Income Tax Appellate Tribunal - Mumbai
Ibi Kellogg India (P) Ltd. vs Ito on 24 April, 2006
ORDER
D.C. Agrawal, Accountant Member
1. In this case, the assessee has raised following main grounds:
The Commissioner (Appeals) erred in upholding the action of the Income Tax Officer of allowing depreciation under Section 32 of the Income Tax Act, 1961, when the same was not claimed in the return of income filed by the appellants.
2. The only grievance of the assessee is that the assessing officer has computed depreciation and allowed it from the total income and the Commissioner (Appeals) had confirmed the same even enough the assessee has not claimed it. Assessee had filed return of loss on Rs. 13,62,69,110. No depreciation was claimed. It was submitted before the assessing officer that the claim of depreciation is optional and cannot be thrust upon the assessee. The assessee has relied on the decision of Hon'ble Supreme Court in CIT v. Mahendra Mills . According to the Income Tax Officer, the reasons for not claiming the depreciation was that unabsorbed depreciation could not have been carried forward for set off for more than 8 years. The assessee wanted to avail depreciation allowance as and when it had positive income and hence, it did not claim it in this year as it had loss. The assessing officer considered assessee's contentions. According to him, the profit and gains from business or profession has to be worked out as per Section 28. Section 29 envisages that such income should be computed in accordance with the provisions of sections 30 to 43D. The learned assessing officer observed that decision of Hon'ble Supreme Court in CIT v. Mahendra Mills' case (supra) pertained to the pre-amendment law when Section 34(1) was in the statute and which was deleted with effect from 1-4-1988. The above judgment mainly was based on the provisions of Section 34(1). Section 34(1) stated that deduction referred in subsection (1) or (1A) of Section 32 shall be allowed only if prescribed particulars have been furnished. Thus, where particulars are not furnished, the question of allowing depreciation will not arise. After deletion of Section 34(1), such requirement is no longer existing and depreciation has to be calculated as per Section 32(1), which envisages that depreciation on plant and machinery or furniture owned by the assessee and used for the purpose of business or profession shall be allowed on prescribed percentage of the WDV. The word "shall" used in Section 32(1) is mandatory and therefore, there is no discretion left with the assessee to claim or with the assessing officer not to work out depreciation. The assessing officer further relied on other decisions such as CIT v. Kotagiri Industrial Co-operative Tea Factory Ltd. , Distributors (Baroda) (P) Ltd v. Union of India ), H.H. Sir Rama Varma and CIT v. Gannon Dunkerley & Co. Ltd. . Thus, holding that the claim of depreciation is not optional, he calculated depreciation and computed income thereafter.
3. Before the Commissioner (Appeals), it was reiterated that claim of depreciation is optional and if it is not claimed in the return of income, then same cannot be thrust upon the assessee. Relying on the decision of Hon'ble Punjab & Haryana High Court in Ram Nath Zindal v. CIT , it was argued before the Commissioner (Appeals) that Explanation 5 to Section 32 can have prospective effect only. The learned Commissioner (Appeals) considered the decision of Hon'ble Bombay High Court in CIT v. Bombay State Transport Corpn. the Hon'ble Madras High Court in G.R. Govindarajulu Naidu v. CIT for the proposition that profits have to be computed in the commercial sense under the appropriate principle of accountancy and the wear and tear of the assets utilized by the assessee for the purposes of earning his profit. Hence, depreciation will have to be considered and allowance has to be made for such wear and tear. The depreciation is a beneficial provision and it is to be allowed.
4. Before us, the learned authorised representative submitted that depreciation could not be thrust upon the assessee in view of the decision of Hon'ble Supreme Court in Mahendra Mills case (supra). The Explanation 5 introduced in Section 32 is prospective in view of the decision of Hon'ble Punjab & Haryana High Court in Ram Nath Zindals case (supra). She further submitted that on the question of prospectively of Explanation 5, the decision of Hon'ble Punjab & Haryana High Court is the only decision and therefore, it is binding on the parties by virtue of the decision of Hon'ble Bombay High Court in CIT v. Smt. Godavaridevi Saraf .
5. Against this, the learned Departmental Representative submitted that the issue is squarely covered in favour of the revenue by the decision of Special Bench of ITAT in Vahid Paper Converters (IT Appeal No. 1686 (Mum.) of 2004). It has been followed by ITAT, Mumbai in IT Appeal No. 301 (Mum.) of 1994 in Dy. CIT v. GP Electronics Ltd. dated 25-11-2005. The learned DR also submitted that all those decisions, which had followed Mahendra Mills (supra) pertained to the period prior to 1-4-1988 when Section 34 was in statute. Even though Explanation 5 to Section 32(1) has been treated prospective, but it is an Explanation, which explained the intent of the Legislature from the day of the main section was introduced. Even otherwise, total income of the assessee has to be computed in accordance with the provisions of sections 30 to 43D of the Act. By the use of word 'shall' in Section 32(1) no option is left with the assessing officer but to calculate depreciation and allow it. Further, intention of the assessee is not bona fide. Since brought forward depreciation can be allowed only up to 8 years, it does not want to claim depreciation, instead want to claim business loss first and to carry forward WDV of the asset as such to subsequent years and to claim depreciation as and when there is positive income.
6. In rejoinder, learned authorised representative submitted that decision of vahid papers was on the issue as to whether for the purpose of allowing deduction under chapter VI-A depreciation, has to be allowed or not. It is held that deduction under Chapter VI-A has to be allowed after considering depreciation whether it has been claimed or not claimed. Whereas computation of gross total income prior to Chapter VI-A will be governed by decision of Hon'ble Supreme Court in Mahendra Mills (supra). The learned authorised representative also referred to para 26 from the decision of Mahendra Mills (supra), which reads as under:
We get support from the earlier decision of this Court in Dharampur Leather Co. Ltd's case (supra). Allowance of depreciation is calculated on the written down value of the assets, which written down value be the actual cost of acquisition less the aggregate of all deductions actually allowed to the assessee for the past years. Actually allowed does not mean notionally allowed. If the assessee has not claimed deduction of depreciation in any past year it cannot be said that it was notionally allowed to him. A thing is the language when it is claimed. A subtle distinction is there when we examine the language used in Section 16 and that sections 34 and 37 of the Act, it is rightly said that a privilege cannot be a disadvantage and an option cannot become an obligation.'
7. We have heard the rival submissions and considered the material on record. Hon'ble Supreme Court in Mahendra Mills case (supra) held as under:
Language of the provision of sections 32 and 34 are specific and admits of no ambiguity Section 32 allows depreciation as deduction subject to the provisions of Section 34. Section 34 provides that deduction under Section 32 shall be allowed only if prescribed particulars have been furnished. Rule 5AA (since deleted) provided for the particulars required for the purpose of deduction under Section 32. Even in the absence of Rule 5AA return of income in the form prescribed itself requires particulars to be furnished if the assessee claims depreciation. These particulars are required to be furnished in great detail. Circular No. 29D(XIX- 14) of 1965.
8. From the above, it follows that for the purposes of deciding the issue Section 32 has to be read jointly with Section 34. Section 34 provides that deduction under Section 32 shall be allowed only if prescribed particulars have been furnished'. Section 34 which is deleted with effect from 1-4-1988 reads as under:
(1) The deductions referred to in Sub-section (1) or Sub-section (1A) of Section 32 shall be allowed only if the prescribed particulars have been furnished; and the deduction referred to in Section 33 shall be allowed only if the particulars prescribed for the purpose of Clause (i) and Clause (ii) of Sub-section (1) of Section 32 have been furnished by the assessee in respect of the ship or machinery or plant.' Thus, a power vested in the assessing officer to examine the claim of depreciation and allow it only when prescribed particulars are furnished by the assessee. These particulars included, brought forward WDV, assets acquired during the year, or sold during the year, rates of depreciation, whether asset was used in that year or not. No depreciation was available on an asset if it was sold during the year. This information was considered necessary before claim of depreciation is admitted. One more reason for disallowing claim of depreciation when particulars are not furnished was to facilitate the assessing officer to calculate written down value after adjusting actually allowed depreciation. Wherever depreciation was not allowed for want of particulars, the WDV as brought forward from earlier year would be carried forward to subsequent year. Notional depreciation would not be adjusted to work out WDV to be carried forward to the next year. Thus, on one hand, there was a compulsion imposed on the assessee to furnish particulars for claiming depreciation, if it wanted to reduce its tax liability and on the other hand, Hon'ble Supreme Court in Mahendra Mills' case (supra) protected the interest of assessee by prohibiting the assessing officer from reducing the depreciation to work out WDV to be carried forward to the next year. It was held in Mahendra Mills case that depreciation allowed means actually allowed and not notionally allowed.
9. Thus, so long as Section 34 was in statute, the depreciation under Section 32 could not be allowed in the absence of particulars furnished by the assessee. After deletion of Section 34 and Rule 5AA, there is no requirement of particulars to be furnished and hence, assessing officer cannot ignore depreciation. He will take the particulars from the earlier year from the record and calculate depreciaron as per prescribed rates on the basis of WDV carried forward in preceding year. There is a material change in the scenario, after concept of block of assets had come into the statute. Once an asset is a part of block of assets, working of and allowing of depreciation is automatic from year to year irrespective of any claim made by the assessee in this behalf. This working is not stopped for want of any claim or furnishing of particulars. Therefore, decision of Hon'ble Supreme Court in the case of Mahendra Mills case (supra) will no longer be applicable for assessment subsequent to assessment year 1988-89. This aspect was also considered by Hon'ble Supreme Court in Mahendra Mills case (supra) and observed that question involved in that case Mahendra Mills (supra) pertained to assessment years prior to 1-4-1988. "Section 32 has since been amended by the Taxation Laws (Amendment and Miscellaneous Provisions) Act, 1986, with effect from 1-4-1988. However, the answer to the question remains of substantial importance as various matters are stated to be pending in the High Courts relating to the assessment years prior to 1-4-1988".
10. On the question whether the decision of Hon'ble Supreme Court in Mahendra Mills case (supra) should be followed even after removal of Section 34 and Rule 5AA, learned DR submitted that change in fact and change in law materially affect the nature of binding procedure. We feel that the nature of binding precedence considerably affected by changes in factual matrix and law on the subject. In Padmasundara Rao v. State of Tamil Nadu , Hon'ble Supreme Court held as under:
Courts should not place reliance on decisions without discussing as to how the factual situation fits in with the fact situation of the decision on which reliance is placed. There is always peril in treating the words of a speech or judgment as though they are words in a legislative enactment, and it is to be remembered that judicial utterances are made in the setting of the facts of a particular case, said Lord Morrin in Herrington v. British Railways Board (1972) 2 WLR 53 7 (HL). Circumstantial flexibility, one additional or different fact may make a world of difference between conclusions in two cases.
Thus, the material difference is the deletion of Section 34 and therefore, reliance cannot be wholly placed for assessment years, subsequent to 1-4-1988, on the decision in Mahendra Mills case (supra). Para 26 of that decision as referred to by learned Counsel for assessee does not clinch the issue in favour of assessee because that para lays down guidance for the purposes of calculation of depreciation based on actual cost of acquisition and deduction of depreciation actually allowed in earlier years. That is, this para lays down how WDV has to be worked out and for that purpose only actually allowed depreciation has to be considered. It does not lay down a law that even after the deletion of Section 34, depreciation could not be worked out by the assessing officer, if not claimed by the assessee. While considering the decision of Special Bench, which has considered the decision of Mahendra Mills (supra) the question involved was whether depreciation though allowable but not claimed in the return of income has to be allowed while computing deduction under chapter VIA. This question was answered against assessee. For the purposes of computing deduction under Chapter-VIA and for working out total income or profit for that purpose, depreciation actually allowable has to be considered and irrespective of whether it was claimed in earlier years or not, The learned Counsel for assessee suggested that there should be two computations of total income, one for the purpose of computing deduction under Chapter-VIA wherein depreciation whether claimed or not has to be considered and the other for the purposes of gross total income for which depreciation will be considered only when it is claimed. We do not think that this interpretation is correct. Computation of income, one for the purpose of computing of deduction under chapter VIA and other for the purposes of "gross total income" has to be the same.
There cannot be a dichotomy and two standards one for computing income/profit for the purposes of deduction under chapter VI-A and other for the purposes of computing gross total income from which deduction under Chapter VI-A has to be reduced. if this is allowed to work, then gross total income before allowing deduction under Chapter VI-A would be more than the gross total income for the purpose of computing deduction within Chapter VI-A. In the former, depreciation allowance is not considered because it is not claimed by the assessee, whereas in the later, it had to be considered irrespective of the fact whether it is claimed by the assessee or not in view of Vahid Paper Converters case. The deduction of gross total income as per Income Tax Act, 1961 is only one. As per Section 80B(5) "gross total income" means the total income computed in accordance with the provisions of this Act, before making any deductions under this chapter. Section 80AB read as under:
80AB. Deductions to be made with reference to the income included in the gross total income.-Where any deduction is required to be made or allowed under any section (except Section 80M) included in this Chapter under the heading "C-Deductions in respect of certain income" in respect of any income of the nature specified in that section which is included in the gross total income of the assessee, then, notwithstanding anything contained in that section, for the purpose of computing the deduction under that section, the amount of income of that nature as computed in accordance with the provisions of this Act (before making any deduction under this Chapter) shall alone be deemed to be the amount of income of that nature which is derived or received by the assessee and which is included in his gross total income.
It means that for the purposes of allowing deduction under any section under the head 'C' the amount of income on which deduction is to be allowed will be computed in accordance with the provisions of the Act and that alone should be included in the gross total income. Thus, 'income' included in gross total income is the same as the one on which deductions under chapter VI-A are allowed. If depreciation is allowable, even though not claimed, depreciation has to be allowed in any case to compute income. Such income after allowing depreciation will form part of gross total income. At the relevant time, when Section 34 was in the statute, depreciation could be allowed only when particulars were furnished. Hence, income of that nature on which deduction under Chapter VI-A had to be allowed could be worked out without considering depreciation. This 'income' thus would be the same either for being part of gross total income or for becoming a base for computing deduction under Chapter VI-A. After removal of Section 34 and Rule 5AA, particulars are no longer necessary. Therefore, 'income' would be computed after allowing depreciation, whether claimed or not. This 'income' again would remain the same for both the purposes i.e., for becoming part of gross total income and for becoming base for deduction under Chapter VI-A. If Hon'ble special Bench holds that depreciation has to be allowed from the income before allowing deduction under Chapter VI-A, then such income alone computed after allowing depreciation would be the part of gross total income and not the one worked out without allowing depreciation.
In G.P. Electronics Ltd. case (supra) for the assessment year 1990-91, decided by H-Bench on 25-11-2005 additional ground raised by the revenue were as under:
'On the facts and in the circumstances of the case and in law, the Commissioner (Appeals) erred in directing the assessing officer to delete the depreciation of Rs. 53,37,240 allowed under Section 32 in the absence of the same being claimed by the assessee, while computing the total income of the assessee under the head "income from Business or profession". The Commissioner (Appeals) did not appreciate that Section 34(1) stood deleted from 1-4-1988 and that Explanation 5 to Section 32 clarifying the allowability of depreciation as being mandatory was introduced merely for the removal of doubts and therefore, its applicability was not prospective in nature and hence, squarely applicable to the assessee's case.
This was answered by ITAT as under
9. In view of the above pleadings, we kept our decision pending on this issue. Now the order of the special Bench is available. The special Bench has decided this issue against the assessee in the case of Vahid Paper Converters, Daman, vide order dated 9-11-2005, wherein it has been held that profits derived from industrial undertaking under Section 80-IA has to be computed after taking into consideration the depreciation under Section 32 of the Act, despite the fact that assessee has not claimed the same for computing the regular income under the head "income from Business or profession". Therefore, following the same, the issue is decided in favour of the revenue. The additional ground raised by the revenue stands allowed. The order of the learned Commissioner (Appeals) is, therefore, set aside on this issue and assessing officer is directed to recompute the deduction accordingly.
Thus, even in computation of gross total income before allowing deduction under chapter VI-A, the ratio of Vahid Paper Converters by Special Bench would be applicable.
It was argued by learned Counsel for assessee that there is still a format in the return, which requires particulars to be furnished by the assessee. But the importance of format in the return was in the conjunction with Section 34 and Rule 5AA. When the two are no longer in statute, format in the return form cannot be substituted for express provisions, which existed at the relevant time. Absence of particulars and data, an assessee is required to fill up in the return, will not disentitle the assessee to claim/allowance/relief. The assessing officer is not estopped from computing income as per Income Tax Act, 1961. Format of the return of income does not decide either the statutory liability of the assessee or restricts the statutory duty of the assessing officer, unless they are backed by statutory provisions. Such formats in the return in any case have undergone changes from time to time, particularly, in respect of claim of depreciation. Now in block of assets, no specific particulars are required to be submitted in respect of depreciation to which an assessee is entitled for the block. No such option is available to the assessee either to claim depreciation or not to claim. The data of block of assets can be obtained from the particulars furnished in earlier year. In the current year, data about sale and purchases of assets can be obtained from the balance sheet or other financial statements. In any case, the question involved is not of an option available to an assessee, but is that of provisions of law existing at the relevant time. When Section 34 and Rule 5AA were in the statute, one could say that if assessee does not want to claim depreciation, he need not furnish particulars and the assessing officer would be statutorily bound not to work out depreciation and reduce it from its income or increase its loss. The power of the assessing officer to disallow depreciation, in the absence of particulars was taken to an advantage and an option not to claim depreciation by not furnishing particulars. Now, there is no such power in the assessing officer to disallow depreciation, if particulars are not furnished and therefore, there is no such advantage or option available with the assessee. The source of such advantage and hence, option to the assessee to claim or not to claim depreciation, was the power of the assessing officer to disallow depreciation, if particulars are not furnished. When that situation is no longer in the statute, then there is no advantage or option available to the assessee. Therefore, we are of the considered view that in the absence of statutory requirement to furnish particulars before an assessee become entitled for depreciation, format alone in the return will not decide any liability or the duty of the parties. Nevertheless, old formats under Rule 5AA have lost relevance under concept of block of assets.
11. Regarding the issue whether Explanation 5 to Section 32 introduced by the Finance Act, 2001 with effect from 1-4-2002 is retrospective, the learned authorised representative submitted that is prospective in view of the decision of Hon'ble Punjab & Haryana High Court in Ramnath Zindal case (supra). In our view, this aspect is not going to have any effect on the allowability of depreciation as per law. Even without explanation, depreciation is needed to be allowed as per law, whether claimed or not claimed, in view of the deletion of Section 34 from the Statute. Reliance was placed by the learned Counsel for assessee on CIT v. Snehavalli Textiles (P) Ltd. (2003) 259 ITR 77 (Mad) and CIT v. Kerala Electric Lamp Works Ltd. (2003) 261 ITR 72 11 (Ker). In Sri Snehavalli Textiles (P) Ltd. case (supra), the question involved was whether depreciation given up in revised return would mean that the assessee is disentitled to depreciation allowance. The Tribunal, in that case, held that assessee was not entitled to depreciation and this decision was confirmed by Hon'ble Madras High Court. The Hon'ble High Court held that assessment made on the basis of revised return without considering the claim of depreciation would be a proper assessment. In Kerala Electric Lamp Works Ltd.'s case (supra), the issue was as to whether Explanation 5 to Section 32 inserted by Finance Act, 2001 would be applicable from 1-4-2002 or for prior years. It was held that explanation is prospective. Thus, the question as to whether depreciation is only at the option of the assessee even after withdrawal of Section 34 was not before Hon'ble Courts in the above two cases. On the other hand, in Madhana Exports (P) Ltd. v. Assistant Commissioner (2002) 82 ITD 306 (Mum) it was held by ITAT, Mumbai that the depreciation has to be considered because of omission of Section 34. In view of this, we hold that the computation of income of assessee is to be done after working out depreciation. We therefore, decide the issue in favour of the revenue and dismiss this appeal of assessee.
12. In the result, the appeal of the assessee is dismissed.