionate to the non-business use of the vehicle. This was previously authorised by section 10(3) of the repealed Act and now by sub-rule (2) of Rule (1) of -the Third Schedule to the Ordinance. This happened in the present case as well. What should be the written down value (WDV) for the next year when the depreciation 'actually' allowed is one-half of the depreciation worked out at the percentage prescribed by law? According to my learned brother, the J.M.: For working out the written down value 'from the actual cost the aggregate of the allowance for depreciation actually allowed had to be reduced'. On the other hand my view is quite reverse. I am of the opinion that if the W.D.V. is worked out in the manner ordered by my learned brother, it would in fact mean that depreciation would in due course be allowed on the total cost of the vehicle although one-half of the depreciation is admittedly not allowable when the use of the vehicle was not entirely for business purposes and thus hit by the provisions of sub-rule (2)1 of Rule 1 of the Third Schedule. The scheme of Third Schedule,1 especially Rule 8(7)(b)(ii) thereof, is that where the asset or class of assets is acquired before the income year, the W.D.V. means the actual cost to the assessee as reduced by the aggregate of the allowance for depreciation allowed to him under the Ordinance or the repealed' Act. As a result of the terminology inherited from here for section 10(5)(b) of the repealed Act the assets would be deemed to have suffered the depreciation even though it is not so actually allowed by the Department. On an enquiry in the history of the amendment relating to the depreciation I discover that prior to 1969 the relevant provision of the repealed Act in section 10(5)(b) read as-under:- "In the case of assets acquired before the previous year, the actual cost to the assessee less all depreciation actually allowed to him under this Act, or any Act repealed thereby, or under executive order, issued when the Indian Income Tax Act, 1886, was in force: (underlined here for emphasis) An interesting case of a professional, who was a practising lawyer, then came up before the Tribunal. The facts obtaining there have a striking similarity to the facts now in consideration before us inasmuch as the assessee had maintained a car and only a part of the depreciation was allowed by the Assessing Officer on the ground that the vehicle was not wholly used for professional purposes. Having been aggrieved by the said order an appeal was preferred contesting that since the depreciation was restricted to the amount considered relevant for professional purposes only, the amount actually allowed in the preceding year should have been taken into consideration for working out the W.D.V. This contention was accepted by the learned A.A.C. and the Appellate Tribunal. The decision by the Tribunal was reported as (1968) 17 Tax 49 (Trib.). In order to counteract this decision the Legislature deleted the word 'actually' from section. 10(5)(b) of the repealed Act. This amendment was introduced by, Finance Act, 1969. When the Department was in reference to the High Court the learned Judges finally held: "Since the word 'actually' existed between the words 'all depreciation' and 'allowed to him'; Mr. Nasim Hassan was right in demanding that out of the depreciation calculated in the previous year only, that much which was actually allowed to him should be taken into consideration and not that part which was disallowed because the car was being used for other than professional 'purposes also." On a plain reading of the judgment by the High Court it emerges that it devolved on the existence of the word 'actually' in the relevant provision for the year under consideration by them. Therefore, the learned Judges during the course of the judgment observed:- "The view taken by the I.T.O. would be fully justified if this was the state of law during the period to which the assessment relates. Unfortunately for him, however, the word 'actually' existed after the word depreciation and before the word 'allowed' in the subsection during the relevant period. It is apparent that the verdict by the High Court in P L D 1976 Lah. 1502 is for those years when the word 'actually' existed, the deduction for working out WDV would be of the amount 'actually' allowed as depreciation and after the deletion of the word 'actually', the WDV would be worked out by deducting the depreciation which would have been allowable as per law. Coming to the wording employed in clause (b)(ii)'of Rule 8(7) of the Third Schedule of the Ordinance it is pertinent to note that the terminology is identical to the post-1969 state of law in the repealed Act. Rule 8(7)(b)(ii) reads as under:- "Where the asset or class of assets was acquired before the income year, the actual cost thereof to the assessee be reduced by the aggregate of the allowance for depreciation allowed to him under this Ordinance or the repealed 'Act in respect of assessment for earlier years." This does not contain the word 'actually' hence at par with the repealed Act prior to the amendment brought about by the Finance Ordinance, 1969. I am, therefore, of the view that the entire depreciation which would have been admissible had the asset been used only for purposes of business should be the basis-for deduction and not the depreciation 'actually' allowed. . FARHAT ALI KHAN (CHAIRMAN).-- This case has been placed before me to resolve the difference of opinion which arose between the learned A.M. and learned J.M. of Bench No. 2 at Lahore. The precise question which has been placed before me has been formulated by the learned Members as under:- "Whether for working out the W.D.V. under. Rule 7(b)(ii) of the Third Schedule the actual cost should be reduced by the amount of depreciation actually allowed in earlier years or the words 'depreciation allowed to him' connote nothing more and nothing less than such amount as allowable as per law." The brief facts giving, rise to the appeal are that the appellant, a Private Limited Co., deriving its income as construction contractor maintained certain number of different types of vehicles. It appears that during the relevant assessment year the appellant claimed depreciation on all the vehicles. The I.T.O. however, made the proportional disallowance out of the claim for the involvement of personal use. It further appears that the I.T.O. worked out the written down value of the vehicles after deducting the full depreciation as claimed though he had disallowed half of it because of the involvement of personal element. On appeal his finding regarding the working of the written down value was challenged before the learned C .I. T. (A) but it was repelled with the following observation:- "It was further claimed that the Income Tax Officer has taken the written down value of vehicles after deducting the full depreciation, whereas it should have been after deducting the depreciation allowed. i.e. of that admissible. This contention of the assessee is also' not legally tenable. Depreciation attributable to personal use of the car has also to be taken into consideration when determining the written down value." However, the appellant still felt aggrieved and went up in second appeal and thus the difference of opinion has arisen. Chaudhry Siddique Akhtar, the learned counsel for tie appellant and Mr. Javed Tahir Butt, the learned D.R., appeared before me. The learned A.R. of the appellant has supported the learned J.M. whereas the learned D. R. has relied upon the reasoning of learned A.M. . I have carefully gone through the discussion made by both the learned members. It appears from perusal of the order proposed by the learned J.M. that he laid emphasis on the depreciation, which was actually allowed in earlier years. The learned J.M_ dealt with the issue in the following words:- "The word 'written down' value has been defined in sub-para (7) of para 8 of the Third Schedule. Clause (b)(ii), the sub-para, which is relevant, provides that the written down value of class of asset acquired before the income year would be 'the actual cost thereof .to the assessee as reduced by the aggregate of the allowance for depreciation allowed to him under this Ordinance or the repealed Act in respect of the assessment for earlier years', therefore, while working out the written down value it is not the claim of the assessee in the earlier years but from the actual cost the aggregate of the allowance for depreciation actually allowed had to be reduced." The learned A.M., however, could not reconcile himself with this view. Referring to the pre- and post-1969 position of section 10(5)(b) of the repealed Income Tax Act, the learned A.M. came to the following conclusion:- "I am, therefore, of the view that the entire depreciation which would have been admissible had the asset been used only for the purposes of business should be the basis for deduction and not the depreciation actually allowed." In order to fortify his reasoning the learned A.M. also referred to certain decision of this Tribunal where a practising lawyer had claimed depreciation on his car but half of the claim was disallowed for the reasons he had used it for personal purposes as well. While working out the written down value, the lawyer deducted only the amount of depreciation, which was actually allowed and his working was ultimately upheld by the Tribunal. According to learned A.M., the matter was taken to the High Court and the view of the Tribunal was upheld in a case reported as P L D 1976 Lah. 1502. After giving my due consideration to the opinions of both the learned Members, I think, with profound respect, that the approach of learned A.M. is not correct. The first cardinal principle of interpretation of statutes is that intent of the Legislature as manifested by the words used in any statute must be given effect. However, if there is any ambiguity reference could be made to earlier legislation. But let me mention here that a provision is to be held ambiguous only if it contains a word or phrase, which in that particular context is capable of having more than one meaning. As held by their Lordships of House of Lords of England in a case reported as (1955) 2 All. E.R: 345 p. 366, Kirkness v. John Hutson & Co. Ltd. by an ambiguity is meant a phrase fairly and equally open to diverse meanings. Where the language is of doubtful meaning or where an adherence to the strict letter would lead to injustice, hardship or to contradictory positions, it becomes the duty of a Court to ascertain the true meaning. In fact it is in this area of legislative ambiguities that Courts have to fill in the gaps, clear the doubts and remove the hardship. But as warned by Indian Supreme Court in a case reported as A I R 1965 SC 1473, C.I.T. (Madras) v. Indian Bank Ltd. it is not permissible first to create an artificial ambiguity and then try to resolve it by taking resort to some general principles of interpretation. I would also like to mention here that it is also settled law that a provision of law, which is benevolent in nature should be interpreted in such a way that it extends its scope instead of creating a mischief. For this proposition of law I refer again to an Indian Supreme Court's case reported as A I R 1968 SC 697 Sevantilal Maneklal v. C.I.T. Now with this legal background let me now turn to the provision of paragraph (ii) of clause (b) of sub-rule (7) of Rule 8 of the IInd Schedule of the Income Tax Ordinance. It reads: (7) 'Written down value' means. (a) ......................................................... (b) in the case of other assets or class of assets. (i) ......................................................... (ii) Where the assets or class of assets was acquired before the income year the actual cost thereof to the assessee as reduced by the aggregate of the allowance for depreciation allowed to him under this Ordinance or the repealed Act in respect of assessments for earlier years." From its bare perusal it appears that the aggregate of the allowances for depreciation which was to be reduced from the actual cost is that which was allowed to an assessee under the Income Tax Ordinance or the repealed Income Tax Act in respect of assessments for earlier years. Now, if we peruse the provisions of section 10(2)(ii) of the repealed Income Tax Act and Rules 1 and 2 of the IIIrd Schedule of the Income Tax Ordinance it appears that depreciation allowance could be allowed only-- (i) if an assessee is the owner of any building, machinery, plant or furniture, and (ii) uses such building, machinery, plant or furniture for the purposes of his business or profession, and (iii) uses such building, machinery, plant or furniture for the purposes of his business or profession, in an income, year for which the claim is made. However, let me mention here that in those cases, where any building, machinery, plant or furniture was not wholly used for the purposes of the business or profession, the allowance is to be restricted to the fairly proportional part of the amount, which would be admissible if such building, machinery, plant or furniture were wholly used. It is thus clear that if a building, machinery, plant or furniture is used for personal purposes, the assessee would not be entitled to any depreciation allowance. In other words it can be said that if a building, machinery, plant or furniture is used both for business purposes as well as personal reasons, the depreciation allowance would be allowed in former but would be disallowed in the latter case. With) this discussion if we refer to paragraph (ii) of Clause (b) of sub-rule (7) of Rule 8 of the IInd Schedule of the Income Tax Ordinance, itl appears to be indisputably established that it refers to the depreciation allowance which is 'allowed' and not to what is 'disallowed'. Since the legislature has laid down that the aggregate of the allowance for depreciation which is allowed to an assessee shall be deducted from the actual cost, it would not be permissible to say that the I T.O. would be entitled to reduce the aggregate of the depreciation allowance which is claimed though half of it might have been allowed and half of it might have been disallowed. The legislative intent appears to be very clear and to reduce that claim also which has been disallowed from the actual cost would definitely be without any legislative authority. In my humble judgment the key to the interpretation of this paragraph lies in looking into the provisions of the Income Tax Ordinance or the repealed Income Tax Act under which a depreciation allowance has been made allowable simply because the Legislature has used the words 'depreciation allowed to him under this Ordinance or the repealed Act'. Had it been the intention of the Legislature that an Assessing Officer should deduct from the actual cost the total amount of the depreciation as claimed by an assessee irrespective of the fact what was allowable and what was not, it would have used such language. In my humble judgment it would be fallacious to say: that depreciation allowance would be deemed to have been allowed even though it is not allowable in law. I am, therefore, of the view that whatever depreciation allowance has been allowed to an assessee either under the repealed Income Tax Act or under the Ordinance in earlier years, the total amount thereof would be deducted from the actual cost for the purpose of working out the written down value of an asset. With due respect, I think that deduction of depreciation allowance which would have been allowed had the asset been used wholly .for business purposes cannot be called 'depreciation allowed' if part of it is disallowed for non-business purposes. Such interpretation is not borne out of the language used by the legislature, and virtually amounts to killing a dog after calling it mad. Now as far as the cases cited by the learned A.M. are concerned, they appear to be wholly irrelevant for our purposes in view n` discussion made above and I need not dilate on them. It is well settled that consideration stemming from legislative history must not be allowed to override the plain words of a Statute (please see (1973) 89 I T R 45 at p. 52(C.I.T. v. Madurai Mills Co. Ltd.) Let me also point out that their Lordships of Lahore High Court have not considered the meaning of word 'allowed' as used in 'the relevant provisions .of law. , _ Turning to the question referred to me I feel that there is no difference in its both parts. As discussed above, only that depreciation allowance can: actually be allowed which is allowable as per law. In other words let me observe that a depreciation allowance cannot be said to be allowable wholly or partly if it is wholly or partly not allowable. Similarly in my judgment the expression 'depreciation actually allowed' means the depreciation allowed in point of fact as against the claim made in point of fact. As such, I would answer both parts of the question in the affirmative. The difference of opinion stands resolved accordingly. M.B.A./529/T Question answered in the affirmative.