IN THE COURT OF APPEAL OF THE DEMOCRATIC SOCIALIST REPUBLIC OF SRI LANKA In the matter of a Case Stated under Section 170 of the Inland Revenue Act No 10 of 2006 The Wheel Works (Pvt) Ltd, No.68, Block A, Biyagama Export Processing Zone, Biyagama. Appellant CA TAX No. 11/2013 Tax Appeals Commission Appeal No. TAC/IT/004/2011 Vs.

Commissioner General of Inland Revenue, Department of Inland Revenue, Sir Chittampalam A.

Gardiner Mawatha, Colombo 02. Respondent Before: Hon. D.N. Samarakoon, J.

Hon. Sasi Mahendran, J.

Counsel: Mr. Riad Ameen instructed by D. L. and F. de Saram for the Appellant.

Mr. Manohara Jayasinghe, D. S. G., for the Respondent.

Argued on: 03.08.2021 Written submission tendered on: 27.08.2019 by the Appellant.

30.08.2016 and 15.03.2022 by the Respondent.

Decided on: 08.08.2023 D.N. Samarakoon, J (01) Introduction:-

It is said, “The larger the depreciation expense, the lower the taxable income, and the lower a company’s tax bill. The smaller the depreciation expense, the higher the taxable income and the higher the tax payments owed¹” –

Investopedia This is also the common sense.

It is stated, in Written Submissions of the Appellant, The Wheel Works (Pvt) Ltd., dated 27.08.2019, at paragraph 14 that, “Profits and income arising from sale of capital assets is a capital gain and therefore it is not normally liable for income tax unless express provision is made for it”.

Mr. E. Gooneratne, says at page 163 – 164 of his book Income Tax in Sri Lanka, First Edition, 1991 “Depreciation is a loss of capital. Where an allowance for depreciation has been granted in respect of a capital asset used in a trade or business the total of the allowances granted in previous years must be brought into

1 What Is the Tax Impact of Calculating Depreciation? (investopedia.com)

the computation of a capital gain arising on the disposal of such asset. (a) When the total of the allowances granted for depreciation is equal to the cost of acquisition there is no loss. The whole of the proceeds of disposal is profit or gain. Part of the proceeds of disposal not in excess of the cost of acquisition is taxed as profit of the trade or business. (b) The difference between the proceeds of sale and the cost of acquisition is taxable as capital gain. (c)When the total allowance for depreciation is less than the cost of acquisition the profit is reduced by an amount equal to the difference between the cost of acquisition and total allowance for depreciation. (d)The proceeds of disposal not in excess of the cost of acquisition less the difference between the cost of acquisition and total allowance for depreciation is taxed as profits of the trade or business. (e)The difference between the proceeds of disposal and the cost of acquisition is taxable as capital gain. The provisions are applicable to capital assets acquired and also capital assets constructed used in a trade or business for which an allowance for depreciation has been granted. (f)When the total allowance for depreciation is less than the cost of acquisition or cost of construction the owner is indemnified for the loss of capital by the deduction of the difference from the proceeds of disposal. No deduction shall be made in respect of any capital loss arising from the disposal of any capital assets used in producing profits and income in any trade, business, profession or vocation if a deduction for depreciation has been allowed in respect of such asset under section 23”.

This Court is not considering the above passage as absolute truth, because the provisions of the applicable Inland Revenue Act govern the question. But it can assist the Court to clarify the position. The situation in (a) is as follows, (a) When the total of the allowances granted for depreciation is equal to the cost of acquisition there is no loss. The whole of the proceeds of disposal is profit or gain. Part of the proceeds of disposal not in excess of the cost of acquisition is taxed as profit of the trade or business.

Cost is Rs.