Income Tax Appellate Tribunal - Delhi
Whirlpool India Ltd., vs Department Of Income Tax on 12 January, 2007
BEFORE THE INCOME TAX APPELLATE TRIBUNAL,
"DELHI BENCH - I", NEW DELHI
BEFORE SMT. DIVA SINGH, JUDICIAL MEMBER and
SHRI B.C. MEENA, ACCOUNTANT MEMBER
ITA NO.2085/DEL.2007
(ASSESSMENT YEAR :1998-99)
DCIT, Circle 18 (1), vs. M/s. Whirlpool of India Limited,
New Delhi. 7th Floor, Atma Ram House,
1, Tolstory Mary, New Delhi.
(PAN NO.AAACK1024B)
(APELLANT) (RESPONDENT)
ASSESSEE BY : S/Shri Ajay Vohra & D. Sanghavi, Advocates
DEPARTMENT BY : Shri Raj Tandon, CIT DR
ORDER
PER B.C. MEENA, ACCOUNTANT MEMBER :
This is an appeal filed by the revenue arising out of the order of the CIT (Appeals)-IX, New Delhi dated 12.01.2007 for the assessment year 1998-99. The grounds of appeal read as under :-
"i) On the facts and in the circumstances of the case, the Ld. CIT (A) has erred in deleting the addition of Rs.6,29,3l7,24/- relating to capital gain on sale of flats. (plot)
ii) On the facts and in the circumstances of the case, the Ld. CIT (A) has erred in allowing the assessee not to claim depreciation of Rs.54,94,76,671/-.
iii) On the facts and in the circumstances of the case, the Ld. CIT (A) has erred in allowing the VRS expenditure of Rs.1,52,81,000/- as against the capital expenditure treated by assessing officer."2 ITA NO.2085/DEL/2007
2, In the ground no.1, issue is related to deletion of addition made for capital gain. The assessee company is manufacturing compressors and the compressor division was sold as a going concern to Tecumseh India Private Limited. As per the Memorandum of Understanding (MOU) dated 02.07.1997, the terms of MOU are as under :-
Tecumseh shall purchase
- The plant and machinery, equipment and tooling located at Whirlpool's Faridabad facility (excluding land and building at Faridabad Complex) and the entire assets including land, building, plant and machinery etc., located at Whirlpool's Ballabgarh factory.
- The raw materials and work in progress inventory of compressor division.
- The assets and machinery used exclusively in the compressor repair facility
- To take up the liabilities of the compressor division
- The land measuring in aggregate 105983 square meters and buildings constructed thereon situated at 23 Mile Stone, Ballabgarh, Haryana
- Take over the employees and workers of Whirlpool numbering approximately 1600 who were working on the compressor manufacturing facility.
- Tecumseh shall supply and meet Whirlpool's compressor requirement and also provide services for repairing of the compressors.
The total consideration payable by Tecumseh to Whirlpool was Rs.52.5 crores, the break up of which are as under: -
i) Consideration for Land and Building
3 ITA NO.2085/DEL/2007
a) Land Measuring 56 357 sq. Mtr with buildings and
improvements thereon Rs.15.61 crores
b) Land measuring 28138 sq Mtr with buildings and
improvements thereon Rs.6.48 crores
c) Land measuring 21488 sq. Mtr Rs. 3.01 crores
i) Consideration for plant and machinery, equipment
etc., Rs.19.50 crores
ii) Purchase price of inventories Rs.5.25 crores.
iii) Non competition fee Rs.2.65 crores"
As per the assessee, the entire transaction was completed before 31.07.1997 except the following two :-
"a) Land measuring 28138 sq.mtr. and buildings thereon, the consideration of which was fixed at Rs.6.48 crores. Due to dispute regarding notification for acquisition by the Haryana Government, the said land could not be transferred to Tecumseh at that time and after getting the requisite permission the said land was transferred during the financial year 1999-2000 and has been offered to tax in the assessment year 2000-01.
b) Land measuring 21488 sq. Mtrs. The consideration of which was fixed at Rs.3.01 crores since the said land is also under acquisition from Haryana Government."
The AO held that sale transaction of the land around 7 acres in total has been completed during the relevant previous year under consideration, only the registration has been done subsequently. Assessing Officer considered the sale consideration of Rs.6.48 crores as taxable under the head Long term capital gain during the year under consideration. The relevant portion of the AO's order is as under :-
4 ITA NO.2085/DEL/2007"ii) Sale of land area of 28,138 square meters ( 7 acres approximately) Further from Clause 3. (iii) of the MOU between the assessee company and Tecumseh it is also clear that the assessee has received a sum of Rs.3.24 crores representing 50% of the total consideration as "partial Payment" against the sale of property in plot of land area measuring 7 acre being the Second Part and another Rs.324 crore representing remaining 50% of the sales consideration was kept in an interest bearing escrow account with the agreement that the said amount shall be delivered to the assessee on-or before the registration of the said land.
Clause 3 of the MOU also specifies that the land measuring 7 acre Part is the subject matter of Notification issued by the Haryana State Government under section 4 and 6 of the Land Acquisition Act, 1894 and accordingly this plot of land shall be transferred to Tecumseh when it is released from the Haryana State Government. However, Clause 3 (ii) of the said MOU, reads that-
"(ii) The Seven Acre Parcel is part and parcel of the Compressor Division along with the Main Parcel described in section 3.a above. The Seven Acre Parcel is effectively required for the conduct of the business of the Compressor Division and the Related Operations on the Main Parcel. Until such time as Tecumseh India shall own the Seven Acre Parcel, following the Seven Acre Closing, Tecumseh India and the Compressor Business and Related Operations on the Main Parcel shall have continuous use of the Seven Acre Parcel, and accordingly, Whirlpool hereby grants to Tecumseh India an unrestricted exclusive license to use and build upon the Seven Acre Parcel, for the consideration and on other terms and conditions provided herein (the "License") From the above it is clear that the assessee company has received the 50% sales consideration of Rs.6.48 crores for the 7 acre part and has also given physical possession of the said property to Tecumseh along with factory complex transferred to Tecumseh during July 1997. The balance 50% was put in a bank account which was also subsequently receivable by the 5 ITA NO.2085/DEL/2007 assessee company. Incidentally as per the agreement, interest of this deposit of Escrow Account was also receivable by the assessee. Thus in effect, the assessee had got the full benefit of the entire sale consideration. Hence, even though this seven acre part was subsequently registered in the name of Tecumseh during the previous year corresponding to assessment year 2000-2001, it can be said that said land was actually transferred during the previous year under consideration as part performance of the contract between the parties u/s. 53 of the Transfer of Property Act read with section 2(47)/ 2(14) of the Act.
Accordingly the assessee was asked to show cause why the sales consideration of this 7 acre part should also not be taxed during the year under consideration In response to which the assessee vide its letter dated 222.200 I reiterated the same fact and has stressed on the clause 3 of the MOU and repeated that the seven acre land was subject to acquisition proceeding by the Haryana Government. The land therefore, could not be sold to Tecumseh unless the same was released from the Haryana Government As and when the land was released during the pervious year corresponding to assessment year 2000-2001, the said land was registered in the name of Tecumseh and accordingly capital gains on the sale was declared in the assessment year 2000-2001.
The submission of the assessee fails to justify that the transaction is not covered within the meaning of section 2 (47)
(v) of the Income Tax Act, 1947 which specifies that transfer means" any transaction involving the allowing of the possession of any immovable property to be taken or retained in part performance of a contract of the nature referred to in section 53A of the Transfer of Property Act, 1872".
Considering all the facts and submission of the assessee it is clear that the sales transaction of the 7 acre part was completed during the previous year under consideration even thought it was registered subsequently and accordingly the sales consideration of Rs.6.48 crores shall be taxed under the head long term capitals gains during the year and not as the capital gain of the assessment year 2000-2001 when the assessee has offered the same to tax under the head capital gains by claiming higher Index benefit."
6 ITA NO.2085/DEL/20073. The CIT (A) has granted the relief by holding as under :-
7. I have considered the matter carefully. In my opinion the assessee did not have absolute and clear title over the land once it was under notification of acquisition by the Haryana Government. Once, a land had been notified for acquisition, the same can not be sold / transferred unless and until it is released from the notification. Further, the MOU between the two parties clearly spells out conditions enabling return of land to the assessee and refund of the ·consideration, if the land would not be released from the acquisition notification. The assessee was not legally competent to transfer the land during the pendency of the notification and could not have got the conveyance deed registered in ·favour of the Tecumseh without necessary permission/approval of the Haryana Government regarding the acquisition. Attention is drawn here to the decision of the Karnataka High Court in the case of CIT Vs. H.K. Patil : 202 ITR 30. In that case, there was an agreement for sale of machinery after obtaining necessary sanction of the authority concerned. However, the machinery was handed over to the Vendee before obtaining the sanction. The consideration was received after obtaining sanction. The Vendor made entries in the books of accounts after sanction was obtained. The Court held that sale took place after sanction of the competent authority was obtained and long term capital gains accrued only after sale following the sanction. In view of the above facts, I am of the opinion that there was no transfer in terms of section 2(47) or otherwise and therefore, capital gains would not be attracted in this year. As a result, the grounds are allowed."
4. While pleading on behalf of the revenue, learned DR submitted that land measuring 28138 sq.mtrs.(7 acres) with building thereupon was sold for Rs.6.48 crores. Assessee had received half of payments and balance was put into interest bearing escrow account. Interest thereupon was to be received by assessee on or before registration. Thus, in a way, whole of sale proceeds were received either by assessee or in escrow 7 ITA NO.2085/DEL/2007 account and interest earned was also of assessee. The possession was handed over to the Tecumesh. The assessee's claim that possession was not given and it was only given on licence under section 52 of the Indian Easement Act, 1882 is not correct. Ld. AR also relied on the following decisions and submitted a written submissions which read as under :-
"1. Smt. D. Kasturi v CIT (2010) 323 ITR 40 (MAD.) Where assessee had executed agreement for transfer in respect of property and given possession to party and received consideration, doctrine of part performance as per section 53A of Transfer of Property Act was rightly invoked; subsequent act of assessee in executing power of attorney and sale deeds executed by PA holder on basis of such power of attorney would not in any way alter status of the parties to agreement.
For application of section 53A the relevant consideration would be the clauses in the agreement between the parties to the agreement and their performance in terms of agreement. The subsequent act of the assessee in executing the power of attorney and the sale deeds executed by the power holder on the basis of such power of attorney would not in any way alter the status of the parties to the agreement dated 29-3-1993, for applicability of section 53A. The assessee could no longer assert possessory rights against the firm to which possession was already given pursuant to the agreement and that too after receiving the full sale consideration. Thus, there was no merit in the assessee's appeal.
2. Chaturbhuj Dwarkadas Kapadia of Bombay v CIT 260 ITR 497(BOM) Clauses (v) and (vi) were introduced in section 2(47) of the Income- tax Act, 1961, with effect from April 1, 1988. They provide that "transfer" includes (i) any transaction which allows possession to be taken/retained in part performance of a contract of the nature referred to in section 53A of the Transfer of Property Act, 1882, and
(ii) any transaction entered into in any manner which has the effect of transferring or enabling the enjoyment of any immovable property. Therefore, in these two cases capital gains would be taxable in the year in which such transactions are entered into, even if the transfer of the immovable property is not effective or complete 8 ITA NO.2085/DEL/2007 under the general law. Under section 2 (47)(v) any transaction involving allowing of possession to be taken over or retained in part performance of a contract of the nature referred to in section 53A of the Transfer of Property Act would come within the ambit of section 2(47)(v). In order to attract section 53A, the following conditions need to be fulfilled. There should be a contract for consideration; it should be in writing; it should be signed by the transferor; it should pertain to transfer of immovable property ; the transferee should have taken possession of the property; lastly, the transferee should be ready and willing to perform his part of the contract. Even arrangements confirming privileges of ownership without transfer of title could fall under section 2(47)(v). Section 2(47)(v) was introduced in the Act from the assessment year 1988-89 because prior thereto, in most cases, it was argued on behalf of the assessee that no transfer took place till execution of the conveyance.
Assessees used to enter into agreements for developing properties with builders and under the arrangement with the builders, they used to confer privileges of ownership without executing conveyance and to plug that loophole, section 2(47)(v) came to be introduced in the Act.
Held, that section 2(47)(v) read with section 45 indicates that capital gains was taxable in the year in which such transactions were entered into even if the transfer of immovable property is not effective or complete under the general law.
3. CIT v Podar Cement (P) Ltd 226 ITR 625 (SC) Hence, though under the common law "owner" means a person who has got valid title legally conveyed to him after complying with the requirements of law such as the Transfer of Property Act, the Registration Act, etc., in the context of section 22 of the Income-tax Act, 1961, having regard to the ground realities and further having regard to the object of the Income-tax Act, namely, to tax the income, "owner" is a person who is entitled to receive income from the property in his own right.
4. CIT v Vijay Flexible Containers 186 ITR 693 (BOM) A capital asset is defined by section 2(14) to mean "property of any kind held by an assessee'. The word, 'transfer' in relation to a capital asset is defined in section 2(47) to include, the sale, exchange or relinquishment of the asset or the extinguishment of any rights therein. Thus, the right to obtain a conveyance of immovable property fell within the expression 'property of any kind 'used in section 2(14) and was, consequently, a capital asset."
9 ITA NO.2085/DEL/20075. On the other hand, the learned AR submitted that the assessee received a sum of Rs.3.24 crores representing 50% of the total consideration as a partial payment against the sale of plot of land and the balance of Rs.3.24 crores was kept in an interest bearing escrow account, which, along with interest was to be delivered to the assessee on or before the registration of the land. This sale was subject to the acquisition proceedings and assessee was to get it released and then transfer the land by way of registration. Pending such work the land was licensed to the Tecumesh. These facts are very clear from the terms of agreement dated 2nd July, 1997. This land was released by Haryana Government to the assessee during the previous year relevant to the AY 2000-01 and then the land was registered in the name of transferee. The AO had wrongly invoked the provisions of section 2(47)(v) of Income-tax Act, as the transfer has not taken place during the relevant previous year. Therefore, capital gain did not arise during the year. The CIT (A) had rightly granted the relief by holding that assessee was not having an absolute and clear title over the land once it was under notification of Acquisition by the Government of Haryana. The land could not be sold /transferred once it is notified under the Land Acquisition Act, 1894. There was specific condition in the MOU with the Tecumseh transferee that in the case, when assessee is not able to get release the land from acquisition 10 ITA NO.2085/DEL/2007 notification then the amount shall be refunded. The assessee was not legally competent to transfer the land without the approval of the Government of Haryana in respect of acquisition notice. There was no transfer in terms of section 2(47)(v) of the Act, hence, there was no capital gain arises. The assessee had actually not parted with the possession of the land but the transfer was for a licence given to Tecumseh under section 52 of the Indian Easements Act, 1882. The MOU clearly spells out the terms and conditions of licence agreement.
Ld. AR relied on the decision of Hon'ble Mumbai High Court in the case of DCIT vs. Asian Distributors Ltd., 70 TTJ 88. In the case of Asian Distributors, the transfer of possession to developer and last installment was due beyond financial year, the Hon'ble Court held that neither it was a transfer in terms of section 2(47)(v) of I.T. Act nor in terms of section 53A of Transfer of Property Act, 1882, the transaction can be at best be classified as an agreement granting licence to the developer within the meaning of Section 52 of the Easement Act, 1882. He further pleaded that licence agreement and the agreement to sell was contingent to the release of the land by the Government of Haryana. A licence agreement in the interim period cannot be construed to be a part performance of the agreement to sell. The agreement to sell is a separate agreement which is distinct from the licence agreement in the meaning of section 52 of the Indian Easements Act, 1882. He also pleaded that there is nothing 11 ITA NO.2085/DEL/2007 provided in the law which can divest the assessee of his right to deal, as he deems fit, with the property the title to which he holds. An intending purchaser definitely will be worried about the pendency of acquisition proceedings. Therefore, there was good reason for the assessee and the purchaser to have entered into an arrangement of licence and a contingent agreement to sell. For this proposition, he relied on the following decisions :-
(i) Spl. Land Acquisition Officer, Bombay vs. M/s. Godrej & Boyce, AIR 1987 Hon'ble Supreme Court 2421
(ii) Buddaiah vs. CIT, 155 ITR 277 (Karnataka)
(iii) Fruit & Vegetable Merchants Union vs. Delhi Improvement Trust, AIR 1957 SC 344.
6. We have heard both the sides on the issue in detail and had also perused the agreement dated 02.07.1992 between the assessee and the Tecumesh. As per the clauses of agreement, the Haryana State Government has agreed in principle to release the seven acre parcel from the acquisition Notifications and with this understanding, the clause was also made that assessee shall obtain requisite permission to effectively convey and vest the seven acre parcel in Tecumesh India. This land was agreed to be sold by the assessee to Tecumesh India. As per this agreement, this was also part and parcel of the compressor division and this land was required for the conduct of the business of compressor division and the related operations on the main parcel. The assessee had given the possession and the fruits of the land were enjoyed by the 12 ITA NO.2085/DEL/2007 Tecumesh India. The assessee had already received half of the sale consideration and the balance 50% was kept in escrow account. All the interest accrued in escrow account was payable to the assessee on a monthly basis. The assessee claims that it was a licence fee for enjoying the benefits of the land. In our considered view, this amount cannot be treated as licence fee. The assessee's reliance on the decision of Hon'ble Mumbai High Court in the case of DCIT vs. Asian Distributors Ltd.
(cited supra) is also not of any help as in that case the facts are at variance to the assessee's case. In the case of Asian Distributors Ltd., the possession of the land is agreed to be given to the developers only upon payment of the last installment and till such time, assessee had a right to revoke contract in certain eventualities and, therefore, the court held that neither in terms of section 2(47)(v) of Income-tax Act nor in terms of Section 53A of Transfer of Property Act, impugned transaction can be classified as transfer of capital asset or would be considered as allowing of the possession of any immovable property in part performance of a contract of nature referred to in Section 53A of the Transfer of Property Act, hence, assessee was not liable to capital gain tax. In the section 2(47) of Income-tax Act , the "transfer" in relation to capital asset is defined as under :-
"(47) ["transfer", in relation to a capital asset, includes,--
(i) the sale, exchange or relinquishment of the asset ; or
(ii) the extinguishment of any rights therein ; or 13 ITA NO.2085/DEL/2007
(iii) the compulsory acquisition thereof under any law ; or
(iv) in a case where the asset is converted by the owner thereof into, or is treated by him as, stock-in-trade of a business carried on by him, such conversion or treatment ;] [or] [(iva) the maturity or redemption of a zero coupon bond; or] [(v) any transaction involving the allowing of the possession of any immovable property to be taken or retained in part performance of a contract of the nature referred to in section 53A of the Transfer of Property Act, 1882 (4 of 1882) ; or
(vi) any transaction (whether by way of becoming a member of, or acquiring shares in, a co-operative society, company or other association of persons or by way of any agreement or any arrangement or in any other manner whatsoever) which has the effect of transferring, or enabling the enjoyment of, any immovable property.
Explanation.--For the purposes of sub-clauses (v) and (vi), "immovable Property" shall have the same meaning as in clause (d) of section 269UA;]"
Section 53A of the Transfer of Property Act defines "Part performance thus :-
" Part performance.-Where any person contracts to transfer for consideration any immovable property by writing signed by him or on his behalf from which the terms necessary to constitute the transfer can be ascertained with reasonable certainty, and the transferee has, in part performance of the contract, taken possession of the property or any part thereof, or the transferee, being already in possession, continues in possession in part performance of the contract and has done some act in furtherance of the contract, and the transferee has performed or is willing to perform his part of the contract, then, notwithstanding that where there is an instrument of transfer, that the transfer has not been completed in the manner prescribed therefor by the law for the time being in force, the trans-feror or any person claiming under him shall be debarred from enforcing against the transferee and persons claiming under him any right in respect of the property of which the transferee has taken or continued in possession, other than a right expressly provided by the terms of the contract :
Provided that nothing in this section shall affect the rights of a transferee for consideration who has no notice of the contract or of the part performance thereof."14 ITA NO.2085/DEL/2007
In the case under consideration, the contract for transfer is signed in writing by both sides. The assessee had given the possession of the said land to Tecumesh India (purchaser). Assessee had also received 50% of the sale consideration and balance 50% had been put in escrow account and interest accrued thereupon has been received by the assessee on monthly basis. The assessee was always ready and willing to perform his part of contract. Clauses have been incorporated in the agreement itself that assessee shall receive the necessary release and approval from the Haryana State Government or other official or agency which are necessary. The assessee has also granted an unrestricted exclusive right to use and build upon this land. The Government of Haryana had agreed in principle to release the property out of acquisition notices prior to agreements between assessee and purchaser. Therefore, in our considered view, the assessee has transferred a capital asset as defined under section 2(47)(v) of the Income-tax Act. Consequent upon this transfer of capital asset, the assessee is liable to pay the capital gain tax during the year under consideration. The ground realities show that effectively, there was a transfer as per provisions of section 2(47)(v) of the Income-tax Act. In view of these facts, ground no.1 of revenue's appeal is allowed.
7. In the ground no.2, the issue involved is allowing assessee not to claim the depreciation by the assessee.
15 ITA NO.2085/DEL/20078. The assessee has not claimed the depreciation on the bulk of assets with the contention that the claim of depreciation is at the option of the assessee. The AO held that the decision of Hon'ble Apex Court in the case of Mahendra Mills Ltd. vs. ITO reported in 243 ITR 56 was applicable only to the AYs prior to the deletion of section 34(1) of the Income-tax Act. It was held that after deletion of this sub-section w.e.f.
1.4.1988, the particulars which were required to be filed for claiming the depreciation is no longer a pre-condition and the AO allowed the depreciation by holding as under :-
"Further, in the assessment year 1997-98 the assessee also did not claim any depreciation allowances. My learned predecessor had made detailed discussion of the case in the order for the assessment year 1997-98 and held that by not claiming any depreciation allowances, the assessee company had adopted a colorable tax planning devices and hence the case of the assessee is squarely covered within the purview of the decision of the Supreme Court in the McDowell's case (154 ITR 148). Accordingly, with the available information in the record of assessment calculated and allowed depreciation allowances for that year.
Since, the assessee's case for both the years with regard to claim of depreciation allowances are same, 1 am constrained to take a decision contrary to the orders of my predecessor for the assessment year 1997-98. Accordingly, the assessee is granted depreciation amounting to Rs.54,94,76,67 1/- as per Annexure "A" to this order. The depreciation shall be allowed to be carried forward for eight succeeding years as per section 32(2) of the I.T. Act and the written down value of the assets / additions to the asset's shall accordingly be reduced and this would be the opening WDV for the assessment year 1999-2000."
9. The CIT (A) granted the relief by holding as under :-
"8. Grounds No.4 and 5 are with regard to compulsory grant of depreciation amounting to Rs.54,94,76,671/- u/s 32 of the Act. The ld. ARs argued that depreciation could not be thrust upon the assessee as it had not claimed deduction for the same. This issue has come up before me in the assessee's own case for A.Y. 1997-98. I have in my order dated 12.1.2007 held that depreciation could not be compulsorily granted if the same had not been claimed and decided the issue in favour of the assessee. In this year also, 16 ITA NO.2085/DEL/2007 these grounds are decided in favour of the assessee for reasons mentioned in the aforesaid order. Hence, these grounds are allowed."
10. At the outset of the hearing, the learned AR submitted that this issue is covered in favour of the assessee by the Delhi Bench of the Tribunal in the assessee's own case for the AYs 1997-98 and 1999-00.
11. Learned DR submitted that although this issue has been decided by the Tribunal in favour of the assessee in earlier orders as referred by the learned AR but the ITAT has not considered the decisions in the following cases :-
(i) ACIT vs. M/s. KRBL Ltd. - 2008-TIOL-111-ITAT-DEL;
(ii) Dabur India Ltd. vs. CIT - 2008-TIOL-463-High Court-DEL-IT
(iii) Kellog India (P) Ltd. vs. ITO - (2006) 8 SOT 679 (Mum);
(iv) Sri Padmavathi Srinivasa Cotton Ginning & Pressing Factory vs. DCIT
- (2009) 125 TTJ 411 (Visakha) He has given the written submissions relying on the following decisions/ judgments which are reproduced below :
"5. ACIT v. M/s KRBL Ltd. 2008-TIOL-111-ITAT-DEL (ITA Nos. 3771 to 3777/Del/2006 AY 98-99 to 2004-05
9. We have heard both the parties and perused the material available on record. The facts of the case are not in dispute. Ld. CIT(A) has directed the Assessing Officer not to allow depreciation for assessment years 1998-99 to 2001-02 in view of the decision of Hon'ble Supreme Court in the case of Mahendra Mills (Supra). He had also relied on the decision of Hon'ble Supreme Court in the case of Varas International Pvt. Ltd. (Supra). One of argument of ld. CIT-DR is that assessee's case is covered by the decision of Hon'ble Bombay High Court in the case of Indian Rayon Corporation Ltd. (Supra) In this case, the assessee claimed deduction under section 80HH without claiming depreciation allowance under section 32 of the Act. In this case the issue for consideration for their Lordship was:17 ITA NO.2085/DEL/2007
"Whether on the facts and in the circumstances of the case, the Tribunal was justified in coming to the conclusion that depreciation allowance ought to be deducted while computing the total income for the purposes of deduction under section 80HH? "
Hon'ble Bombay High Court held that the controversy in Mahendra Mills, 243 ITR 53 (SC) was not concerning deductions under section VIA of Income Tax Act Therefore, that judgement was not to apply to the case where deductions under Chapter VIA have been claimed. Hon'ble Bombay High Court in the case of Indian Rayon Corporation Ltd. held as under :
"In the above judgements of the Bombay High Court to which one of us (Kapadiu J.) was a party it has been held, inter alia, that Chapter VI-A of the Income Tax Act deals with special deductions. That, Chapter VI-A for the purposes of computing such deductions, constituted a separate code by itself In order to compute the total taxable income of the assessee, deductions computed under section 80HH have to be reduced from the gross total income of the assessee. The question basically in this matter is concerning computation of deduction under Chapter VI-A in which section 80HH falls. Profits and gains of a newly established undertaking, therefore, have got to be computed as per the provisions of section 29 to section 43A and if the assessee claims relief under Chapter VI-A of the Act, then it is not open to the assessee to disclaim depreciation allowance. This is because Chapter VI-A is an independent code by itself for computing these special types of deductions. In other words, one must first calculate the gross total income from which one must deduct a percentage of incomes contemplated by Chapter VI-A. That such special incomes were required to be computed as per the provisions of the Act, viz., section 29 to section 43A, which included section 32(2). Therefore, one cannot exclude depreciation allowance while computing profits deprived from a newly established undertaking for computing deductions under Chapter VI- A. Therefore, the appellant's claim for allowance of deduction under section 80HH, without taking into 18 ITA NO.2085/DEL/2007 consideration the current depreciation will have to be rejected. "
10. From the above decision it is clear that for the purpose of deduction under Chapter VIA the profits and gains have to be computed as per the provisions of section 29 to 43D of the Act. Since section 32 is included in section 29 to 43D, depreciation has to be allowed for the purpose of computation of gross profits out of which deduction under Chapter VIA are to be allowed. Further Hon'ble Justice DP. Wadhwa at page 58 of the decision in the case of Mahendra Mills (Supra) had specifically mentioned "section 32 has since been amended by the Taxation Laws (Amendment & Miscellaneous Provisions) Act, 1986, w.e.f. April 1, 1988. However, the answer to the question remains of substantial importance as various matters are stated to he pending in the High Courts relating to the assessment years prior to April 1, 1988. " This observation of Hon'ble Justice DP. Wadhwa proves beyond doubt that the decision of Mahendra Mills (Supra) is applicable for assessment years prior to 01.4.1988 i.e. upto AY 1987-88. Thus the decision of Hon'ble Supreme Court in the case of Mahendra Mills Ltd (supra) cannot be applied for AY 1988-89 onwards. Since the issue is squarely covered by the decision of Hon'ble Bombay High Court and the Ld. AR of the assessee cited no other contrary decision, we are of the view that for the purpose of computing gross profits, for allowing deduction under section 80HHC, depreciation has to be allowed. Accordingly, in our view Ld. CIT (A) had erred in directing the Assessing Officer for assessment years 1998-99 to 2001-02 not to allow depreciation and take initial cost of assets for assessment year 2002-03 for allowance of depreciation and consequent WDV with modifications on account of addition or deletion in respective block of assets in subsequent assessment years. In other words the assessing officer had rightly computed depreciation for assessment years 1994-95 to 1997-98 notionally to arrive at W.D.V. for assessment year 1998-99 and subsequent assessment years. Accordingly, we set aside the order of Ld CIT(A) and restore the order of Assessing Officer.
19 ITA NO.2085/DEL/20072. Dabur India Ltd. V CIT 2008-TIOL-463-HC-
DEL-IT (ITA 579/2007)
6. Being aggrieved, the Assessee has raised the following issues before us:-
i) that ITAT ought to have adhered to the principle of consistency and followed the decision of co-ordinate benches of the ITAT in the case of the Assessee for assessment years 1997-98 to 2000-01. It was further submitted by the learned counsel that, in the event, the ITAT was not for some reason in agreement with the earlier decision of the co-ordinate benches of ITAT, it was duty bound to refer the matter to a larger bench. Reliance in support of this submission was placed on a judgment of this Court in the case of DLF Universal Ltd. Vs. CIT (2008) 6 DTR 113. (ii) the judgment of the Special bench of the ITAT in case of Vahid Papers Converters (supra) was distinguishable and, (iii) on merits of the case, it was submitted, that the, Assessee had an option to claim depreciation under Section 32 of the Act, and that, it cannot be thrust on the Assessee while determining the eligible profits and gains for the purpose of ascertaining the amount deductible under Section 80 IB and 80 HHC.
1st contention
7. In so far as the first contention is concerned, according to us, the submission is thoroughly misconceived. The ITAT has, after considering the applicability of the decision of the special bench in the case of Vahid Paper Converters (supra), come to the conclusion that the ratio of the said decision is squarely applicable to the facts of the instant case. That being so, in our view, the ITAT had no choice but to pay obeisance at the altar off judicial discipline and abide by the decision of the larger bench. The submission that the ITAT ought to have followed the decision of a co- ordinate bench in the teeth of the decision of a larger bench is wholly untenable as it would amount closing one's eyes to the exceptions to the principle of consistency - one such exception being; that it need not be followed where a decision is passed in ignorance of a 20 ITA NO.2085/DEL/2007 decision of a bench of a greater numerical strength or, of a higher judicial authority.
2nd contention
8. The second contention that decision in the case of Vahid Papers Converters (supra) is distinguishable is also unsustainable. The decision in the Vahid Papers Converters (supra) pertains to Appeals relevant to not only assessment year 2001-02, but also, with respect to Appeals, for assessment year 1999-2000 to 2002-03. As a matter of fact, it deals with law as it subsisted between 1.4.1988 to 31.3.2002. The only issue that the Special bench of ITAT did not decide in Vahid Papers Converters (supra) was, whether Explanation 5 to Section 32 of the Act inserted by Finance Act, 2001 was clarificatory in nature and hence, would apply to earlier years as well. The ITAT considered it unnecessary to decide this issue in view of the decision it had taken, dehors the amendment, which is that depreciation was required to be charged in calculating eligible profits and gains for the purpose of deduction under Section 80 IB and 80 HHC.
3rd contention
9. On merits, the issue raised by the assessee that if it has an option to claim depreciation under Section 32 of the Act with respect to computation of normal income then the claim of depreciation allowance cannot be thrust upon the Assessee for determining profits and gains eligible for the purposes of ascertaining amount deductible under Section 80 IB and 80 HHC is untenable for the reasons delineated below:-
9.1 To answer this contention we would have to analyse, based on the scheme of the Act, as to the manner in which income of an assessee is to be calculated in the normal course in contrast to calculation of income i.e, profit and gain for the purpose of deduction under Chapter VI-A of the Act, in particular, Section 80 IB and Section 80HHC.
9.2 The Scheme of the Act :- Chapter I of the Act provides for definition of terms and expressions used in the Act. Chapter-II broadly deals with basis of charge, the scope of total income, provisions by which a person is held 21 ITA NO.2085/DEL/2007 to be resident in India, and incomes which are deemed to accrue or arises in India. Reference in this regard may be had briefly to the following sections appearing in Chapter-
II of the Act:-
9.2.1 Section 4 of the Act provides that income tax shall be charged for any assessment year in respect of the total income of the previous year of every person. „Previous year has been defined under Section 3 of the Act to mean any financial year which immediately precedes the assessment year. The expression „total income is in turn defined under Section 2(45) of the Act. The said section defines „total income to mean total amount of income referred to in Section 5, computed in the manner laid down in the Act. The scope of „total income is provided under Section 5 of the Act. Section 5, inter alia, provides that the total income of any previous year of a person who is a resident will include all income derived from any source which is, received or is deemed to have been received in India by or on behalf of such person ; or accrues or arises or is deemed to accrue or arise in India or, even that, which accrues or arise outside India. Similarly, sub-Section (2) of Section 5 of the Act provides that total income of any previous year of a person who is „non-resident is that, which is, received or deemed to be received in India or, that which accrues or arises or is deemed to accrue or arise to a „non-resident in India during such year. The indicia for a person to be held as „resident in India is contained in Section 6 of the Act. Section 9 of the Act is a deeming section which provides for incomes, which are, deemed to accrue or arise in India.
9.3 Chapter III in the Act makes provision for incomes which are not required to be included in the total income of the previous year in respect of an assessee. Chapter IV of the Act contains provisions beginning with Section 14 and ending with Section 59. The provisions of Chapter IV essentially pertain to computation of total income of an assessee under various heads of income. As a matter of fact, Section 14 of Chapter IV of the Act clearly provides 22 ITA NO.2085/DEL/2007 that save as otherwise provided in the Act, all income shall, for the purposes of charge of income tax and computation of total income, be classified under the five heads provided therein i.e (A) - Salaries (B) - Interest on securities (omitted by the Finance Act, 1988 w.e.f from 1.4.1989). (C) - Income from house property (D) - Profits and gains of business or profession (E) - Capital gains (F)-
Income from other sources.
9.4 In the instant case, we are concerned with "profits and gains of business or profession". Section 28 of the Act provides that, amongst others, income from "profits and gains of business or profession" which was carried on by the assessee during the previous year will be chargeable to income tax under the said Act. Section 29 which is crucial for the purposes of the present appeal, provides that the income referred to in Section 28 shall be computed in accordance with the provisions contained in Sections 30 to 43D.
9.5 It is, thus, evident that in computing the income chargeable to income tax under the head "profits and gains from business or profession", the provisions contained in Sections 30 to 43D will have to be borne in mind. Since we are concerned with the chargeability of depreciation in computing the total income of the Assessee, the reference to Section 32 of the Act becomes necessary. Section 32(1) of the Act allows for deduction on account of depreciation in respect of (i) buildings, machinery, plant or furniture, being tangible assets; (ii) know-how patents, copyrights, trade marks, licences, franchises or any other business or commercial rights of similar nature, being intangible assets acquired on or after 1.4.1998, owned, wholly or partly, by the assessee and used for the purposes of the business or profession. Sub-section (2) of Section 32 provides that where an assessee has not been able to give full effect to depreciation allowance as provided in sub-Section (1) in any previous year, owing to the fact that there are no profits or gains chargeable for that previous year, or owing to the fact that profit or gains chargeable being less than the depreciation allowance then, the Assessee can carry forward unabsorbed depreciation subject to the provisions of sub-Section (2) of Section 72 and sub-Section (3) of 23 ITA NO.2085/DEL/2007 Section 73 of the Act. Sections 30, 31 and 32 (A) to 35(E) provide for rebates, allowances and deductions under various heads. Section 36 provides for certain "other deductions" specified therein while, computing the income referred to in Section 28. Section 37 of the Act is a residuary head whereby, any expenditure which, not being in the nature of a capital expenditure or a personal expense of the assessee but being otherwise laid out or expended fully and exclusively for the purposes of business or profession is allowed to be deducted in computing income chargeable under the head "Profits and gains of business or profession." The other provisions mentioned in Chapter IV and provisions of Chapter V not being relevant for the issue at hand are not referred to herein.
9.6 Chapter VI-A provides for deductions which are permitted under the Act from the gross total income in computing the „total income of the assessee. Chapter VI- A for his purpose is divided into four parts - A, B, C & D. Part A deals with general provisions with respect to deductions; beginning with Section 80A and ending with the definitions for the said chapter, as provided in Section 80B. Part B deals with deductions „in respect of payments made by the Assessee. Part-C with which we are concerned, deals with deductions in respect of „certain incomes of the assessee . Finally, Part-D deals with „other deductions .
9.7 In this background let us touch upon various sections in each part under Chapter VI-A which are relevant for the issue at hand. Section 80A(1) states that in computing total income of an assessee, there shall be allowed from his gross total income, in accordance with and subject to provisions of Chapter VI-A, deductions specified in Sections 80C to 80U. Sub-Section (2) of Section 80A specifically sets out that the aggregate amount of deductions under this Chapter shall not, in any case, exceed the gross total income of the assessee. Section 80AB which is important, clearly provides where any deduction is required to be made or allowed under any section included in this Chapter under the heading "C-
24 ITA NO.2085/DEL/2007Deductions in respect of certain incomes" 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. Importantly, gross total income for the purposes of this chapter (i.e, Chapter VI-A) has been defined in Section 80B(5) in the following terms :- "gross total income means total income computed in accordance with the provisions of this Act, before making any deduction under this chapter."
9.8 The incomes in respect of which deductions is sought, in the instant case, are those which are referred to in Section 80-IB and 80HHC. Under Section 80 HHC a prescribed percentage of deduction is allowed while computing the total income of the assessee on the profits and gains derived by the assessee from the export of such goods or merchandise. Similarly, under Section 80 IB an Assessee is allowed a deduction in computation of his total income of a prescribed percentage of his profits and gains derived from industrial undertakings which are defined as eligible businesses under sub-Sections (3) to (11) & (11A) of Section 80-IB, for such assessment years as provided therein.
10. A conjoint reading of the provisions of the Act would show that Chapter VIA of the Act refers to special types of deductions available to the assessee while computing his total income. Section 80A(1), referred to herein above, clearly sets out that in computing the Assessee s total income there shall be allowed from his gross total income, in accordance with and subject to the provisions of the Chapter VI-A deductions specified in Section 80 (C ) to 80(U). The deductions sought by the assessee under Section 80-IB and 80 HHC therefore are required to be allowed in computing the total income of the assessee. Section 80-B(5) in turn, as noticed above, defines gross 25 ITA NO.2085/DEL/2007 total income for the purposes of Chapter VI-A to mean total income computed in accordance with the provisions of this Act before making any deductions under Chapter VI-A. Sections 80-IB and 80 HHC fall in Part C under the heading "deductions in respect of certain incomes". The said Part C of Chapter VI-A begins with Section 80H. Therefore, in calculating the deductions under Section 80- IB and 80 HHC firstly, gross total income would have to be calculated, which would mean, calculation of total income in accordance with the provisions of this Act. In the instant case we are concerned, with calculation of deductions under 80-IB and 80HHC.
11. In arriving at the extent of the permissible deduction under section 80 IB and section 80HHC, the income which is to be considered is that which is calculated in accordance with the provisions of the Act alone. Thus, in calculating profits and gains of business „derived from the industrial undertakings i.e, eligible businesses, under Section 80-IB or export business under Section 80 HHC, we would have to bear in mind the provisions of Sections 30 to 43D as referred to in Section 29, Section 80AB and Section 80B(5). A conjoint reading of these provisions leads to the conclusion that depreciation allowance under Section 32 will have to be deducted in arriving at the "profits and gains" of business derived by an Assessee, from an industrial undertaking specified under Section 80- IB or export business under Section 80 HHC.
12. In the instant case as noticed by the Assessing Officer, the Assessee while claiming depreciation for all his units except six (6) units located in Baddi had attempted to seek a dual benefit, not envisaged under the provisions of the Act. Firstly, by opting out of a claim for depreciation allowance under Section 32 of the Act which resulted in enhancement of profit and gains derived from the industrial undertakings and/or businesses specified under Section 80-IB and Section 80 HHC of the Act, and consequent thereto led to an enhancement of the quantum of deduction under the said provisions. Secondly, by this methodology the Assessee ensured that it could avail the benefit of depreciation allowance on a higher written value of the assets in the years subsequent to the period over 26 ITA NO.2085/DEL/2007 which the deductions under Sections 80-IB and 80 HHC would be available.
13. It is, thus, according to us important to bear in mind the scheme of the Act which envisages that, while computing normal profits which does not involve relief by way of special deduction provided for under Chapter VI-A of the Act, an Assessee is entitled to opt out of a claim for depreciation allowance. In other words, the Assessee can choose to declare and pay tax on a greater amount of income. Where, however, the Assessee seeks to claim "special deductions under Chapter VI-A of the Act, there is no option available to the assessee, but to provide for depreciation allowance while calculating the eligible profits and gains on which deduction is permissible under the provisions specified in Chapter VI-A. In this context, as discussed also by the authorities below, the decision of the Supreme Court in the case of CIT vs. Mahindra Mills Ltd. (2000) 243 ITR 246 is clearly distinguishable for following reasons:-
13.1 Firstly, the decision in Mahindra Mills Ltd. (supra) pertained to assessment years 1974-75 when, Section 34 was present on the Statute book. Briefly, Section 34 provided that in order to claim depreciation under Section 32 of the Act, the Assessee was required to give particulars as specified under Section 34 of the Act. With effect from 1.4.1988 Section 34 was deleted from the Statute book and, a consequential amendment was made in Section 32 of the Act. It was in this context that the Supreme Court had observed that the Assessee had an option to claim depreciation and the same could not be thrust upon the assessee.
13.2 The case which is apposite to the facts of the present case is the judgment of the Supreme Court in the case of Cambay Electric Supply Industrial Company Ltd.Vs. CIT (1978) 113 ITR 84. The assessee in the said case was in the business of generation and distribution of electricity, and as such, was entitled to deduction under Section 80E(1) of the Act as obtaining at the relevant point in time.
The Assessing Officer had included income earned by the assessee on sale of machinery under Section 41(2) as 27 ITA NO.2085/DEL/2007 balancing charge. Apart from the issue whether income from sale of machinery and the resulting balancing charge could be included in arriving at profits „attributable (the expression then appearing in the Act as against „derived ) to the business of the Assessee, the other issue which the Supreme Court was called upon to answer was whether unabsorbed depreciation and unabsorbed development rebate would have to be adjusted in computing the eligible profits "attributable" to such business. The Supreme Court answered the question as follows:-
".......The court has further observed that in its opinion the deduction under Section 80E is a special benefit given to a company which satisfies the conditions under Section 80E and the deduction permissible thereunder is only from profits and gains attributable to the specified activities and this benefit should not be diminished by the other benefits conferred by the Act, such as the right to have the previous losses set off, that the two serve different purposes and the benefit of both must be available to an assessee, without the one impinging on the other. It will thus appear that the Kerala High Court has regarded section 72 appearing in Chapter VI as a provision unconnected with the computation of the total income of an assessee and a provision which comes into operation at a stage subsequent to the computation of the total income arising from business done in accordance with Sections 30 to 43A occurring in Chapter IV of the Act and, therefore, the unabsorbed losses cannot be set off before calculating the deduction under Section 80E. It is not possible to accept the view that section 72 has no bearing on, or is unconnected with, the computation of the total income of an assessee under the head "Profits and gains of business or profession". Actually, section 72(1) provides that where the net result of computation under the head "Profits and gains of business or profession" is a loss and such loss cannot be or is not wholly set off against the income under any head of income in accordance with the provisions of section 71, so much of the loss as has not been so set off, subject to the other provisions of the Chapter, shall be carried forward to the following assessment year and shall be set off against the profits and gains, if any, of any 28 ITA NO.2085/DEL/2007 business or profession for that assessment year. Therefore, section 72(1) has a direct impact upon the computation under the head "Profits and gains of business or profession". In other words, the correct figure of total income, which is otherwise taxable under other provisions of the Act, cannot be arrived at without working out the net result of computation under the head "Profits and gains of business or profession". Further, the question whether special benefit under section 80E as well as the normal or usual benefit of carry forward of losses of previous years should both be available to an assessee, without one impinging on the other must depend upon the intention of the legislature and such intention has to be gathered from the language employed. In this view of the matter it is extremely doubtful whether in spite of the legislative mandate contained in the three steps provided for by sub- section (1) of section 80E, the carried forward losses would not be deductible before working out the 8% deduction contemplated by Section 80E and, therefore, the contention that by parity of reasoning or on a priori reasoning unabsorbed development rebate and unabsorbed depreciation should be held to be non-deductible before working out the 8% deduction under section 80E(1) cannot be accepted. As observed earlier, on a proper construction of the provision contained in sub-section(1) of section 80E, items like unabsorbed depreciation and unabsorbed development rebate will have to be deducted in arriving at the figure which would be exigible to deduction of 8% under section 80E(1)."
14. The controversy at hand was examined by the Bombay High Court in the case of Indian Rayon Corporation Ltd. Vs. Commissioner of Income Tax (2003) 261 ITR 98. The Bombay High Court examined the issue at great length. The relevant observations read as follows:-
......Secondly, in any event, the controversy in Mahendra Mills' case (2000) 243 ITR 56 (SC) was not concerning deductions under Chapter VI-A of the Income-tax Act. Therefore, that judgment would not apply to this case. The important distinction, which is required to be noticed in this case, is that we are required to compute the total taxable income of the assessee who has claimed special 29 ITA NO.2085/DEL/2007 deduction under Chapter VI-A. For that purpose, one has to keep in mind the provisions of sections 80B(5) and 80AB. Consequently, section 80HH, inter alia, lays down that if the gross total income includes profits from a newly established undertaking then 20 per cent of such profits would be deductible from the gross total income in order to arrive at the total taxable income. That, in such a case, profits derived from a newly established undertaking shall be computed in accordance with the provisions of the Act, i.e., section 29 to section 43A. Therefore, net profit will have to be computed in accordance with the provisions of the Act. The argument of the assessee is that in view of the judgment of the Supreme Court in Mahendra Mills' case (2000) 243 ITR 56, it is open to the assessee not to claim depreciation allowance under section 32 and consequently it is argued that 20 per cent rate of deduction should be applied to Rs.100 in the above illustration, without taking into account the depreciation. We do not find any merit in this argument. The scheme of section 4 and section 5 of the Income-tax Act does indicate that income-tax is a tax in respect of income computed as per the provisions of the Act. There is a distinct dichotomy between cases of computation of normal income under the Act de hors Chapter VI-A and computation of taxable income where the assessee claims the benefit of deduction under Chapter VI-A because the Legislature has intended that these special deductions should be restricted to the profits derived from a newly established undertaking. To give an illustration, export profits under section 80HHC are required to be restricted to the receipt of foreign exchange.
If this object is kept in mind, then it is clear that the analogy of section 32(2) given by the assessee will not apply in cases where an assessee claims special deduction under Chapter VI-A. The matter can be looked at from another angle. While computing normal income, an assessee may set off depreciation against its gross income. In such cases, depreciation is like any other ordinary expense. However, such depreciation cannot be equated with special deduction under Chapter VI-A. In any event, in this case, on the facts, the assessee claims depreciation of Rs.75 from the balance income of Rs. 80 and, therefore, the judgment of the Supreme Court in Mahendra Mills case (2000) 243 ITR 56 has no application. In the above 30 ITA NO.2085/DEL/2007 judgments of the Bombay High Court to which one of us (Kapadia J.) was a party it has been held, inter alia, that Chapter VI-A of the Income-tax Act deals with special deductions. That, Chapter VI-A, for the purposes of computing such deductions, constituted a separate code by itself. In order to compute the total taxable income of the assessee, deductions computed under section 80HH have to be reduced from the gross total income of the assessee. The question basically in this matter is concerning computation of deduction under Chapter VI-A in which section 80HH falls. Profits and gains of a newly established undertaking, therefore, have got to be computed as per the provisions of section 29 to section 43A and if the assessee claims relief under Chapter VI-A of the Act, then it is not open to the assessee to disclaim depreciation allowance. This is because Chapter VI-A is an independent code by itself for computing these special types of deductions. In other words, one must first calculate the gross total income from which one must deduct a percentage of incomes contemplated by Chapter VI-A. That such special incomes were required to be computed as per the provisions of the Act, viz., section 29 to section 43A, which included section 32(2). Therefore, one cannot exclude depreciation allowance while computing profits derived from a newly established undertaking for computing deductions under Chapter VI- A. Therefore, the appellant s claim for allowance of deduction under section 80HH, without taking into consideration the current depreciation will have to be rejected."
15. We are in agreement with the ratio of the decision of the Bombay High Court in the case of Indian Rayon Corporation Ltd. (supra).
16. In view of the discussion above, no fault can be found with the decision of ITAT on merits as well. The Tribunal has correctly applied the law. Consequently, no substantial question of law arises for our consideration. The appeals are dismissed.
3. Kellogg India (P) Ltd. V ITO (2006) 8 SOT 679 (Mum) 31 ITA NO.2085/DEL/2007
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 32 ITA NO.2085/DEL/2007 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 depreciation 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. "Section32 has since been amended by the Taxation Laws (Amendment and Miscellaneous 33 ITA NO.2085/DEL/2007 Provisions) Act, 1986, with effect from April 1, 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 April 1, 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 [2002] 255 ITR 147, 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 537 (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 ( 34 ITA NO.2085/DEL/2007 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 35 ITA NO.2085/DEL/2007 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.
36 ITA NO.2085/DEL/2007In GP Electronics Ltd.'s 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 CIT(A) 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 CIT(A) 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 CIT(A) 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 37 ITA NO.2085/DEL/2007 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 38 ITA NO.2085/DEL/2007 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 AR submitted that is prospective in view of the decision of Hon'ble Punjab & Haryana High Court in Ramnath Zindal's 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 721 1 (Ker.). In Sri Snehavalli Textiles (P.) Ltd.'s case ( supra ), the question involved was whether depreciation given up in revised return would mean that the assessee is dis-entitled 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. Asstt. CIT [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.
39 ITA NO.2085/DEL/200712. In the result, the appeal of the assessee is dismissed.
4. Sri Padmavathi Srinivasa Cotton Ginning & Pressing Factory v DCIT (2009) 125 TTJ 411 (Visakha)
5. With regard to the first question, learned Authorised Representative placed his reliance on the decision of Hon'ble Supreme Court in the case of CIT v . Mahendra Mills [2000] 159 CTR (SC) 381 : [2000] 243 ITR 56 (SC), wherein the Hon'ble apex Court held that the words "actually allowed" does ,not mean "notionally allowed". The apex Court further held that if the assessee has not claimed deduction for depreciation in any past year, it cannot be said that it was "notionally allowed" to him. A thing is "allowed" when it is claimed. The decision of Hon'ble Supreme Court in the above said case was followed by the Hyderabad Bench of Tribunal in the case of M.A. Aziz, New Bharat Kirana Stores v . ITO [2004] 89 TTJ (Hyd) 555 : [2002] 80 ITD 233 (Hyd) . By placing his reliance on these decisions, learned Authorised Representative submitted that only the cost of the assets should be deducted as depreciation was not actually allowed in the hands of the assessee.
5.1 . On the contrary, learned Departmental Representative contended that after insertion of Expln. 5 to section 32 of the Act, which reads as under, by Finance Act, 2001 w.e.f . 1st April, 2002, the decision rendered in the case of Mahendra Mills ( supra ) will not have application :
"Explanation 5 : For the removal of doubts, it is hereby declared that the provisions of this sub-section shall apply whether or not the assessee has claimed the deduction in respect of depreciation in computing his total income."
According to learned Departmental Representative, Expln. 5 cited above is retrospective in operation, as the same is clarificatory in nature. To support his proposition, learned Departmental Representative relied upon the recent decision of Hon'ble Supreme Court in the case of CIT v . Gold Coin Health Food (P) Ltd. [2008] 218 CTR (SC) 359 : [2008] 304 ITR 308 (SC), wherein the Hon'ble apex Court held that the amendment to Expln. 4 to section 271 40 ITA NO.2085/DEL/2007 is clarificatory in nature and hence it will have retrospective operation. It was pointed out that despite the fact that above said Explanation was substituted by the Finance Act, 2002 w.e.f . 1st April, 2003, the Hon'ble apex Court has held it to be retrospective in operation.
5.2 . On the contrary, learned Authorised Representative placed his reliance on the decision of Mumbai Bench of the Tribunal in the case of Sadhuram Patel & Sons v . ITO [2009] 121 TTJ (Mumbai) 180 : [2008] 16 DTR (Mumbai) 443 , wherein the Tribunal, by following the decision of Hon'ble Madras High Court in the case of CIT. v . Sree Senhavalli Textiles (P) Ltd. [2003] 183 CTR (Mad) 453 :
[2003] 259 ITR 77 (Mad) and the decision of Hon'ble Kerala High Court in the case of CIT. v . Kerala Electric Lamp Works Ltd. [2003] 183 CTR (Ker) 182 : [2003] 261 ITR 721 (Ker), has held that Expln. 5 will have only prospective operation.
5.3. The Hon'ble Supreme Court in the case of Gold Coin Health Food (P) Ltd. ( supra ) has reversed its own decision in the case of Virtual Soft Systems Ltd. v . CIT [2007] 207 CTR (SC) 733 : [2007] 289 ITR 83 (SC) .
While arriving at this decision, Hon'ble apex Court considered the principles of statutory interpretation. The relevant observations are extracted below :
"As noted by this Court in CIT v . Podar Cement (P) Ltd. [1997] 141 CTR (SC) 67 : [1997] 5 SCC 482 the circumstances under which the amendment was brought in existence and the consequences of the amendment will have to be taken care of while deciding the issue as to whether the amendment was clarificatory or substantive in nature and, whether it will have retrospective effect or it was not so.
In 'Principles of Statutory Interpretation', 11th Edn. 2008, Justice G.P. Singh has stated the position regarding retrospective operation of statutes as follows :
The presumption against retrospective operation is not applicable to declaratory statutes. As stated in Craies and approved by the Supreme Court : For modern purposes a declaratory Act may be defined as an Act to 41 ITA NO.2085/DEL/2007 remove doubts existing as to the common law, or the meaning or effect of any statute. Such Acts are usually held to be retrospective. The usual reason for passing a declaratory Act is to set aside what Parliament deems to have been a judicial error, whether in the statement of the common law or in the interpretation of statutes. Usually, if not invariably, such an Act contains a preamble, and also the word declared' as well as the word 'enacted'. But the use of the words 'it is declared' is not conclusive that the Act is declaratory for these words may, at times, be used to introduce new rules of law and the Act in the latter case will only be amending the law and will not necessarily be retrospective, In determining, therefore, the nature of the Act, regard must be had to the substance rather than to the form. If a new Act is 'to explain' an earlier Act, it would be without object unless construed retrospective. An explanatory Act is generally passed to supply an obvious omission or to clear up doubts as to the meaning of the previous Act. It is well-settled that if a statute is curative or merely declaratory of the previous law retrospective operation is generally intended. The language 'shall be deemed always to have meant' or 'shall be deemed never to have included' is declaratory, and is in plain terms retrospective. In the absence of clear words indicating that the amending Act is declaratory, it would not be so construed when the amended provision was clear and unambiguous. An amending Act may be purely clarificatory to clear a meaning of a provision of the principal Act which was already implicit A clarificatory amendment of this nature will have retrospective effect and, therefore, if the principal Act was existing law when the Constitution came into force, the amending Act also will be part of the existing law.' In Zile Singh v . State of Haryana [2004] 8 SCC 1 , it was observed as follows :
"13. It is a cardinal principle of construction that every statute is prima facie prospective unless it is expressly or by necessary implication made to have a retrospective operation. But the rule in general is applicable where the object of the statute is to affect vested rights or to impose new burdens or to impair existing obligations. Unless there 42 ITA NO.2085/DEL/2007 are words in the statute sufficient to show the intention of the legislature to affect existing rights, it is deemed to be prospective only-- 'nova constitutio futuris formam imponere debet non praeteritis' --a new law ought to regulate what is to follow, not the past. (See Principles of Statutory Interpretation by Justice G.P. Singh, 9th Edn., 2004 at p. 438.) It is not necessary that an express provision be made to make a statute retrospective and the presumption against retrospectivity may be rebutted by necessary implication especially in a case where the new law is made to cure an acknowledged evil for the benefit of the community as a whole (ibid., p. 440).
14. The presumption against retrospective operation is not applicable to declaratory statutes. In determining, therefore, the nature of the Act, regard must be had to the substance rather than to the form. If a new Act is 'to explain' an earlier Act, it would be without object unless construed retrospectively. An explanatory Act is generally passed to supply an obvious omission or to clear up doubts as to the meaning of the previous Act. It is well-settled that if a statute is curative or merely declaratory of the previous law retrospective operation is generally intended. ...An amending Act may be purely declaratory to clear a meaning of a provision of the principal Act which was already implicit. A clarificatory amendment of this nature will have retrospective effect [ibid., pp. 468-69).
15. Though retrospectivity is not to be presumed and rather there is presumption against retrospectivity, according to Craies (Statute Law, 7th Edn.), it is open for the legislature to enact laws having retrospective operation. This can be achieved by express enactment or by necessary implication from the language employed. If it is a necessary implication from the language employed that the legislature intended a particular section to have a retrospective operation, the Courts will give it such an operation. In the absence of a retrospective operation having been expressly given, the Courts may be called upon to construe the provisions and answer the question whether the legislature had sufficiently expressed that intention giving the statute retrospectivity. Four factors are suggested as relevant : ( i ) general scope and purview of 43 ITA NO.2085/DEL/2007 the statute; ( ii ) the remedy sought to be applied; ( iii ) the former state of the law; and ( iv ) what it was the legislature contemplated (p. 388). The rules against retrospectivity does not extend to protect from the effect of a repeal, a privilege which did not amount to accrued right (p. 392)'.
The above being the position, the inevitable conclusion is that Expln. 4 to section 271(1)( c ) is clarificatory and not substantive. The view expressed to the contrary in Virtual Soft Systems Ltd. v . CIT [2007] 207 CTR (SC) 733 :
[2007] 9 SCC 665 : [2007] 289 ITR 83 (SC) is not correct."
5.4 . Both the decisions of Hon'ble Madras High Court in the case of Sree Senhavalli Textiles (P) Ltd. ( supra ), and that of Hon'ble Kerala High Court in the case of Kerala Electric Lamp Works Ltd. ( supra ) have been rendered prior to the decision of Hon'ble Supreme Court referred to in para 5.3 supra . The Hon'ble Kerala High Court decided against retrospective operation of the Expln. 5 to section 32 by giving more importance to the date of amendment. The relevant observations are extracted below :
"As we have noticed this Explanation was inserted as per the Finance Act, 2001, and the explanation itself was given effect to only with effect from the 1st day of April, 2002, and when the legislature has expressly given effect to the Explanation to commence from 1st day of April, 2002, only we do not see any force in the contention raised by learned counsel appearing for the Revenue that de hors the express provision the section should be given retrospective effect contrary to the legislative intention."
The Hon'ble Madras High Court has also observed on the similar lines. However as pointed by learned Departmental Representative, though the amendments were made to Expln. 4 to section 271 by the Finance Act, 2002 w.e.f . 1st April, 2003, the Hon'ble Supreme Court has held that these amendment is clarificatory and not substantive. In that case, it will have retrospective operation.
44 ITA NO.2085/DEL/20075.5 . Now let us consider whether the Expln. 5 to section 32, inserted by Finance Act, 2001 is clarificatory or substantive in nature. The notes on clauses relating to the Finance Bill, 2001 explains the amendment made to section 32 as under :
"Clause 21 seeks to amend section 32 of the IT Act relating to depreciation.
Sub-clause ( a ) seeks to insert a new Expln. 5 in clause ( ii ) of sub- section (1) of the said section so as to clarify that the provisions of sub- section (1) of section 32 shall apply whether or not the assessee has claimed the deduction for depreciation in computing his total income.
Sub- clause ( b ) seeks to substitute sub- section (2) so as to provide that where full effect cannot be given to the depreciation allowance in any previous year owning to there being no profits or gains chargeable for that previous year or owing to the profits or gains chargeable being less than the allowance, the depreciation allowance or part thereof to which effect has not been given shall be added to the amount of allowance for depreciation for the following previous year, or for the succeeding previous years till such time the full effect has been given to the depreciation allowance claimed by the assessee.
These amendments will take effect from 1st April, 2002, and will, accordingly, apply in relation to the assessment year 2002-03 and subsequent years."
The Memorandum Explaining the Provisions of the Finance Bill, 2001 also states as under :
"Modification of provisions relating to allowance of depreciation Under the existing provisions of sub- section (2) of section 32 of the IT Act, carry forward and set off of unabsorbed depreciation is allowed for 8 assessment years.
With a view to enable the assessee to conserve sufficient funds to replace capital asset, specially in an era where obsolescence takes place so often, the Bill proposes to dispense with the restriction of 8 years for carry forward and set off of unabsorbed depreciation. It is further proposed to clarify that in computing the profits and gains of business or profession for any 45 ITA NO.2085/DEL/2007 previous year, deduction of depreciation under section 32 shall be mandatory.
The proposed amendments will take effect from the 1st April, 2002, and will, accordingly, apply in relation to assessment year 2002-03 and subsequent years."
The intention of inserting the impugned Explanation is "to clarify" that the deduction of depreciation under section 32 shall be mandatory. As pointed by learned Departmental Representative, the provision itself starts with the words "For removal of doubts".
5.6. Learned Authorised Representative placed his reliance on the decision of Hon'ble Supreme Court in the case of Mahendra Mills ( supra ). On a careful consideration of the said decision, we notice that the law relating to depreciation that was prevailing at the relevant point of time was altogether different from the one now exists. The following points highlight the basis on which Hon'ble apex Court arrived at the decision :
( a ) The year under consideration in that case was assessment year 1974-75.
( b ) The Hon'ble apex Court recognized the fact that section 32 has been amended by the Taxation Laws (Amendment and Miscellaneous Provisions) Act? 1986 w.e.f . 1st April, 1988 and hence the apex Court confined itself to the provisions of section 32 and other sections that were applicable to assessment year 1974-75. ( c ) Sec. 32, as it stood at the relevant point of time read as under :
32(1). In respect of depreciation of buildings, machinery, plant or furniture owned by the assessee and used for the purposes of the business or profession, the following deductions shall, subject to the provisions of section 34, be allowed :....
( ii ) in the case of buildings, machinery, plant or furniture, other than ships covered by clause ( i ), such percentage on the WDV thereof as may in any case or class of cases be prescribed.
( d ) The Hon'ble apex Court gave importance to the words "subject to the provisions of section 34" which was available then in section 32. Sec. 34, which was omitted w.e.f . 1st April, 1988 read as under :46 ITA NO.2085/DEL/2007
"34. (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."
( e ) The particulars to be given were prescribed in r. 5AA. The said rule was inserted from 1st April, 1981 and was omitted from 2nd April, 1987.
( f ) The apex Court also considered the circular of the Central Board of Revenue (No. 29DXK-14) of 1965, F. No. 45/239/65. IT, wherein it was stated that "where the required particulars have not been furnished by the assessee and no claim for depreciation has been made in the return, the ITO should estimate the income without allowing depreciation allowance".
( g ) Accordingly, the apex Court held that the claim of depreciation is not mandatory. The relevant observations are extracted below :
"The language of the provisions of sections 32 and 34 is specific and admits of no ambiguity. Sec. 32 allows depreciation as deduction subject to the provisions of section 34. Sec. 34 provides that deduction under section 32 shall be allowed only if prescribed particulars have been furnished. We have seen r. 5AA of the rules which though since deleted provided for the particulars required for the purposes of deduction under section 32........ There is a circular of the Board dated 31st Aug., 1965, which provides that depreciation could not be allowed where the required particulars have not been furnished by the assessee and no claim for the depreciation has been made in the return.... If section 34 is not satisfied and the particulars are not furnished by the assessee, his claim for depreciation under section 32 cannot be allowed. Sec. 29 is thus to be read with reference to other provisions of the Act. It is not in itself a complete code."
( h ) In its earlier decision in the case of CIT v . Dharampur Leather Co. Ltd. [1966] 60 ITR 165 (SC) , the Court interpreted the words "actually allowed" occurring in section 10(5)( b ) of IT Act, 1922 to hold that the words "actually allowed" did not include any notional allowance. By following the said interpretation, the apex Court in this case held as under :
"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 'allowed' when it is claimed. A 47 ITA NO.2085/DEL/2007 subtle distinction is there when we examine the language used in section 16 and that of sections 34 and 37 of the Act. It is rightly said that a privilege cannot be to a disadvantage and an option cannot become an obligation.".
5.7. The effect of omission of section 34 and r. 5AA and consequential amendment in section 32 by omitting reference to section 34 makes it clear that one cannot take support from the decision of the Hon'ble apex Court in the case of Mahendra Mills ( supra ), after the amendment. Sec. 43(6) of the Act which defines the term "WDV" reads as under :
"WDV means--
( a ) in the case of assets acquired in the previous year, the actual cost to the assessee;
( 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 under the......"
The term "actually allowed" still exists under the statute. The above analysis of provisions of IT Act makes it clear that the intention of the Parliament has always been that the allowance of depreciation is mandatory. When the Courts interpreted the term "WDV" by giving importance to section 34 referred to in section 32, it is evident that the Parliament has omitted section 34 and made consequential amendment in section 32 through Taxation Laws (Amendment and Miscellaneous Provisions) Act, 1986 to make its intentions clear. When the Hon'ble apex Court upheld the view that the depreciation claim is optional by its order dated 15th March, 2000, it was felt that further clarification is necessary in this matter and accordingly Expln. 5 to section 32 was inserted by Finance Act, 2001 to make the intention very clear that the depreciation claim is mandatory.
5.8. The learned Authorised Representative contended that there is no decision to support the view that Expln. 5 to section 32 is retrospective and further submitted that the facts pertaining to Gold Coin Health Food (P) Ltd. ( supra ) are totally different from the instant case. However, we are unable to agree with his contentions, in view of the decision of Hon'ble Supreme Court in the case of Gold Coin Health Food (P) Ltd. ( supra ), which lays down the proposition for interpretation of law. Under Art. 141 of the 48 ITA NO.2085/DEL/2007 Constitution of India, the law declared by the Supreme Court shall be binding on all Courts within the territory of India. Hence, in our opinion, the Expln. 5 to section 32 is clarificatory in nature and hence it will have retrospective operation. Accordingly, in the instant case, the depreciation cannot be taken as "notionally allowed", but only as 'actually allowed.' Hence the AO is right in deducting only the WDV in order to compute the short- term capital gain.
(Emphasis added)"
12. On the other hand, the learned AR relied on the order of CIT(A) and also on the decision of ITAT Bench 'I' in ITA Nos.2084 & 3087/Del/2007 in the assessee's own case for assessment years 1997-98 & 1999-2000. He also relied on the following case laws :-
(i) CIT vs. Someshwar Sehkari Karkhana Ltd.: 177 ITR 443(Bom.)
(ii) CIT vs. Kolhapur Oxygen Acetylene Pvt. Ltd.: (1991)190 ITR 574 (Bom.)
(iii) Godavari Sugar Mills Ltd. vs. CIT: (1994) 208 ITR 801 (Bom.)
(iv) Beco Engineering Co. Ltd. vs. CIT (1998) 144 CTR 529 ( P&H)
(v) CIT vs. Machine Tools Corporation of India Ltd. :(1993) 201 ITR 101 (Karnataka)
(vi) CIT vs. Arun Textiles: 192 ITR 700 (Guj.)
(vii) CIT vs. Andhra Cotton Mills Ltd.: 228 ITR 30 (AP)
(viii) CIT vs. Agya Wanti : 248 ITR 641 (J&K)
(ix) Sial SBEC Bioenergy Ltd vs. DCIT: 83 TT J 866 (Del.)
(x) Medley Pharmaceuticals Ltd. vs. ITO: 71 TT J 328 (Mum.)
(xi) Royal Diam in ITA No.4172/Murn/2000 (Mum.)
(xii) Uvifort Metalizers vs. DCIT: 73 TTJ 381 (Ahd.)
(xiii) Plastiblends (I) Ltd. vs ITO: 95 TTJ 1062 (Mum.)
(xiv) Beta Naphtol Pvt. Ltd. vs. DCIT : 50 TT J 375 (Indore)
(xv) ACIT vs. Gujarat State Fertilizers Company Ltd.: 68 TT J 862 (Ahd.) 49 ITA NO.2085/DEL/2007 (xvi) Amrit Protein Foods Ltd. vs. DCIT : ITA Nos.6850, 6851, 6852/Del/94 (Del.) He further submitted that amendment in section 32(1) for introducing Explanation (5) for making allowability of depreciation compulsory is prospective in nature and it is w.e.f. 1.4.2002. This amendment was prospective in nature and shall not effect the assessee's case where the assessment year is 1998-99. For this proposition, he relied on the following decisions :-
(i) CIT vs. Sree Senhavalli Textiles Pvt. Ltd. : 259 ITR 77( Mad.)
(ii) CIT vs. Kerala Electric Lamp Works Ltd.: 261 ITR 721 (Kerala)
(iii) Ram Nath Jindal vs. DCIT: 252 ITR 590 (P&H)
(iv) CIT vs. Friends Corporation : 180 ITR 334 (P&H)
(v) Parksons Press vs. ITO: 12 SOT 128 (Mum.)
(vi) DCIT vs. Seagram Distilleries Ltd. in ITA No. 2532/Del/2006, AY. 2001-02
(vii) ACIT vs. KRBL Ltd. in ITA Nos. 3771 to 3777/Del/2006 Learned AR pleaded to sustain the order of CIT (A) on this issue.
11. We have heard both the sides on the issue and after hearing we are of the view that this issue is covered by the decision of coordinate Bench in assessee's own case for AYs 1997-98 and 1999-00 wherein the ITAT held as under :-
"2. First, we take up appeal for assessment year 1997-98 in ITA No.2084/Del./2007. Ground no.1 of the appeal reads as under :
"On the facts and in the circumstances of the case, the Ld.CIT(A) has erred in allowing the assessee not to claim depreciation of Rs.23,38,88,128."50 ITA NO.2085/DEL/2007
3. Briefly stated, the facts are that it is noted by the Assessing Officer in para.5 in the assessment order that as per the return of income filed by the assessee, it is seen that the assessee has foregone depreciation which as per books comes to Rs.1535.33 lakhs. The Assessing Officer asked the assessee to explain as to why depreciation should not be allowed as it was a statutory deduction provided in the Act for determining taxable income of the assessee. In reply, it was submitted by the Ld.AR of the assessee that prior to its amendment by Finance Act, 1998, section 32 specifically provided that in respect of depreciation of building, machinery, plant or furniture owned by the assessee and used for the purpose of business, deduction shall be allowed subject to provisions of section 34 of the Act. It was submitted that the allowance can be given only when it is claimed. It was also submitted that under section 32, the Assessing Officer cannot force it upon the assessee. Reliance was placed on the judgment of the Hon'ble Bombay High rendered in the case of CIT vs. Someshwar Sahkari Karkhana Ltd., 177 ITR 443. The Assessing Officer did not accept the contention of the assessee. It is noted by him that the case law quoted by the assessee pertained to a period when section 34 was on Statute Book. After the deletion of this section w.e.f. 1.4.1988, depreciation shall be granted even if the prescribed particulars have not been furnished. The Assessing Officer thrusted upon the assessee of the depreciation of Rs.2338.88 lakhs.
4. Being aggrieved, the assessee carried the matter in appeal before the Commissioner of Income-tax (Appeals). Before the Commissioner of Income-tax (Appeals), reliance was placed on the judgment of the Hon'ble Apex Court rendered in the case of CIT vs. Mahindra Mills, 243 ITR 56. Reliance was also placed on the judgment of the Hon'ble Bombay High Court rendered in the case of CIT vs. Someshwar Sehkari Karkhana Ltd., (supra). Reliance was also placed on the judgment of the Hon'ble Madras High Court rendered in the case of CIT vs. Sree Senhavalli Textiles Pvt. Ltd., 259 ITR 77 and of the Hon'ble Kerala High Court in the case of CIT vs. Kerala Electric Lamp Works Ltd., 261 ITR 721. The Commissioner of Income-tax (Appeals) has decided the issue in favour of the assessee. It is observed by the Commissioner of Income-tax (Appeals) in para.9 of his order that some of the High Courts 51 ITA NO.2085/DEL/2007 relied upon by the Ld.AR of the assessee have held that the amendment of section 32 whereby Explanation 5 has been inserted is prospective in nature and will not be effective in assessment years prior to 1.4.2002. On this basis, the Commissioner of Income-tax (Appeals) decided this issue in favour of the assessee. Now, the revenue is in appeal before us.
5. Before us, it was submitted by the Ld.DR of the revenue that Explanation 5 to section 32 is effective from assessment year 2002-03, but is clarificatory in nature. Hence, applicable in the present year also. He supported the assessment order. As against this, Ld. AR of the assessee supported the order of the Commissioner of Income-tax (Appeals). It was his submission that Explanation 5 to section 32(1) is applicable from assessment year 2002-03 and it is prospective in nature. In support of this contention, reliance was placed by him on various judicial pronouncement as under :
CIT vs. Sree Senhavalli Textiles Pvt. Ltd., 259 ITR 77 (Mad.) CIT vs. Kerala Electric Lamp Works Ltd., 261 ITR 721 (Ker.) Ram Nath Jindal vs. DCIT (2001), 252 ITR 590 (P&H) CIT vs. Friends Corporation, 180 ITR 334 (P&H) Parksons Press vs. ITO, 12 SOT 128 (Mum.) DCIT vs. Seagram Distilleries Ltd. in ITA No.2532/D/06,AY.2001-02 ACIT vs. KRBL Ltd. in ITA Nos.3771 to 3777/Del./2006.
6. We have heard the rival submissions and perused the material placed on record. We find that Explanation 5 has been inserted in section 32(1) by Finance Act, 2001 w.e.f. 1.4.2002. Explanation 5 reads as under:
"For the removal of doubts, it is hereby declared that the provisions of this subsection shall apply whether or not the assessee has claimed the deduction in respect of depreciation in computing his total income."
It was held by various High courts relied upon by the Ld.AR of the assessee as noted above that the above Explanation is prospective in nature. No contrary judgment of Hon'ble jurisdictional High Court or of the Hon'ble Apex Court or of any other High Court was brought to our notice and hence respectfully following the judgments of various High Courts 52 ITA NO.2085/DEL/2007 and the Tribunal cited above, we uphold the order of the Commissioner of Income-tax (Appeals) on this issue. This ground of the revenue is rejected."
Respectfully following the same, we dismiss this ground of revenue's appeal.
12. Ground No.3 in revenue's appeal is against allowing the VRS expenditure of Rs.1,52,81,000/- as against the capital expenditure treated by the AO.
13. The assessee has debited VRS expenditure and treated the same as revenue expenses. Learned DR submitted that this expenditure was incurred to carry out restructuring and introduced automation on different areas. The assessee has reduced the strength of the employees and for that, the restructuring of human resource and financial engineering etc. was carried out and ex-gratia payments are made to encourage the scheme to further the long term advantage of the company and by making the ex-gratia payments, the company has got enduring benefit. Thus, it was an advantage for the enduring benefit for the business of the assessee, therefore, it is a capital expenditure and the AO has rightly held it as capital expenditure. Ld. DR relied on the order of Assessing Officer and pleaded that the order of CIT (A) deserves to be set aside.
14. On the other hand, the learned AR relied on the order of the CIT (A) and pleaded that the amount has been spent under the voluntary retirement scheme. It is a revenue expenditure in view of u/s 37(1) of the 53 ITA NO.2085/DEL/2007 Income-tax Act as the same had been incurred on account of commercial expediency. The payment of compensation to the workers to induce to retire prematurely was an expenditure incurred on account of commercial expediency in order to carry out the business. Therefore, it is an expenditure allowable u/s 37(1) of the Income-tax Act and it is not an expenditure of capital nature. Ld. AR relied on the decision of Hon'ble Supreme Court in the case of Management of the Indian Cable Co. Ltd.
Vs. Their Workmen reported in AIR 1972 Hon'ble Supreme Court 2195.
He also pleaded that the test of enduring benefit to determine the nature of the expenditure whether it is capital or revenue breaks down in the cases when no capital asset came into existence and does not add to the profit making apparatus of the business. For this proposition, he relied on the decision of Hon'ble Supreme Court in the case of Empire Jute Co.
Ltd. vs. CIT, 124 ITR 1. Ld. AR also relied on the following decisions :-
(i) Sassoon J. David & Co. (P) Ltd. Vs. CIT - 118 ITR 261L;
(ii) CIT vs. Ashok Leyland Ltd. - (1972) 86 ITR 549 (SC);
Ld. AR also relied on the decision of CIT vs. Pfizer Ltd. in ITA No.128 of 2009 (Bom. High Court ) - where the retrenchment compensation paid held to be revenue expenditure. He also relied on the decision of Hon'ble Rajasthan High Court in the case of CIT vs. PI Industries Ltd., 321 ITR 601 (Raj.) wherein the VRS expenses has been held to be revenue expenditure. He further relied on the decision of Delhi High Court in the 54 ITA NO.2085/DEL/2007 case of CIT vs. DCM Limited, (2009) 221 CTR 513 (Delhi) where retrenchment compensation paid on the closure of business held to be allowable. He also relied on the decision of Hon'ble Bombay High Court in the case of CIT vs. Bhor Industries Ltd., 264 ITR 180 (Bom.), wherein VRS expenses held to be revenue expenditure. Ld. AR also relied on the following decisions :-
(i) CIT vs. Simpson & Co. Ltd., 230 ITR 703 (Madras);
(ii) CIT vs. Ramvilas Service Ltd., 211 ITR 763 (Madras);
(iii) CIT vs. Machinery Manufacturing Corporation Ltd., 198 ITR 559 (Calcutta);
(iv) Anglo Persian Oil Co. (India) Ltd. Vs. CIT, 1 ITR 129 (Calcutta);
(v) Madura Coats Vs. DCIT, 273 ITR 32 (Madras) Ld. AR also relied on the decision of ITAT in the case of M/s. Foseco India Ltd. Vs. ACIT in ITA No.4667/Mum./2005 and Siel vs. DCIT, (2008) 20 SOT 144. He final submitted that the provisions of section 35DDA are not applicable in assessee's case as the same has been inserted by the Finance Act, 2001 w.e.f. April 1, 2001.
15. We have heard both the sides in detail. After hearing the same, we hold that the provisions of section 35DDA providing for amortization of expenditure incurred under the VRS have come into the statute by the Finance Act, 2001 w.e.f. 1.4.2001, therefore, these are not applicable to 55 ITA NO.2085/DEL/2007 the AY 1998-99 which is under consideration. Further, in the umpteen number of decisions by the various courts, it has been held that the expenditure on the voluntary retirement scheme is an allowable expenditure as the same has been incurred on account of commercial expediency. This is a compensation paid to the workmen who retired prematurely and such expenditure incurred by the assessee for commercial expediency in order to facilitate carrying out the business is allowable u/s 37(1) of Income-tax Act, therefore, it cannot be said to be an expenditure of capital in nature. Further, in the case of M/s. Foseco India Ltd., cited supra, the ITAT Mumbai 'D' Bench has held that expenditure incurred on VRS is allowable as revenue expenditure.
Keeping these facts in view, we dismiss this ground of revenue's appeal.
16. In the result, the appeal of the revenue is partly allowed.
Order pronounced in open court on the 20th day of January, 2012.
Sd/- sd/-
(DIVA SINGH) (B.C. MEENA)
JUDICIAL MEMBER ACCOUNTANT MEMBER
Dated : the 20th day of January, 2012
TS
Copy forwarded to:
1.Appellant
2.Respondent
3.CIT
4.CIT (A)-XXV, New Delhi.
5.CIT(ITAT), New Delhi.
AR/ITAT