This case interpretation/summary of C.I.T. v. Mysore Sugar Co. Ltd., Bangalore, 1967 is written by Mr. Sonu Choudhary, a student at the Faculty of Law (Delhi University). If you also want to publish your articles or case interpretations/summaries, send your work to niyamskanoon09@gmail.com.
Introduction
By reading Section 10(2) of the Income Tax Act, 1922, we get to know that this section provides various types of deductions that can be claimed by an assessee while computing his/her total profits or gains of his business. Sub-clause (XV) of Section 10(2) provides for the deduction of any other expenses which is not covered by sub-clause (I) to (XIV), provided that it is not a capital expenditure. This case (C.I.T. v. Mysore Sugar Co. Ltd., Bangalore) is also related to this particular section in which the Supreme Court found the difference between capital expenditure and revenue expenditure. So read this interesting case to understand it.
Facts
- The Respondent had given an amount of Rs 2,87,422 to Oppigedars (sugarcane growers) as advance for buying sugarcanes on which the Oppigedars had also agreed to pay interest. The said amount was lost due to the occurrence of drought in that year which prevented the crop from growing and delivering.
- Therefore the respondent (Mysore Sugar Co.) claimed a deduction for that amount on the ground of being irrevocable bad debt, as per S.10(2)(xi) of the Income Tax Act, 1922.
- But the Income Tax Officer, Appellate Assistant Commissioner and the Tribunal declined for deduction by holding that the said amount was an advance payment and not a debt payment.
- However, the High Court, on appeal, held that the said amount is a revenue expenditure that is deductible as per Section 10(2)(xv) of the Act.
- This order led the appellant to come before the Supreme Court.
Issue before SC
Whether the money given by the respondent is a capital expenditure or revenue expenditure.
Decision and Reasoning
The money given by the respondent is a revenue expenditure because the respondent company was making arrangements to run his business of sugar making by purchasing good quality crops that's why they made an advance payment that had to be adjusted in the total cost at the time final delivery of sugarcanes.
Also, the growers needed the money not as an investment but just as an advance payment which they were to use for seedlings, fertilizers etc.
Therefore, the HC was right in holding that the money was deductible under S.10(2)(xv) of the Act.
Appeal Dismissed.
Other Observations
Analysis of Law- The general principle of S.10 is to deduct every reasonable business expenditure except of capital nature. S.10(2) is not exhaustive for deductions to be made while computing taxable profits and gains of any business.
Difference between capital expenditure and revenue expenditure - Any expenditure or losses incurred for running a business is revenue expenditure or loss. But if the expenditure or losses are incurred for acquiring an asset for the benefit of the business will be a capital expenditure or loss.
Summary -
The Respondent company (Mysore Sugar Co.) was claiming a deduction of Rs 2,87,422 that had been given to the sugarcane growers as advance money for buying sugarcanes. The claim was made as per S.10(2)(xi). However, the appellant declined to deduct and held that said amount can't be considered as a bad debt. But both the High Court and the Supreme Court held that said amount is deductible under sub-clause (XV) of S.10(2) as revenue expenditure. Because the amount was paid in advance to the sugarcane growers which had to be adjusted in total purchase price after delivery of sugarcanes.
Relevant Act and its Section
Section 10 of the Income Tax Act, 1922
10. Business.—(1) The tax shall be payable by an assessee under the head ["Profits and gains of business, profession or vocation"] in respect of the profits or gains of any [business, profession or vocation] carried on by him.
(2) Such profits or gains shall be computed after making the following allowances, namely:—
(i) any rent paid for the premises in which such [business, profession or vocation] is carried on, provided that when any substantial part of the premises is used as a dwelling-house by the assessee, the allowance under this clause shall be such sum as the Income-tax Officer may determine having regard to the [proportional annual value of the part] so used;
(ii) in respect of repairs, where the assessee is the tenant only of the premises, and has undertaken to bear the cost of such repairs, the amount paid on account thereof, provided that, if any substantial part of the premises is used by the assessee as a dwelling-house, a proportional part only of such amount shall be allowed;
(iii) in respect of capital borrowed for the purposes of the [business, profession or vocation], * * the amount of the interest paid:
[Provided that no allowance shall be made under this clause in any case for any interest chargeable under this Act which is payable without [the taxable territories], not being interest on a loan issued for public subscription before the 1st day of April, 1938, except interest on which tax has been paid or from which tax has been deducted under section 18 or in respect of which there is an agent in [the taxable territories] who may be assessed under section 43 or, in the case of a firm, for any interest paid to a partner of the firm;]
Explanation.—Recurring subscriptions paid periodically by shareholders or subscribers in such Mutual Benefit Societies as may be prescribed, shall be deemed to be capital borrowed within the meaning of this clause;
(iv) in respect of insurance against risk of damage or destruction of buildings, machinery, plant, furniture, stocks or stores used for the purposes of the [business, profession or vocation], the amount of any premium paid;
(v) in respect of current repairs to such buildings, machinery, plant or furniture, the amount paid on account thereof;
(vi) in respect of depreciation of such buildings, machinery, plant or furniture being the property of the assessee, a sum equivalent, [where the assets are ships other than ships ordinarily plying on inland waters,] to such percentage on the original cost thereof to the assessee as may in any case or class of cases be prescribed [and in any other case, to such percentage on the written down value thereof as may in any case or class of cases be prescribed];
[and where the buildings have been newly erected, or the machinery or plant being new, [not being machinery or plant entitled to the development rebate under clause (vi-b),] has been installed, after the 31st day of March, 1945, [and before the 1st day of April, 1956,] a further sum (which shall however not be deductible in determining the written down value for the purposes of this clause) in respect of the year of erection or installation equivalent,—
(a) in the case of buildings the erection of which is begun and completed between the 1st day of April, 1946, and the 31st day of March, [1956J (both dates inclusive), to fifteen per cent. of the cost thereof to the assessee;
(b) in the case of other buildings, to ten per cent. of the cost thereof to the assessee;
(c) in the case of machinery or plant, to twenty per cent, of the cost thereof to the assessee;]
[and where the buildings have been newly erected after the 31st day of March, 1961, such buildings being used solely for the purpose of residence of persons employed in the business and drawing remuneration not exceeding two hundred rupees per mensem or such buildings being used solely or mainly for the welfare of such persons as hospitals, creches, schools, canteens, libraries, recreational centres, shelters, rest rooms and lunch rooms, a sum (which shall not be deductible in determining the written down value for the purposes of this clause) equal to twenty per cent, of the actual cost of the building to the assessee in respect of the previous year of erection of the building:]
Provided that—
(a) the prescribed particulars have been duly furnished;
(b)where, [in the assessment of the assessee'or if the assessee is a registered firm, in the assessment of its partners,] full effect cannot be given to any such allowance in any year [not being a year which ended prior to the 1st day of April, 1939,] owing to there being no profits or gains chargeable for that year, or owing to the profits or gains chargeable being less than the allowance, [then, subject to the provisions of [clause (b)] of the proviso to sub-section (2) of section 24], the allowance or part of the allowances which effect has not been given, as the case may be, shall be added to the amount of the allowance for depreciation for the following year and deemed to be part of that allowance, or if there is no such allowance for that year, be deemed to be the allowance for that year, and so on for succeeding years; and
(c) [the aggregate of all allowances in respect of depreciation made under this clause and clause (vi-a) or under any Act repealed hereby,] or under the Indian Income-tax Act, 1886 (II of 1886), shall, in no case, exceed the original cost to the assessee of the buildings, machinery, plant or furniture, as the case may be;
[(vi-a) in respect of depreciation of buildings newly erected, or of machinery or plant being new which has been installed, after the 31st day of March, 1948, a further sum (which shall be deductible in determining the written down value) equal to the amount admissible under clause (vi) (exclusive of the extra allowance for double or multiple shift working of the ma chinery or plant and the initial depreciation allowance admissible under that clause for the first year of erection of the building or the installation of the machinery or plant) [in not more than five successive assessments for the financial years next following the previous year in which such buildings are erected and such machinery and plant installed and falling within the period commencing on the 1st day of April, 1949, and ending on the 31st day of March, 1959];]
* * * * *
[(vi-b) in respect of a new ship acquired or new machinery or plant installed after the 31st day of March, 1954, which is wholly used for the purposes of the business carried on by the assessee, a sum by way of development rebate in respect of the year of acquisition of the ship or of the installation of the machinery or plant, equivalent to,—
[(i) in the case of a ship acquired after the 31st day of December, 1957, forty per cent, and in the case of a ship acquired before the 1st day of January, 1958, twenty-five per cent, of the actual cost of the ship to the assessee; and
(ii) in the case of machinery or plant installed before the 1st day of April, 1961, twenty-five per cent, and in the case of machinery or plant installed after the 31st day of March, 1961, twenty per cent. of the actual cost of the machinery or plant to the assessee;]
Explanation 1.—In the case of a ship acquired or machinery or plant installed after the 31st day of December, 1957, where the total income of the assessee for the year of acquisition or installation (the total income for this purpose being computed without making any allowance under this clause) is nil or is less than the full amount of the development rebate calculated at the rate applicable thereto under this clause,—
(i) the sum to be allowed by way of development rebate for that year under this clause shall be only such amount as is sufficient to reduce the said total income to nil; and
(ii) the amount of the development rebate, to the extent to which it has not been allowed as aforesaid, shall be carried forward to the following year, and the development rebate to be allowed for the following year shall be such amount as is sufficient to reduce the total income of the assessee for that year, computed in the manner aforesaid, to nil, and the balance of the development rebate, if any, still outstanding shall be carried forward to the following year and so on, so however that no portion of the development rebate shall be carried forward for more than eight years;
Explanation 2.—Where in any year development rebate is to be allowed in accordance with the provisions of Explanation 1 in respect of ships acquired or machinery or plant installed in more than one year, and the total income of the assessee for that year (the total income for this purpose being computed without making any allowance under this clause) is less than the aggregate of the amounts due to be allowed in respect of the assets aforesaid for that year, the following procedure shall be followed, namely:—
(i) the allowance under paragraph (ii) of Explanation 1 shall be made before any allowance under paragraph (i) of that Explanation is made; and
(ii) where an allowance has to be made under paragraph (ii) of Explanation 1 in respect of amounts carried forward from more than one year, the amount carried forward from an earlier year shall be allowed before any amount carried forward from a later year:
Provided that no allowance under this clause shall be made unless—
(a) the particulars prescribed for the purpose of clause (vi) have been furnished by the assessee in respect of the ship or machinery or plant; and
(b) except where the assessee is a company being a licensee within the meaning of the Electricity (Supply) Act, 1948 (LIV of 1948), or where the ship has been acquired or the machinery or plant has been installed before the 1st day of January, 1958, an amount equal to seventy-five per cent, of the development rebate to be actually allowed is debited to the profit and loss account of the relevant previous year and credited to a reserve account to be utilised by him during a period of ten years next following for the purposes of the business of the undertaking, except—
(i) for distribution by way of dividends or profits, or
(ii) for remittance outside India as profits or for the creation of any asset outside India,
and if any such ship, machinery or plant is sold or otherwise transferred by the assessee to any person other than the Government [or for any consideration not connected with any amalgamation or succession referred to in clause (vi-c)]at any time before the expiry of ten years from the end of the year in which it was acquired or installed, any allowance made under this clause shall be deemed to have been wrongly allowed for the purposes of this Act:]
[Provided further that no allowance under this clause shall be made in respect of any machinery or plant which consists of office appliances or road transport vehicles;]
[(vi-c) (i) where in a scheme of amalgamation, a company (hereinafter in this sub-clause referred to as the predecessor) sells or otherwise transfers to the company formed in pursuance of the predecessor's amalgamation . with that company (hereinafter in this sub-clause referred to as the successor) any ship, machinery or plant in respect of which development rebate has been allowed to the predecessor under clause (vi-b),—
(1) the successor shall continue to fulfil the conditions mentioned in the first proviso to clause (vi-b) in respect of the reserve created by the predecessor and in respect of the period within which such ship, machinery or plant shall not be sold or otherwise transferred and in default of any of these conditions, the provisions of sub-section (11) of section 35 shall apply to the successor as it would have applied to the predecessor had it committed the default;
(2) the balance of development rebate, if any, still outstanding to the predecessor in respect of such ship, machinery or plant shall be allowed to the successor in accordance with Explanations 1 and 2 of clause (vi-b), so, however, that the total period for which the balance of development rebate shall be carried forward in the assessments of the predecessor and the successor shall not exceed the period of eight years specified in Explanation 1 to clause (vi-b) and the successor shall be treated as the assessee in respect of such ship, machinery or plant for the purposes of clause (vi-b) and this sub-clause;
Explanation.—For the purposes of this sub-clause, "amalgamation" means the merger of two companies (each of which is hereinafter in this Explanation referred to as the amalgamating company) to form one company (hereinafter in this Explanation referred to as the amalgamated company) in such manner that—
(a) all the property of the amalgamating companies immediately before the amalgamation becomes the property of the amalgamated company by virtue of the amalgamation;
(b) all the liabilities of the amalgamating companies immediately before the amalgamation become the liabilities of the amalgamated company by virtue of the amalgamation; and
(c) all the shareholders of the amalgamating companies immediately before the amalgamation become shareholders of the amalgamated company by virtue of the amalgamation,
otherwise than as a result of the acquisition of property of one company by another company pursuant to the purchase of such property by the other company or as a result of the distribution of such property to the other company after the winding up of the company;
(ii) where a firm is succeeded to by a private company, as defined in the Companies Act, 1956 (1 of 1956), in the business carried on by it as a result of which the firm sells or otherwise transfers to the private company any ship, machinery or plant, the provisions of sub-clause (i) of this clause shall, so far as may be, apply to the firm and the company;
Explanation.—The provisions of this sub-clause shall apply only where—
(a) all the property of the firm immediately before the succession becomes the property of the company;
(b) all the liabilities of the firm immediately before the succession become the liabilities of the company; and
(c) all the partners of the firm immediately before the succession become shareholders of the company;]
[(vii) in respect of any such building, machinery or plant which has been sold or discarded or demolished or destroyed, the amount by which the written down value thereof exceeds the amount for which the building, machinery or plant, as the case may be, is actually sold or its scrap value:
Provided that such amount is actually written off in the books of the assessee:
Provided further that where the amount for which any such building, machinery or plant is sold, [whether during the continuance of the business or after the cessation thereof], exceeds the written down value, so much of the excess as does not exceed the difference between the original cost and the written down value shall be deemed to be profits of the previous year in which the sale took place:
Provided further that where any insurance, salvage or compensation moneys are received in respect of any such building, machinery or plant which has been discarded or demolished or destroyed, and the amount of such moneys does not exceed the written down value, the amount allowable under this clause shall be the amount, if any, by which the difference between the written down value and the scrap value exceeds the amount of such moneys:
Provided further that where any insurance, salvage or compensation moneys are received in respect of any such building, machinery or plant as aforesaid, and the amount of such moneys exceeds the difference between the written down value and the scrap value no amount shall be allowable under this clause and so much of the excess as does not exceed the difference between the original cost and the written down value less the scrap value shall be deemed to be profits of the previous year in which such moneys were received:
Provided further that for the purposes of this clause, the original cost of a building, the written down value of which is determined in accordance with the first proviso to sub-section (5), shall be deemed to be the written down value so determined as at the date of its being brought into use for the purposes of the business, profession or vocation;]
[(viii) in respect of animals which have been used for the purposes of the [business, profession or vocation] otherwise than as stock-in-trade and have died or become permanently useless for such purposes, the difference between the original cost to the assessee of the animals and the amount, if any, realised in respect of the carcasses or animals;]
[(ix)] any sums paid on account of land-revenue, local rates or municipal taxes in respect of such part of the premises as is used for the purposes of the [business, profession or vocation];
[(x) any sum paid to an employee as bonus or commission for services rendered, where such sum would not have been payable to him as profits or dividend if it had not been paid as bonus or commission:
Provided that the amount of the bonus or commission is of a reasonable amount with reference to—
(a) the pay of the employee and the conditions of his service;
(b)the profits of the [business, profession or vocation] for the year in question; and
(c) the general practice in similar [businesses, professions or vocations];]
[(xi) when the assessee's accounts in respect of any part of his business, profession or vocation are not kept on the cash basis, such sum, in respect of bad and doubtful debts, due to the assessee in respect of that part of his business, profession or vocation, and in the case of an assessee carrying on a banking or money-lending business, such sum in respect of loans made in the ordinary course of such business as the Income-tax Officer may estimate to be irrecoverable but not exceeding the amount actually written off as irrecoverable in the books of the assessee:
Provided that if the amount ultimately recovered on any such debt or loan is greater than the difference between the whole debt or loan and the amount so allowed, the excess shall be deemed to be a profit of
the year in which it is recovered, and if less, the deficiency shall be deemed to be a business expense of that year;]
[(xii) any expenditure (not being in the nature of capital expenditure) laid out or expended on scientific research related to the business;
[(xiii) any sum paid to a scientific research association having as its object the undertaking of scientific research or to a university, college or other institution to be used for scientific research or to a university, college or other institution to be used for research in social science or statistical research related to the class of business carried on:
Provided that such association, university, college or institution is R for the time being approved for the purposes of this clause by the 47 prescribed authority;]
(xiv) in respect of any expenditure of a capital nature on scientific research related to the business, an allowance for each of the five consecutive previous years beginning with the year in which the expenditure was incurred, or where the expenditure was incurred prior to the commencement of the business, for each of the five consecutive previous years beginning with the year in which the business was commenced, equal to one-fifth of such expenditure:
Provided that no allowance shall be made for any expenditure incurred more than three years before the commencement of the business:
Provided further that—
(a) where an asset representing scientific research expenditure of a capital nature ceases to be used for scientific research related to such business—
(i) no allowance shall be made in respect of any previous year after the previous year in which the cessation takes place, and
(ii) if the aggregate of the amounts allowed under this clause added to the value of the asset immediately before the cessation is less than the said expenditure, there shall also be allowed in respect of the previous year in which the cessation takes place an additional deduction equal to the difference;
(b) where such asset is sold without having been used for other purposes, the sale proceeds shall be taken to be the value of the asset immediately before the cessation, and if an additional allowance or a greater additional allowance would have been made in respect of the previous year in which the cessation occurred on the basis of that value, an amount equal to the additional allowance which would have been made or, as the case may be, to the difference between the additional allowance which would have been made and the additional allowance which was made for that year shall be made in respect of the previous year in which the sale occurs;
(c) where the proceeds of the sale plus the total amount of the allowances made under this clause exceed the amount of the expenditure, the excess or the amount of the allowances so made, whichever is the less, shall be treated as a receipt of the business accruing at the time of the sale;
(d) where a deduction is allowed for any previous year under this clause in respect of expenditure represented wholly or partly by any asset,
no deduction shall be allowed under clause (vi) or clause (vii) for the same previous year in respect of that asset;
(e) where an asset is used in the business after it ceases to be used for scientific research related to that business, and a claim for an allowance under clause (vi) or clause (vii) is made in respect of that asset, the actual cost to the assessee of the asset shall be treated as reduced by the amount of any deductions allowed under this clause;
(f) clause (b) of the proviso to clause (vi) shall apply in relation to deductions allowable under this clause as it applies in relation to deductions allowable in respect of depreciation;
(g) if any question arises under clause (xii), clause (xiii) or this clause as to whether, and if so to what extent, any activity constitutes or constituted or any asset is or was being used for scientific research, the Central Board of Revenue shall refer the question to the prescribed authority, whose decision shall be final;
Explanation.—In clause (xii), clause (xiii) and this clause—
(i) "scientific research" means any activities in the fields of natural or applied science for the extension of knowledge;
(ii) references to expenditure incurred on scientific research do not include any expenditure incurred in the acquisition of rights in, or arising out of, scientific research, but, save as aforesaid, include all expenditure incurred for the prosecution of, or the provision of facilities for the prosecution of, scientific research;
(iii) references to scientific research related to a business or class of business include—
(a) any scientific research which may lead to or facilitate an extension of that business or, as the case may be, all businesses of that class;
(b)any scientific research of a medical nature which has a special relation to the welfare of workers employed in that business or, as the case may be, businesses of that class;]
[(xiv-a) in respect of any special reserve created by a financial corporation which is engaged in providing long term finance for industrial development in India, an amount not exceeding ten per cent, of the total income carried to such reserve account:
Provided that the corporation is for the time being approved by the Central Government for the purposes of this clause:
Provided further that where the aggregate of the amounts carried to such reserve account from time to time exceeds the paid-up share capital (excluding the amounts capitalised from reserves) of the corporation no allowance under this clause shall be made in respect of such excess;]
(xv)] any expenditure [([not being an allowance of the nature described in any of the clauses (i) to (xiv) inclusive, and] not being in the nature of capital expenditure or personal expenses of the assessee) laid out or expended wholly and exclusively for the purpose of such business, profession or vocation]:
* * * * *
[Provided that in the case of a company, no expenditure in the nature of entertainment expenditure shall be allowed which exceeds the aggregate amount computed as hereunder:—
| (i) on the first Rs. 10,00,000 of the profits and gains of the business (computed before making any allowance under clause (vi-b) or in respect of entertainment expenditure) .. | at the rate of 1 % or Rs. 5,000 whichever is higher; | ||
| (ii) on the next Rs. 40,00,000 of the profits and gains of the business (computed in the manner aforesaid).. | at the rate of ¾ %; | ||
| (iii) on the next Rs. 1,20,00,000 of the profits and gains of the business (computed in the manner aforesaid).. | at the rate of ½ %; | ||
| (iv) on the balance of the profits and gains of the business (computed in the manner aforesaid) .. | nil.] |
[(2A) Where for the purpose of computing profits or gains under this section, an allowance or deduction has been made in the assessment for any year in respect of any loss, expenditure or trading liability incurred by the assessee and, subsequently during any previous year, the assessee has received, whether in cash or in any other manner whatsoever, any amount in respect of such loss or expenditure or has obtained some benefit in respect of such trading liability by way of remission or cessation thereof, the amount received by him or the value of the benefit accruing to him shall be deemed to be profits and gains of business, profession or vocation and to have accrued or arisen during that previous year.]
[(2AA) For the purpose of computing the profits or gains of any business consisting of the prospecting for or extraction or production of mineral oils in relation to which the Central Government has entered into an agreement with any person for the association or participation in such business of the Central Government (which agreement has been laid on the Table of each House of Parliament), there shall be made in lieu of, or in addition to, the allowances admissible under sub-section (2), such allowances as are specified in the agreement in relation—
(a) to expenditure by way of infructuous or abortive exploration expenses in respect of any area surrendered prior to the beginning of commercial production by the assessee;
(b)after the beginning of commercial production, to expenditure incurred by the assessee, whether before or after such commercial production, in respect of drilling or exploration activities or services or in respect of physical assets used in that connection except assets on which allowance for depreciation is admissible under sub-section (2); and
(c) to the depletion of mineral oil in the mining area in respect of the assessment year relevant to the previous year in which commercial production is begun and for such succeeding year or years as may be specified in the agreement;
and such allowances shall be computed and made in the manner specified in the agreement, the other provisions of this Act being deemed for this purpose to have been modified to the extent necessary to give effect to the terms of the agreement.]
(2B) * * * * *
(2C) * * * * *
[(3) Where any building, machinery, plant or furniture in respect of which any allowance is due under clause (iv), clause (v), clause (vi) or clause (vii) of sub-section (2) is not wholly used for the purposes of the business, profession or vocation, the allowance shall be restricted to the fair proportional part of the amount which would be allowable if such building, machinery, plant or furniture was wholly so used.
(4) Nothing in clause (ix) or [clause (xv)]of sub-section (2) shall be deemed to authorise the allowance of any sum paid on account of any cess, rate or tax levied on the profits or gains of any business, profession or vocation or assessed at a proportion of or otherwise on the basis of any such profits or gains; and nothing in [clause (xv)]of sub-section (2) shall be deemed to authorise—
(a) any allowance in respect of a payment which is chargeable under the head "Salaries" if it is payable without [the taxable territories] and tax has not been paid thereon nor deducted therefrom under section 18; or
(b)any allowance in respect of any payment by way of interest, salary, commission or remuneration made by a firm to any partner of the firm; or
(c) any allowance in respect of a payment to a provident or other fund established for the benefit of employees unless the employer has made effective arrangements to secure that tax shall be deducted at source from any payments made from the fund which are taxable under the head "Salaries".
[(4A) Nothing in sub-section (2) shall, in the computation of the profits and gains of a company, be deemed to authorise the making of—
(a) any allowance in respect of any expenditure which results directly or indirectly in the provision of any remuneration or benefit or amenity to a director or a person who has a substantial interest in the company within the meaning of sub-clause (iii) of clause (6C) of section 2, or
(b) any allowance in respect of any assets of the company used by any person referred to in clause (a) either wholly or partly for his own purposes or benefit,
if in the opinion of the Income-tax Officer any such allowance is excessive or unreasonable having regard to the legitimate business needs of the company and the benefit derived by or accruing to it therefrom.
Explanation.—The provisions of this sub-section shall apply notwithstanding that any amount disallowed under this sub-section is included in the total income of any person referred to in clause (a).]
[(4B) Nothing in clause (vi) or clause (vi-a) of sub-section (2) shall be deemed to authorise the allowance for any previous year of any sum in respect of any building, machinery, plant or furniture sold, discarded, demolished or destroyed in that year.]
(5) In sub-section (2), "paid" means actually paid or incurred according to the method of accounting upon the basis of which the profits or gains are computed under this section; "plant" includes vehicles, books, scientific apparatus and surgical equipment purchased for the purposes of the business, profession or vocation; and "written down value" means—
(a) in the case of assets acquired in the previous year, the actual cost to the assessee:
[Provided that where, before the date of acquisition by the assessee, the assets were at any time used by any other person for the purposes of his business and the Income-tax Officer is satisfied that the main purpose of the transfer of such assets, directly or indirectly, to the assessee was the reduction of a liability to income-tax (by claiming depreciation with reference to an enhanced cost), the actual cost to the assessee shall be such an amount as the Income-tax Officer may, with the previous approval of the Inspecting Assistant Commissioner, determine having regard to all the circumstances of the case:]
[Provided further that where before the date of acquisition by the assessee, the assets, which belonged to the assessee and had been used by him for the purposes of his business, profession or vocation, had ceased to be his property by reason of transfer or otherwise, the actual cost to the assessee shall be the actual cost to him when he first acquired the assets less all depreciation actually allowed to him under the Act or under any Act repealed hereby or under executive orders issued when the Indian Income-tax Act, 1886 (II of 1886), was in force;]
[(b) 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 orders issued when the Indian Income-tax Act, 1886 (II of 1886), was in force:]
[Provided that in the case of a building previously the property of the assessee and brought into use for the purposes of the business, profession or vocation after the 28th day of February, 1946, "written down value" means the actual cost to the assessee reduced by an amount equal to the depreciation calculated at the rate in force on that date that would have been allowable had the building been used for the aforesaid purposes since the date of its acquisition by the assessee and had the provisions of this Act relating to the allowance for depreciation been in force on and from the date of acquisition:]
Provided [further] that where the provisions of the proviso to sub-section (2) of section 26 are applicable, the actual cost to the assessee referred to in [clauses (a) and (b)]shall be the actual cost to the person succeeded in the business, profession or vocation;
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[(c) in the case of assets acquired by the assessee by way of gift or inheritance, the "written down value" as in the case of the previous owner or the market value thereof whichever is the less.
Explanation.—For the purposes of this sub-section, the expression "actual cost" means the actual cost of the assets to the assessee reduced by that portion of the cost thereof, if any, as has been met directly or indirectly by Government or by any public or local authority, and any allowance in respect of any depreciation carried forward under clause (b) of the proviso to clause (vi) of sub-section (2) shall be deemed to be depreciation "actually allowed".]
[(5A) Any compensation or other payment due to or received by,—
(a) a managing agent of an Indian company at or in connection with the termination or modification of his managing agency agreement with the company;
(b)a manager of an Indian company at or in connection with the termination of his office or modification of the terms and conditions relating thereto;
(c) any person, by whatever name called, managing the whole or substantially the whole affairs of any other company in the taxable territories, at or in connection with the termination of his office or the modification of the terms and conditions relating thereto;
(d) any person, by whatever name called, holding an agency in the taxable territories for any part of the activities relating to the business of any other person, at or in connection with the termination of his agency or the modification of the terms and conditions relating thereto;
shall be deemed to be profits and gains of a business carried on by the managing agent, manager or other person, as the case may be, and shall be liable to tax accordingly; and the tax on such compensation or other payment shall, if the assessee so elects, be computed at the average of the rates of income-tax and super-tax applicable to his total income for the three years immediately preceding the previous year in which the compensation or other payment was due or received.]
(6) A trade, professional or similar association performing specific services for its members for remuneration definitely related to those services shall be deemed for the purpose of this section to carry on business in respect of those services, and the profits and gains therefrom shall be liable to tax accordingly.
(7) Notwithstanding anything to the contrary contained in sections 8, 9, 10, 12 or 18, the profits and gains of any business of insurance and the tax payable thereon shall be computed in accordance with the rules contained in the Schedule to this Act.]
