Introduction :

1.1 For the purpose of computing income under the head ‘Profits and Gains of Business or Profession’ (Business Income), as per the provisions of S. 32 of the Income-tax Act, 1961 (the Act), a deduction by way of depreciation allowance is permitted. Up to A.Y. 1987-88, it was also necessary to furnish the prescribed particulars, as provided in S. 34(1) of the Act, for claiming depreciation allowance.

1.2 In the past, the issue was hotly debated as to whether the assessee has option to claim or not to claim depreciation allowance u/s.32 read with provisions of S. 34(1) of the Act. The High Courts were divided on the issue, though majority of the High Courts had taken a view that the assessee has the option to claim or not to claim depreciation allowance.

1.3 The issue referred to in para 1.2 above was decided in favour of the assessee by the Bombay High Court in the case of Shri Someshwar Sahakari Sakhar Karkhana Ltd., (177 ITR 443). This judgement was analysed by us in this column in February 1989 issue of BCAJ.

1.4 Some of the High Courts decided the above issue in favour of the assessee on the ground that the assessee has the option to claim or not to claim depreciation allowance irrespective of the requirements of furnishing particulars as per provisions of S. 34(1) of the Act.

1.5 In some cases, the assessees had claimed the depreciation by furnishing the return of income and subsequently had withdrawn such a claim by furnishing revised Return of Income expressly stating that they do not want to claim depreciation. In such cases also, some of the High Courts have decided the issue in favour of the assessee. In such a case, some High Courts had rejected the contention of the assessee on the ground that the revised return furnished by the assessee is not a valid revised return.

1.6 Recently, the issue referred to in para 1.2 above came up before the Apex Court in the cases of Mahendra Mills, etc. and the issue has now been finally settled.

CIT v. Mahendra Mills — 109 Taxman 225 (SC) :

2.1 In the above case, the assessee company maintained accounts on mercantile basis and furnished the return of income for the A.Y. 1974-75 in which the assessee chose not to claim depreciation. The Income-tax Officer (ITO) allowed depreciation but the first Appellate Authority as well as the Appellate Tribunal accepted the contention of the assessee. When the matter came up before the Gujarat High Court, the Court decided the issue in favour of the assessee for which reliance was placed by the Court on its earlier decision in the case of Choksi Metal Refinery, (107 ITR 63). The judgement in the case of Mahendra Mills appears to be unreported and hence not available.

2.2 On behalf of the Revenue it was contended before the Apex Court that the computation of Business Income has to be made in accordance with provisions contained in S. 30 to S. 43A (now 43D) of the Act and therefore, the ITO was bound to allow depreciation, whether assessee chooses to claim it or not. It was also contended that to arrive at the profit, the depreciation has to be deducted commercially, accountably as well as statutorily. Written Down Value (WDV) of the depreciable asset in the next year cannot be WDV of the current year and S. 32(2) prescribes the mechanism as to how the deduction is to be allowed. It was also stated that if the claim for depreciation was a case of choice for the assessee, it would negate the decisions of the Apex Court in the cases of Jaipuria China Clay Mines (P) Ltd., (59 ITR 555) and Garden Silk Wvg. Factory, (189 ITR 512). It was also stated that the ITO during the course of the assessment can call for records. The assessee need not make any claim for the depreciation of the current year which is admissible under the Act and the ITO is duty-bound to allow depreciation in order to compute the business income referred to in S. 28 of the Act which has to be computed in accordance with the provisions contained in S. 30 to S. 43A (now S. 43B).

2.3 On behalf of the assessee, the learned counsel who appeared as Amicus Curiae, made various submissions which inter alia included :

v if the assessee does not claim depreciation or does not furnish required particulars for claiming depreciation, depreciation cannot be thrust upon him;

v to get the depreciation there must be a claim for the same which would be subject to furnishing required particulars;

v the word ‘furnishing’ used in S. 34 would mean ‘what is given voluntarily’;

v even as per CBDT Circular dated 31-8-1965, depreciation cannot be allowed if the required particulars have not been furnished;

v as per the CBDT Circular dated 11-4-1955 it is the duty of the ITO to advise the assessee of his right to claim depreciation, etc. but that would arise only if the assessee is ignorant of his right. The duty of the ITO is to give advice to the assessee of his right and no more;

v under the above referred Circular, the ITO should draw the attention of the assessees to any refunds or reliefs to which they appear to be clearly entitled but which they have omitted to claim for some reason or the other;

v where there are two provisions under which the assessee could claim some benefits, it is for the assessee to choose one;

v the depreciation is claimed on WDV and if depreciation is not claimed in the current year, the WDV would remain the same for the following year;

v it is not correct to say that if the contention of the assessee is correct, that would negate the decisions of the Apex Court as contended by the Revenue (para 2.2);

v the relevant Rule 5AA (omitted from 2-4-1987) prescribed the required particulars to be furnished for claiming depreciation and prior to insertion of that Rule, the Form of Return of Income itself prescribed such particulars;

v 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 allowable under the Act;

v S. 37 also uses the words ‘shall be allowed in computing the income chargeable’. The expenditure under that Section can be allowed only if it is claimed. Similar is the language for the allowance of depreciation;

v the language of S. 16 is ‘the income chargeable under the head salaries shall be computed after making the following deductions… … ’ As against this, language of S. 32 and S. 37 are different.

2.4 Reference was also made to various High Court judgements by both the parties deciding the issue in favour as well as against the assessee.

2.5 After hearing both the parties, the Court considered the judgements of the Apex Court in the case of Jaipuria China Clay Mines (P) Ltd. (supra) and Garden Silk Wvg. Factory (supra) and stated that these two judgements, on which strong reliance was placed by the Revenue, do not advance the case of the Revenue. Issues in those cases were entirely different having no bearing on the question before us.

2.6 The Court then considered its judgement in the case of Dharampur Leather Co. Ltd., (60 ITR 165). In this case, the assessee’s income was exempt for certain number of years and in the A.Y. 1955-56, when the question of computation of income was to be considered and for which depreciation was to be allowed, the ITO took the view that depreciation must be computed as if the income of the assessee had been worked out properly in the earlier years when it was exempted and the depreciation had been allowed in those years at the usual rates. It was contented by the assessee that no depreciation had in fact been actually allowed to the assessee in earlier years and therefore, depreciation should be computed on the original cost of various assets of the assessee. In that case, the Apex Court rejected the contention of the Revenue and held that the words ‘actually allowed’ occurring in S. 10(5)(b) of the Income-tax Act, 1922 did not include any notional allowance.

2.7 The Court then referred to the judgements of various High Courts and noted the following observations of the Bombay High Court in the case of Someshwar Sahakari Sakhar Karkhana Ltd. (supra) [page 237] :

"in our view, to sum up on the first issue, the assessee has a choice to claim or not to claim a deduction on account of depreciation. If he chooses not to claim it, the Income-tax Officer is not entitled to allow a deduction on account of depreciation." (p.450).

2.8 The Court then also dealt with the Gujarat High Court judgement in the case of Arun Textiles, (182 ITR 700) and referred to the observations of the High Court in that case in which the High Court has stated that if the idea behind the provisions of S. 32(1) was to provide for compulsory deduction, then, the WDV of asset acquired before the previous year would have been defined so as to mean actual cost less depreciation allowable and not actual cost less depreciation ‘actually allowed’. The Court also referred to the observation of the High Court interpreting the word ‘allowed’ used in S. 32(1) to the effect that the same presupposes claim made by the assessee and therefore, it is implicit in the provisions of S. 32(1) that the assessee should have made a claim for deduction under the said provision to enable the ITO to consider the same. The Court finally referred to the following observations of the High Court (pages 239/240) :

"… … It is difficult to accept this argument for, under the scheme of the Act, income is to be charged regardless of depreciation on the value of the assets and it is only by way of an exception that S. 32(1) grants an allowance in respect of depreciation on the value of the capital assets enumerated therein. It may appear intriguing on the part of the assessee as to why it does not claim the benefit of deduction from its taxable income, but the choice is clearly its. Where the assessee does not want the benefit, it cannot be thrust upon it. There is no provision which makes it compulsory on the part of the Income-tax Officer to make deductions in all cases. If it were incumbent on the Income-tax Officer to make compulsory deductions irrespective of whether the assessee claimed or not, the statutory requirement of making the claim along with necessary particulars and the provision for ‘allowing’ it would be unnecessary… … "(p. 706)

2.9 After dealing with number of High Court judgements, for and against, the Court observed as under (pages 247/248) :

"We do not think the Gujarat High Court in the case of Gujarat State Warehousing Corpn. has taken correct view in respect of the issues with which we are concerned in the present appeal. The High Court has not properly appreciated the context in which this Court made observations in the case of Jaipuria China Clay Mines (P.) Ltd. (supra) on which the High Court has relied. In later two cases of Choksi Metal Refinery (supra) and Arun Textiles (supra), the Gujarat High Court has itself taken, if we may say so, a different view falling in line with the views of the Bombay, Punjab and Haryana, Karnataka, Andhra Pradesh, Calcutta and Kerala High Courts which view commends to us. Language of the provisions of S. 32 and S. 34 are specific and admit of no ambiguity. S. 32 allows depreciation as deduction subject to the provisions of S. 34. S. 34 provides that the deduction u/s.32 shall be allowed only if prescribed particulars have been furnished. We have seen Rule 5AA of the Rules which, though since deleted, provided for the particulars required for the purpose of deduction u/s.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. There is a circular of the Board dated 31-8-1965, 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. The ITO in such a case is required to compute the income without allowing depreciation allowance. Circular of the CBDT dated 11-4-1955 is of no help to the Revenue. It imposes merely a duty on the officers of the Department to assist the taxpayers in every reasonable way, particularly, in the matter of claiming and securing relief. The Officer is required to do no more than to advise the assessee. It does not place any mandatory duty on the officer to allow depreciation if the assessee does not want to claim that. Provision for claim of depreciation is certainly for the benefit of the assessee. If it does not wish to avail that benefit for some reason, benefit cannot be forced upon him. It is for the assessee to see if the claim of depreciation is to his advantage. Rather, the ITO should advise him not to claim depreciation if that course is beneficial to the assessee. That would be in our view the spirit of the Circular dated 11-4-1955. Income under the head ‘Profits and gains of business or profession’ is chargeable to income-tax u/s.28 and that income u/s.29 is to be computed in accordance with the provisions contained in S. 30 to S. 43A. The argument that since S. 32 provides for depreciation, it has to be allowed in computing the income of the assessee, cannot in all circumstances be accepted in view of the bar contained in S. 34. If S. 34 is not satisfied and particulars are not furnished by the assessee, his claim for depreciation u/s.32 cannot be allowed. S. 29 is, thus, to be read with reference to other provisions of the Act. It is not in itself a complete code."

2.10 After making the above observations, the Court also dealt with some of the cases decided against the assessee particularly, one of the Madras High Court in the case of Southern Petro Chemicals Industries Corpn. Ltd., (233 ITR 400) wherein the Court has decided the issue against the assessee on the ground that the revised return furnished by the assessee for withdrawing claim for depreciation is not a valid return and stated as follows (page 248) :

"… … In the second Madras High Court’s case, Southern Petro Chemicals Industries Corpn. Ltd.’s case (supra) the assessee did claim depreciation but he withdrew the same in the revised return. On that basis it was held that since the assessee had furnished the particulars regarding the claim of depreciation in the original return, the assessee would not be able to withdraw his claim for depreciation. It would appear that the High Court proceeded on the basis that the revised return was not a valid return u/s.139(5). The High Court followed its earlier decision in Dasaprakash Bottling Co.’s case (supra). To us it appears that if the revised return is a valid return and the assessee has withdrawn the claim of depreciation, it cannot be granted relying on the original return when the assessment is based on the revised return."

2.11 The Court finally decided the issue in favour of the assessee and held as follows (page 249) :

"We get support from the earlier decision of this Court in Dharampur Leather Co. Ltd.’s case (supra). Allowance of depreciation is calculated on the written down value of the assets, which written down value would be the actual cost of acquisition less the aggregate of all deductions ‘actually allowed’ to the assessee for the past years. ‘Actually allowed’ does not mean ‘notionally allowed’. If the assessee has not claimed deduction of depreciation in any past year, it cannot be said that it was notionally allowed to him. A thing is ‘allowed’ when it is claimed. A subtle distinction is there when we examine the language used in S. 16 and that in S. 34 and S. 37. It is rightly said that privilege cannot be to a disadvantage and an option cannot become an obligation.

We, thus, uphold the views expressed by the High Courts of Bombay, Punjab and Haryana, Karnataka, Andhra Pradesh, Calcutta and Kerala. Accordingly, the appeal is dismissed. We answer the question set out in the begin-ning of this judgement in the affirmative, i.e. in favour of the respondent-assessee and against the Revenue. There shall be no order as to costs.

We record our appreciation for the assistance rendered by Soli Dastur, who appeared as Amicus Curiae on our request. He made splendid presentation of law on the subject.’’

 

 

Conclusion :

3.1 In view of the judgement of the Apex Court, it is clear that the assessee has a choice to claim or not to claim depreciation. It also seems that this choice available to the assessee is independent of the requirement of furnishing particulars contained in S. 34 of the Act which has been omitted from 1-4-1988. This view gets support from the observation of the Bombay High Court referred to by the Supreme Court (referred to in para 2.7 above) and the conclusion of the Apex Court approving the High Courts’ judge-ments including that of Bombay High Court in the case of Someshwar Sahakari Sakhar Karkhana Ltd. (supra) for which reference may be made to para 2.9 above. This view gets further support from the conclusion of the Apex Court referred to in para 2.11.

3.2 It is also now clear that if the assessee had claimed depreciation and if he withdraws the same by filing a valid revised return, it is possible for him to do so and the AO cannot thrust upon him the deduction of depreciation.

3.3 Though the issue referred to in para 1.2 above is resolved with the above judgement of the Supreme Court, litigation may continue on the same issue on account of change in the method of allowing depreciation from the A.Y. 1988-89 which provides for allowing depreciation on Block of Assets and not on individual assets. It seems to us that even under the new method of allowing depreciation on Block of Assets, the choice with regard to claim or not to claim depreciation may rest with the assessee and the claim of depreciation may still be regarded as optional. Of course, it is for consideration as to whether such a choice is with reference to each Block of Assets or the same is for a particular assessment year.