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Petitioner: COMMISSIONER OF INCOME-TAX VS Respondent: MAHENDRA MILLS and 2 others ARUN JUDGMENT
Court Name: Supreme Court of India Judge(s): D. P. Wadhwa, Syed Shah Mohammad Quadri Title:COMMISSIONER OF INCOME-TAX vs MAHENDRA MILLS and 2 others ARUN
JUDGMENT
Reported As: 2001 PTD 1068 Result: Appeal dismissed Judgment JUDGMENT D.P. WADHWA, J.---A common question of law arises in these appeals. It is: "Whether, on the facts and in the circumstances of the case, the Tribunal was right in coming to the conclusion that the Income-tax Officer could not grant depreciation allowance to the assessee under the Income Tax Act, 1961, when the same was not claimed by the assessee?" The question was referred at the instance of the Revenue to the High Court by the Income-tax Appellate Tribunal ("the Tribunal" for short), for its opinion and answered in the affirmative, in favour of the assessee and against the Revenue. This question has been answered differently by various High Courts some in favour of the assessee and others in favour of the Revenue. Section 32 has since been amended by the Taxation Laws (Amendment and Miscellaneous 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 assessm ent years prior to April 1, 1988. Section 32 as it stood prior to April 1, 1988, in the relevant part, is 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 written down value thereof as may in any case or class of cases be
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prescribed: Provided that where the actual cost of 'any machinery or plant does not exceed seven hundred and fifty rupees, the actual cost thereof shall be allowed as a deduction in respect of the previous year in which such machinery or plant is first put to use by the assessee for the purpose of his busineis or profession: Provided further that no deduction shall be allowed under this clause or clause (iii) in respect of any motor car manufactured outside India, where such motor car is acquired by the assessee after the 28th day of February 1975, and is used otherwise than in a business of running it on hire for tourists;" "32 (2) Where, in the assessm ent of the assessee (or, if the assessee registered firm or an unregistered firm assessed as a registered firm in the assessment of its partners), full effect cannot be given to any allowance under clause (i) or clause (ii) or clause (iia) or clause (iv) or clause (v) or clause (vi) of subsection (1) or under clause (i) of subsection (1A) in any previous year, owing to there being no profits or gains chargeable for that previous year, or owning to the profits or gains chargeable being less than the allowance, then, subject to the provisions of subsection (2) of section 72 and subsection (3) of section 73, the allowance or part of allowance to which effect has not been given, as the case may be, shall be added to the amount of the allowance for depreciation for the following previous year and deemed to be part of that allowance, or if there is no such allowance for that previous year, be deemed to be the allowance for that previous year, and so on for the succeeding previous years." We may also quote sections 28 and 29: "28. The following income shall be chargeable to income-tax under the head 'Profits and gains of business or profession',--- (i) the profits and gains of any business or profession which was carried on by the assessee at any time during the previous year: (ii) any compensation or other payment due to or received by,--- (a) any person, by whatever name called, managing the whole or substantially the whole of the affairs of an Indian company, at or in connection with the termination of his management or the modification of the terms and conditions relating thereto; (b) any person, by whatever name called, managing the whole or substantially the whole of the affairs in India of any other company, at or in connection with the termination of his office or the modification of the terms and conditions relating thereto: (c) any person, by whatever name called, holding an agency in India for any part of the activities relating to the business of any other person, at or in connection with the termination of the agency or the modification of the terms and conditions relating thereto; (d) any person, for or in connection with the vesting in the Government, or in any 'corporation owned or controlled by the Government, under any law for the time being in force, of the management of any property or business; (iii) income derived by a trade, professional or similar association from specific services performed for its members; (iv) the value of any benefit or perquisite, whether convertible into money or not, arising from business or the exercise of a profession." "29. Income from profits and gains of business or profession, how computed.---The income referred to in section 28 shall be computed in accordance with the provisions contained in sections 30 to 43A." The assessee is a company and maintains accounts on mercantile basis. For the assessment year 1974-75, the assessee did not claim any depreciation. The Income-tax Officer, however, allowed depreciation. The assessee appealed to the Commissioner of Income-tax (Appeals) who allowed
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the appeal. The Revenue then took the matter to the Tribunal which dismissed the appeal of the Revenue. At the instance of the Revenue, the question of law as set out in the beginning of the judgment was referred to the Gujarat High Court for its opinion. The High Court by the impugned judgment following its earlier decision in Chokshi Metal Refinery v. CIT (1977) 107 ITR 63 (Guj.), answered the question in the affirmative, in favour of the assessee and against the Revenue. Aggrieved, the Revenue has come to this Court. The Income-tax Officer in the assessment order noted that the assessee did not claim current depreciation. It was contended before him that the allowance of depreciation is a right given to the assessee and like all other rights and privileges the assessee has full freedom to claim or not to claim it and that right cannot be a burden. A privilege cannot be to a disadvantage and an option cannot become an obligation. The Income-tax Officer did not accept the contention of the assessee and computed the current depreciation for a sum of Rs.37,61,652 which he allowed. Mr. Verma, learned senior counsel for the Revenue, submitted that sections 28, 29, 32(1) and 32(2) are to be read together and so read, depreciation had to be allowed under law and it is not relevant if it is claimed by the assessee or not. He said there is conflict of judgments of the High Courts. While some judgments support the view canvassed by him, others support the view of the assessee. Section 28 lays down as to what income shall be chargeable to income-tax under the head "Profits and gains of business or profession' and section 29 mandates that income referred to in section 28 shall be computed in accordance with the provisions contained in sections 30 to 43A. That being the law, the Income-tax Officer was bound to allow depreciation whether the assessee chooses to claim the same or not. To arrive at the profit, depreciation has to be deducted commercially, accountability as well as statutorily. The written down value of the plant and machinery for the next year will have to be claimed which cannot be the written down value of the current year. Subsection (2) of section 32 prescribes the mechanism as to how the deduction is to be allowed. Mr. Verma said if the claim for depreciation was a case of choice for the assessee, it would negate the decision of this Court in CIT v. Jaipuria China Clay Mines (P.) Ltd. (1966) 59 ITR 555 and Garden Silk Weaving Factory v. CIT (1991) 189 ITR 512. The Income-tax Officer during the course of assessment can call for the records. Mr. Verma said that during the course of assessment proceedings, the Income-tax Officer can call for the account books of the assessee, look into the same and calculate the depreciation allowable under section 32. To carry forward loss one has to arrive at the net income which can be done only after adjusting depreciation though now after change in law depreciation cannot be carried forward beyond certain years. Mr. Verma submitted that looking at the language used in section 29, the Income-tax Officer is duty bound to allow depreciation in order to compute the income referred to in section 28 of the Act which he is to do keeping in view of the provisions contained in sections 30 to 43A (now section 43D). The assessee need not make any claim for depreciation of the current year. It is admissible under the law. Section 32 only requires as to how the allowance of depreciation is to be quantified. As any claim of depreciation made by the assessee is not binding on the Income-tax Officer similarly not to claim the same is also not binding on the Income-tax Officer and he can from the available material allow admissible deduction for the current year in arriving at the true income of the assessee. Mr. Dastur, who on our request appeared as amicus curiae, submitted that the view canvassed by the Revenue is not correct. He said if the assessee does not claim depreciation or does not furnish particulars for claiming depreciation as prescribed under section 34 of the Act in his return of income, depreciation cannot be thrust upon him. To get depreciation allowance, there must be a
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claim for that under section 32 which would be subject to furnishing of particulars under section 34 of the Act. The word "furnishing" in section 34 would mean "what is given voluntarily". Section 34 of the Act prescribes conditions for depreciation allowance. Subsection (1) of section 34 is relevant and it is as under: "34. (1) The deductions referred to in subsection (1) of subsection (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 subsection (1) of section 32 have been furnished by the assessee in respect of the ship or machinery or plant." Mr. Dastur referred to a circular of the Central Board of Direct Taxes (the CBDT), which provides that depreciation could not have been allowed. The circular of the Central Board of Revenue (No.29D (XIX-14) of 1965, F. No.45/239/65.ITJ, dated August 31, 1965), was to the effect that "where the required particulars have not been furnished by the assessee and no claim for depreciation has been made in the return, the Income-tax Officer should estimate the income without allowing depreciation allowance". Thus, unless the particulars of the depreciation are furnished, no depreciation allowance could be allowed. He referred to yet another circular of the Central Board of Direct Taxes which provides that it is the duty of the Income-tax Officer to advise the assessee of his right to claim depreciation, etc., but that would arise only if the assessee is ignorant of his right. Moreover, the duty of the Income-tax Officer is to give advice to the assessee of his right and no more. The circular of Central Board of Revenue (No.14 (SL-35) of 1955, dated April 11, 1955), required the officers of the Department "to assist a taxpayer in every reasonable way, particularly in the matter of claiming and securing reliefs...Although, therefore, the responsibility for, claiming refunds and reliefs rests with the assessee on whom it is imposed by law, officers should---(a) draw their attention to any refunds or reliefs to which they appear to be clearly entitled but which they have omitted to claim for some reason or other..." When there are two provisions under which an assessee could claim some benefit, it is for the assessee to choose one. A reference was made to a claim for medical reimbursement for the current year which is different from a claim for depreciation. This is so because depreciation is a claim on the written down value and if depreciation is not claimed in the current year, the written down value would remain the same for the following year. Prior to the amendment of section 32 business loss could be carried forward for eight years. There was no time limit for the claiming of depreciation. This is not so now. Earlier, therefore, it was always for the assessee to claim business loss first and current depreciation thereafter if he so desired. There was, thus, a basic difference between carry forward of loss and carry forward of unabsorbed depreciation. Mr. Dastur said it is not correct to say that if the contention of the assessee is correct, that would negate the decision of the Supreme Court in the cases of CIT v. Jaipuria China Clay Mines (1966) 59 ITR 555 and Garden Silk Weaving Factory v. CIT (1991) 189 ITR 512. He then referred to rule 5AA in the Income-tax Rules, 1962 (the Rules), which was inserted by the Income-tax (Amendment) Rules, 1981, with effect from April 1, 1981. It was omitted by the Income-tax (Third Amendment) Rules, 1987, with effect from April 2, 1987, Rule 5AA is as under: "5AA. (1) For the purposes of the deductions referred to in subsection (1) or subsection (1A) of section 32 and subsection (1) of section 32A, the following particulars shall be furnished in a columnar form namely:--- (i) description of assets (in respect of building, indicate whether the building is taken on lease or is owned by the assessee); (ii) written down value of existing assets; (iii) actual cost of assets acquired during the previous year;
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(iv) capital expenditure on additions or alterations; (v) period of user (only where return relates to assessment year 1969-70 or any earlier year); (vi) amount of moneys payable and scrap value in respect of assets sold, discarded, demolished or destroyed; (vii) amount on which depreciation is allowable total of items (ii) to (iv) exclusive of amounts relating to asset referred to in item (vi); (viii) rate of depreciation; (ix) total number of days worked (to be furnished only if extra shift allowance is claimed); (x) total number of days worked---double shift and triple shift (to be furnished only if extra shift allowance is claimed); (xi) depreciation claimed--- (a) initial depreciation; (b) normal depreciation (including extra depreciation for approved hotels); (c) additional depreciation; (d) extra shift allowance---double shift and triple shift; (xii) total depreciation; (xiii) investment allowance claimed (also indicate rate); (xiv) remarks (indicate the amount of initial depreciation, investment allowance or development rebate allowed in respect of the assets in an earlier year). (2) Where the depreciation in respect of any asset is not admissible as a deduction under clause (ii) of subsection (4) of section 37 or sub-clause (ii) of clause (c) of section 40 or sub-clause (ii) of clause (a) of subsection (5) of section 40A, such depreciation shall be excluded for the purposes of sub-rule (1)." This rule 5AA prescribed the particulars for depreciation necessary to be furnished for allowance of depreciation. Prior to the insertion of rule 5AA, the return of income in the form prescribed itself required particulars to be furnished if the assessee claimed depreciation. Mr. Dastur said that the case set up by the assessee before the Income-tax Officer was correct. It was wrong on the part of the Income-tax Officer to allow depreciation in the face of the provision of law to the contrary. He said that calling the books of the assessee for the purpose of computing depreciation is of no relevance inasmuch as depreciation in the books cannot necessarily be the amount of depreciation which is allowable under the Act. Section 37 also uses the words "shall be allowed in computing the income chargeable". Under this section any expenditure which is not expenditure as described in sections 30 to 36 and is also not in the nature of capital expenditure or personal expenses and laid out or expended wholly or exclusively for the purposes of the business or profession of the assessee shall be allowed in computing the income chargeable under the head "Profits and gains of business or profession". It was submitted that expenditure can be allowed only if it is claimed. Similar is the language used in section 34 of the Act. Here also depreciation can be allowed only if it is claimed after giving necessary particulars as required in a return of income, which is to be submitted in the form prescribed. If reference is made to the form of return relevant at the time, complete details are required to be given for the purpose of claiming depreciation. This is under the heading "Statement of particulars under sections 32A(4)/34(1) regarding investment allowance, depreciation and development rebate". The provisions contained in sections 34 and 37 were contrasted with section 16 which deals with deduction from salary. The language here is "the income chargeable under the head 'Salary", shall be computed after making the following deductions, namely:_--" Mr. Dastur like Mr. Verma also referred to the judgments of the High Courts giving diverse views. The High Courts of Allahabad and Madras supported the view canvassed by the Revenue while the High Courts of Bombay, Gujarat, Punjab and Haryana, Karnataka, Andhra Pradesh, Calcutta and
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Kerala supported the case of the assessee. We may now refer to some of the judgments cited at the Bar beginning with Jaipuria China Clay Mines' case (1966) 59 ITR 555 (SC) and Garden Silk Weaving Factory's case (1991) 189 ITR 512 (SC). CIT v. Jaipuria China Clay Mines (P.) Ltd. (1966) 59 ITR 555 (SC), was a case under the Indian Income-tax Act, 1922. The question which came up for consideration before this Court was (page 556): "Whether, in the facts and circumstances of the case, the unabsorbed depreciation of the past years should be added to the depreciation of current year and the aggregate of the unabsorbed depreciation and the current year's depreciation be deducted from the total income of the previous year relevant for the assessment year 1952-53"? The Court noted the following facts in the case (page 556): "The Income-tax Officer assessing the respondent, Jaipuria China Clay Mines (P.) Ltd., Calcutta, hereinafter referred to as 'the assessee' for the year 1952-53 computed its total income at Rs.14,041 before charging depreciation for that year. From that figure he deducted depreciation for the year amounting to Rs.5,350, thus computing a profit of Rs.8,681. From this figure he deducted an equivalent amount, i.e., Rs.8,681, in respect of losses during 1947-48, and he thus worked out the business income as nil. He then computed the dividend income at Rs.2,01,130 and determined the total income at this figure and levied tax on it. The assessee had in its favour an unabsorbed depreciation aggregating to Rs.76,857 and it contended before the Income-tax Officer that this sum should be deducted from the income received from dividends, which, if done, would reduce the total income to Rs.1,32,955, but the Income-tax Officer refused to accede to this contention. The Appellate Assistant Commissioner upheld the order of the Income-tax Officer and the assessee's appeal to the Appellate Tribunal met with the same fate. The High Court, however, accepted the contention of the assessee and answered the question referred to it in favour of the assessee." The Court said that the answer to the question depended upon the interpretation of sections 6, 10 and 24 of the 1922 Act. The Court also observed that it was concerned with the law as it stood on April 1, 1952. It analysed the sections stating that the scheme of the Act is that the tax is levied in respect of the total income of the previous year of every individual, Hindu undivided family, etc., and the total income consists of income under various heads such as salaries, interest on securities, income from property, profits and gains of business, profession or vocation, and income from other sources and capital gains. Various sections deal with how income, profits and gains under each head have to be computed. Section 10 deals with the computation of profits and gains of any business carried on by an assessee. Section 10(2) prescribes the allowances which have to be deducted before computing the profits and gains; one of the allowances is "depreciation", and this is provided under sub-clause (vi). Section 24 provides for set-off of losses in computing aggregate income. After referring to proviso (b) to section 10(2)(vi), this Court observed (page 559): "Apart from authority looking at the Act as it stood on April 1, 1952, it is clear that the underlying idea of the Act is to assess the total income of an assessee. Prima facie, it would be unfair to compute the total income of an assessee carrying on business without pooling the income from business with the income or loss under other heads. The second consideration which is relevant is that the Act draws no express distinction between the various allowances mentioned in section 10(2). They all have to be deducted from the gross profits and gains of a business. According to commercial principle, depreciation would be shown in the accounts and the profit and loss account would reflect the depreciation accounted for in the accounts. If the profits are not large enough to wipe off depreciation, the profit and loss account would show a loss. Therefore, apart from proviso (b) to section 10(2)(vi), neither the Act nor commercial principles draw any distinction between the various allowances mentioned in section
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10(2); the only distinction is that while the other allowances may be out going, depreciation is not an actual outgoing. The proviso (b) to section 10(2)(vi) is as under (page 557): '(b) where, in the assessm ent of the assessee or if the assessee is a registered firm, in the assessm ent of its partners, full effect cannot be given to any such allowance in any year not being a year which ended prior to the 1st day of April, 1939, owing to there being no profit or gains chargeable for that year, or owing to the profits or gains chargeable being less than the allowance, then, subject to the provisions of clause (b) of the proviso to subsection (2) of section 24, the allowance or part of the allowance to which effect has not been given, as the case may be, shall be added to the amount of the allowance for depreciation for the following year and deemed to be part of that allowance, or if there is no such allowance for that year, be deemed to be the allowance for that year, and so on for succeeding years." In conclusion, this Court agreed with the High Court and answered the question in favour of the assessee. In Garden Silk Weaving Factory v. CIT (1991) 189 ITR 512 (SC), the questions before this Court were (page 516); "(1) Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the assessee, a registered firm, is entitled to carry forward unabsorbed depreciation from earlier years and that it will be deemed to be an allowance in the nature of depreciation in the previous year relevant to the assessment year 1968-69? (2) Whether the claim of the assessee to carry forward and set off loss of Rs.3,49,242 against its total income for the assessm ent year 1968-69 has been rightly rejected?" It will be seen that the issues which were before the Court are not the same which we are now considering. In the case of Garden Silk Weaving Factory (1991) 189 ITR 512 (SC), reliance was again placed on the earlier decision of this Court in Jaipuria China Clay Mines (P.) Ltd.'s case (1966) 59 ITR 555. The whole stress of the argument of Mr. Verma was that the net income has to be ascertained and for that purpose the Income-tax Officer is duty bound to look into the amount of depreciation available for that assessm ent year and to allow credit for the same to arrive at the net income. This, he said, would be so irrespective of whether the assessee has claimed depreciation or not and whether particulars of depreciation have been furnished or not. We do not think these two judgments of this Court on which strong reliance was placed by Mr. Verma advance his case. The issues in those cases were entirely different having no bearing on the question before us. CIT v. Dharampur Leather Co. Ltd. (1966) 60 ITR 165 (SC), was a case under the Indian Income-tax Act, 1922. Subsection (1) of section 10 deals with the tax payable by an assessee in respect of the profits or gains of any…
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