The main legal point established in the judgment is that the word 'depreciation' includes both actual and notional depreciation, and the Income-tax Officer is obliged to allow any amount written off to meet depreciation, whether actual or notional, as long as it is intended to meet depreciation.

Judgment

SIKRI, J.: This is an appeal by special leave against the judgment of the Madras High Court in a case referred to it under the Indian Income-tax Act, 1922, hereinafter referred to as the Act, answering the question of law against the assessee. The question referred is:

"Whether four-fifth of the sum of Rs. 1,21,245 written off in the books of the assesse as depreciation for the calendar year 1953 is allowable as a deduction in the assessment completed under Section 10 (7) and the rules contained in the schedule of the Income-tax Act."

2. The facts relevant for answering the question are as follows. The assessee is a public limited company carrying on the business of general insurance. It erected a modern substantial building with lifts and air-conditioning at a cost of Rs. 12,08,252/- and got it ready for occupation from December 1, 1952. In its books for the calendar year 1953, the previous year for assessment year 1954-55, it wrote off Rupees 1,21,245/- as depreciation as follows:

Rate Amount

Buildings 10% 1,06,940

Air-conditioning Plant 15% 2,973

Lifts 15% 6,214

Transformers 15% 1,442

Internal Telephone 15% 3,676

Total 1,21,245

3. It was common ground before the Income-tax Appellate Tribunal that one-fifth of the building could be considered as occupied for its own purposes and the remaining four-fifth as let out to tenants for rent. The income-tax Officer disallowed four-fifth of the depreciation claimed on the ground that "the rentals received from this 4/5th portion are being shown separately under the head Property which income in turn has been claimed as exempt under S. 4(3) (xii). Had there been no exemption in the property income there would have been a statutory allowance which would compensate for depreciation. The fact that the whole income is exempt further strengthens that no allowance regarding these portions could be made."

4. On appeal the Appellate Assistant Commissioner disallowed the whole claim (including that allowed by the Income-tax Officer) on another ground. He held that the property fell within the words other assets used in Rule 3 (b) of the Schedule, but what Rule (b) contemplated was an actual depreciation of the value of such assets. As the counsel of the assessee admitted before him that the property being new, there could be no question of actual depreciation.

5. On further appeal, the Appellate Tribunal came to the conclusion that the immovable property to the extent of four-fifths thereof was an investment held solely for the purpose of earning rent there from capable of appreciation either notionally or by sale and realisation , but under R. 6 of the Schedule, the Income-tax Officer has jurisdiction to fix a figure which is fair and just. It accordingly allowed the appeal in part.

6. On a reference being made to it, the High Court held that in computing profits and gains, the Income-tax Officer had the power to examine the quantum of depreciation either written off or reserved and to satisfy himself that it did not exceed the amount allowable to meet the depreciation.

7. It is common ground between the parties that by virtue of S .10 (7) of the Act the profits and gains of any business of insurance have to be computed in accordance with the rules contained in the Schedule to the Act, and Ss. 8, 9, 10, 12 or 18 have no application- Rule 3 (b) and R. 6, on the interpretation of which the answer to the question referred to depends read thus:

"3. In computing the surplus for the purposes of rule 2-

(b) any amount either written off or reserved in the accounts or through the actuarial valuation balance sheet to meet depreciation of or loss on the realisation of securities or other assets, shall be allowed as a deduction, and any sums taken credit for in the accounts or actuarial valuation balance sheet on account of appreciation of or gains on the realisation of the securities or other assets shall be included in the surplus:

Provided that if upon investigation it appears to the Income-t