Skip to content


First Income-tax Officer Vs. Chowgule and Co. (P.) Ltd. - Court Judgment

LegalCrystal Citation
CourtIncome Tax Appellate Tribunal ITAT Pune
Decided On
Judge
Reported in(1984)9ITD674(Pune.)
AppellantFirst Income-tax Officer
RespondentChowgule and Co. (P.) Ltd.
Excerpt:
1. the assessee, a limited company, exports iron ore, manganese ore, etc., and also is connected with manufacture of yarn, topping up ships, etc. the several grounds of appeals raised are dealt with as under : the above expenditure was incurred by the assessee under the miners housing scheme for providing housing facility to the staff to the extent there was no reimbursement by the government. the ito disallowed this claim but the commissioner (appeals) following the order of the tribunal in it appeal no. 378 (pune) of 1978-79, dated 20-9-1979 allowed the same. the matter being covered by the above decision of the tribunal in the assessee's own case, no interference with the commissioner's order is called for.out of the sum of rs. 2,57,636 claimed by the assessee on account of travelling.....
Judgment:
1. The assessee, a limited company, exports iron ore, manganese ore, etc., and also is connected with manufacture of yarn, topping up ships, etc. The several grounds of appeals raised are dealt with as under : The above expenditure was incurred by the assessee under the Miners Housing Scheme for providing housing facility to the staff to the extent there was no reimbursement by the Government. The ITO disallowed this claim but the Commissioner (Appeals) following the order of the Tribunal in IT Appeal No. 378 (Pune) of 1978-79, dated 20-9-1979 allowed the same. The matter being covered by the above decision of the Tribunal in the assessee's own case, no interference with the Commissioner's order is called for.

Out of the sum of Rs. 2,57,636 claimed by the assessee on account of travelling expenses of directors abroad, the ITO disallowed Rs. 1,93,698 for the reason that the visits of the directors were not supported by any evidence to show that they were related to the company's business affairs. The Commissioner (Appeals) held that having regard to the nature of the business carried on by the assessee, such visits of the directors have been regular and had been allowed for the preceding years. The directors on a blanket permission has recognised the export house to visit abroad as per the reports submitted to the RBI. The department has challenged this allowance.

2. According to the learned Counsel for the department, the assessee had a wide range of activities from exporting iron and manganese ore, manufacturing of yarn and topping up of ships. In order to claim an expenditure on travel as relevant to the business of the assessee, the assessee has to point the particular purposes for which the expenditure was incurred in the present case, this has not been shown. The assessee, according to the learned Counsel, has not proved that all the expenditure was for the purpose of his business and in particular as to what particular part of his business and allowance of this type cannot be granted on the basis of presumption. The purpose of the travel must be indicated and proved with evidence. It is even possible that the assessee has incurred the expenditure for some personal reasons or even for new items of manufacture or new lines of business. Reference is made in this connection to the decisions in the cases of Hindustan Gas & Industries Ltd. v. CIT [1979] 117 ITR 549 (Cal.), CIT v. Ballarpur Industries Ltd. [1979] 119 ITR 817 (Bom.), CIT v. McGaw Ravindra Laboratories (India) Ltd. [1981] 132 ITR 401 (Guj.) and Cooper Engg.

Ltd. v. 672" [1982] 135 ITR 597 (Bom.).

3. For the assessee it is pointed out that the entire foreign travelling expenses have relevance only to his business out of the overall turnover of Rs. 12.82 crores, Rs. 12.73 crores are on account of export only. It is on account of this that the directors have an open permission from the RBI to incur expenditure on the export activities of the assessee. When the RBI, as custodian of the foreign exchange reserves, had accepted the assessee's application, according to the learned Counsel for the assessee, it was unfair to disallow the expenditure which the assessee has been incurring regularly from year to year in connection with his existing business.

4. On a consideration of the facts, we see no reason to allow the claim on the basis of a presumption. To be entitled to an allowance, the assessee must furnish the full facts. Even though the assessee has a blanket permission for availing of foreign exchange in connection with his business from the RBI, the Bank does not make any difference between the nature of the expenditure, as bifurcated by the ITO between capital and revenue necessary for the business and not necessary, etc.

The allowance cannot be automatic and must be based only on furnishing the full facts leading to the expenditure. The assessee is a company with all administrative facilities and having a full system of auditing, etc. We do not see why the complete details as to the expenditure incurred should not be available. Since we are told that the assessee would try to furnish these details as far as possible in the interest of justice, we remit the matter back to the Commissioner for going into the details and deciding the admissibility of the claim.

The Commissioner should give an opportunity to the assessee as well as the ITO to present their cases.

(iii) Claim under Section 35B in respect of the foreign travel expenses of the directors The assessee claimed relief under Section 35B of the Income-tax Act, 1961 ('the Act') in respect of the foreign travel expenses of directors amounting to Rs. 1,93,698 which have also been disallowed by the ITO in working out the total income. The claim under Section 35B in respect of this amount was also denied. On appeal, the Commissioner held the assessee eligible for the relief under Section 35B following his decision that the travelling expenses of Rs. 1,93,698 were for the purpose of the business.

5. The challenge to this allowance will depend on the primary decision of the ITO as to whether the travelling expenses of the directors were for the business of the assessee at all. On the above point, we have already remitted the matter to the Commissioner (Appeals) for fresh consideration. He should also consider the assessee's claim for Section 35B relief on this amount having regard to the nature of the expenditure especially against the export activities of the assessee which is stated to cover the turnover of Rs. 12.73 crores out of the overall turnover of Rs. 12.82 crores.

The assessee claimed a sum of Rs. 47,042 as the scrap value of barges scrapped. The claim made under Section 32(1)(iii) of the Act was disallowed by the ITO on the ground that the asset was not sold and there was no proof to show that it was condemned and its value written off. It would appear that in the objection to the draft assessment order sent to him the assessee stated that he was not asked about the type of evidence necessary for the allowance of this claim. He had, however, furnished a certificate from the Captain of the ports. The Commissioner allowed the claim being satisfied on the basis of the certificate issued by the Captain that the vessel whose registration had been surrendered has not been used by the assessee and he was, therefore, justified in claiming the scrap value as a loss. According to the Commissioner, when the assessee owned a large number of vessels and barges, it was unnecessary to give a written statement about one vessel ; at any rate the certificate of the Captain was sufficient evidence of having discarded the vessel.

6. Objecting to the above, the learned Counsel for the department has pointed out that there was no evidence to show in the first place that there was scrapping of barges and secondly, that such scrapping at any rate took place during the relevant previous year. A letter dated 9-7-1974 from the office of the Captain of ports indicated that the registration of the vessel had been cancelled. This letter, however, did not indicate the date on which the registration was cancelled or the nature of the scrapping.

7. The learned Counsel for the assessee has relied on the certificate as above and also the order of the Commissioner to support his claim.

8. Even though the certificate from the Captain mentions that the registration has been cancelled, further details as to the cancellation are not available. It is not in every case where an asset of this type is incapable of functioning that its registration is cancelled. There may be many reasons other than reduction to the stage of scrap that could justify cancellation of registration. The certificate does not even mention the actual date on which the registration was cancelled.

Both the factum of the vessel being reduced to scrap and the actual value of the scrap or its realisable sale price are relevant for grant of obsolescence allowance. These details being not available, the Commissioner was not justified in the first place in allowing the entire outstanding value of the barge and secondly, allowing it during the year of account since there was no information to support this. The certificate of the Captain, however, indicates that the barge is not in use. A businessman continuing his business is unlikely to keep a barge if serviceable out of the business. In the interest of justice, therefore, we remit this matter to the Commissioner (Appeals) for proper verification as to the date, if any, on which the barge was condemned and made into scrap and also for fixing the value of the scrap. In our view, to say that the entire value of the scrap of a barge which was in a running condition during the preceding year would be worth nil--not even that of scrap metal--is something which cannot be prima facie accepted.

The assessee's previous year ended on 31-3-1974. On 29-3-1974, i.e., 3 days prior to the end of the accounting year, the assessee gifted 17 barges under a revocable gift deed--2 barges to Gomantak (P.) Ltd. and 15 barges to Chowgule Education Society. Gift-tax was paid on the gifts. The assessee claimed depreciation amounting to Rs. 1,09,114 in respect of these barges. Even though the ITO has not discussed this question in his assessment order, a discussion on the same obtains in the IAC's direction under Section 144B of the Act. Holding that one of the conditions for allowance of depreciation is that the assessee should be owner of the asset and since on 31-3-1974, the last day of the year, the assessee was not the owner of these barges, the IAC directed that depreciation on this should not be granted. The Commissioner (Appeals) accepted the assessee's claim for depreciation.

According to him, while the two conditions to be fulfilled for the grant of depreciation are ownership of the assets by the assessee and its user for the purpose of the business, there is no condition that the asset should be owned by the assessee on the last day of the accounting year. It was undisputed that during the period the barges were used by the assessee, they were also owned by him. The assessee never sold, discarded, demolished or destroyed the barges. According to the Commissioner, therefore, the assessee was entitled to depreciation under Section 32(1)(ii) read with Rule 5 of the Income-tax Rules, 1962 ('the rules'). This is challenged in the departmental appeal.

9. The learned Counsel for the department has pointed out that Section 32 interpreted in the light of Section 34 of the Act has reference to the ownership of the asset throughout the year. Reference was also made to Rule 5 and Appendix I of the rules relating to rates of depreciation allowance. Section 34(2) prohibits grant of depreciation for a previous year in respect of the assets sold, discarded, demolished or destroyed in that year. In this sub-section no provision is made for gifts.

'Sold' does not include 'gifted'. According to the learned Counsel the assessee-owner to be eligible for depreciation in respect of an asset, the asset should be owned by the assessee throughout the previous year and not necessarily even to the end of the year. This is clear from the scheme of the Act appearing in sections like Section 34. The learned Counsel has referred to the decision in Century Enka Ltd. v. ITO [1977] 107 ITR 123 (Cal.) where the expression "capital employed' was interpreted giving a concept of holding an asset throughout the year.

Since the assessee did not own the assets throughout the year, he is not entitled to any depreciation at all.

10. For the assessee the learned Counsel has pointed out that even if the asset is owned by the assessee for any time during the year, he should be entitled to the deduction. Reference is made in this connection to the provisions of Section 28 of the Act and the concept of assessment of business income where a business carried on 'at any time during the year' is considered to be relevant. The contention of the department according to the learned Counsel, is not only against the actual practice followed but is also against the basic scheme of the Act. In fact wherever the Act wanted to refer to a period throughout the year, care has been taken to indicate that in the section itself; for instance, Section 2(18)(b)(-8) where the expression 'throughout the relevant previous year' is used. Similar expression occurs in Section 79 of the Act. Whenever a condition is imposed, if it is substantially complied with, according to the learned Counsel, the condition should be regarded as satisfied. This is especially so in the case of a benefit conferred on the assessee. In the present case the asset having been owned by the assessee for the major part of the year, in fact except for the last 3 days of the year, the assessee is entitled to depreciation on the asset for the entire year.

11. There is no dispute about the facts. The assessee owned these assets consisting of 17 barges up to 28-3-1974. The previous year of the assessee being the year ended 31-3-1974, the asset, as claimed by the learned Counsel for the assessee, was owned by the assessee for the year except for the last 3 days. The asset was gifted to two parties. A gift would not come under the scope 'sold, discarded, demolished, or destroyed in that year'. The provisions of Section 34(2)(ii), to which reference was sought to be made during the course of the argument, do not apply to the facts of the case. The question is whether the fact of the gifting or the asset being not in the ownership of the assessee throughout the year would be fatal to the claim. The relevant portions of Section 32 are : (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 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 purposes of his business or profession : The two main conditions to be satisfied for the grant of depreciation are : 1. 'the machinery, plant, etc., must be owned by the assessee' ; and The section does not specify whether these two conditions, viz., ownership of the assessee and the user for the purpose of business should be satisfied throughout the year or at the beginning of the year or the end of the year or at any particular part of the year.

The section also does not provide whether the periods for the two conditions could be different or whether for the same period both the conditions should be satisfied. The provisions of Section 32(1) are to be given effect to by resort to the provisions of Rule 5(1) and Part I of Appendix I. Subject to the provisions of Sub-rules (2) and (3), the allowance under Clause (i) or Clause (ii) of Sub-section (1) of Section 32 in respect of depreciation of buildings, machinery, plant or furniture or the allowance under Clause (i) of Sub-section (1A) of Section 32 in respect of depreciation of any structure or work referred to in that sub-section shall be calculated at the percentages, specified in the second column of the Table in Part I of Appendix I to these rules on the actual cost or, as the case may be, the written down value of such of the assets aforesaid as are used for the purposes of the business or profession of the assessee at any time during the previous year : The rule provides that depreciation is to be calculated on the actual cost or written down value of the assets used for the purposes of the business or profession of the assessee 'at any time during the previous year' at the rates at which depreciation is allowable. This is allowed as a percentage of the actual cost or written down value, as the case may be. The italicized words in' Rule 5(1) indicates that even though Section 32(1) does not refer to any particular portion of the previous year in which the asset should be used for the business or profession of the assessee, depreciation at the prescribed rate would be allowable if the asset is used at any time during the previous year. If, therefore, an asset is used even for one day in the year by the assessee, depreciation would be allowed. While the section, therefore, prescribes that the asset should be used for the purposes of the business of the assessee without mentioning any time limit, the rules made under the Act specifically broadens or liberalises the scope of the deduction by prescribing that depreciation would be allowable if the asset is used at any time during the year, i.e., even for a day or a few hours. The ambiguity, if at all, on 'the period of user' for the purpose of claiming reduction for depreciation is, thus, clearly removed by the rule made under the Act.

12. With regard to the ownership of the asset, however, the section provides that the asset should be 'owned by the assessee'. There is no rule nor any other subordinate legislation which clarifies this particular condition laid down by the section. Where the Legislature wanted to give the assessee the benefit of depreciation even if the asset is used for a day in the year, the rules clearly provided for it.

This indicates a clear awareness on the part of the Legislature of the controversy that could arise about the period for which the asset could be used. We cannot assume that this awareness as to the period would be absent when it concerns the ownership of the asset. When, therefore, the Legislature has not taken the trouble either to specify in the section or in the rules made under the Act, that depreciation would be allowable even if the asset is owned by the assessee for a 'part of the year'--whatever be the particular part of the year--it means that no concession or liberalisation with regard to this condition is intended.

The stand of the learned Counsel for the department, therefore, that the assets should be owned by the assessee throughout the previous year seems to be correct. It is true that an assessee may acquire the asset, as claimed by the learned Counsel for the assessee, sometime after the beginning of the previous year. It may even be that in such a case the asset being used even for a day during the year some ITOs have been granting depreciation as a matter of practice. But this would not set the law if the section or the rules made thereunder do not authorise it. It is true that in other sections provisions with regard to the period of the previous year have been sometimes made but the mere fact that some clauses contain such a provision would not create an ambiguity in other clauses when the wordings are clear and no such reasons are made. The tax is levied on the income of a previous year.

It covers the entire previous year. The income is computed also for the entire previous year. Against this background when it is provided that an asset should be owned by the assessee without any concession as to the length of the period for which the asset is owned, it clearly means that the asset should be owned by the assessee throughout the period of the previous year. There is no inequity if depreciation is not granted in a case where an asset is purchased by a running business during the course of the year. The assessee would be entitled to depreciation in the succeeding year and the written down value in that succeeding year would be the cost of the asset, thus, not putting the assessee at any disadvantage for his not getting any depreciation for the earlier year.

Likewise, where an asset is sold, discarded, etc., during the year of sale the assessee gets an adjustment for any loss of value on account of such sale, etc. In our view, therefore, if the specific condition is that the asset should be owned by the assessee throughout the previous year in order to be entitled to depreciation, there is neither any inequity nor any harshness about it.

13. The decision of the Calcutta High Court in Century Enka Ltd.'s case (supra) dealing with the concept of capital on a particular day of the year for the purposes of Section 80J of the Act supports our view. In Section 15(c) of the Act exemption was provided at a specific percentage per annum 'on the capita] employed in the undertaking'. Rule 19A of the rules prescribing the manner of computation of capital, referred to the value of the asset on the 'first day' of the computation period. The Calcutta High Court held that to the extent the rule directed that the value on the first day of the computation period should be adopted as the basis, the rule was ultra vires. The prescription of the period in that case was against the interest of the assessee. The prescription of a period for the user in business in Rule 5(1) is in the interest of the assessee. This latter prescription, therefore, being a concession offered to the assessee would be regarded as binding on the department even if the rules are legally ultra vires of the Act. Where no such concession is granted enacting of a rule prescribing a time limit against the assessee would certainly, on the ratio of the Calcutta High Court decision, be held improper. Where the rules do not, therefore, prescribe a time limit, there is no reason for whittling down the period for which the asset is owned by the assessee from the 'full previous year' for which the income of the asset is computed and tax is levied for a portion thereof. In this view of the matter, the assessee would not be entitled to depreciation if he owns the asset at the beginning of the year or at the end of the year or at any time in between but not for the full year. In the present case, the ITO had disallowed the claim on the ground that the asset is not owned on the last day of the year. In our view, even if the assessee has owned the asset for 364 days out of 365 days but not for the full year, he would not be entitled to depreciation on this asset.

(i) the section requires that the asset should be owned by the assessee and used by him for his business, (ii) while in respect of the user, a concession is granted by the rules that the user could be for any time in the year, such a concession is not granted in respect of the ownership of the asset, (iii) neither the analogous provisions in other sections of the Act nor any other judicial decisions support curtailing the period of ownership, (iv) the analogous decisions like those for Section 80J clearly support the ownership for the whole year when no particular period is provided, 15. We uphold the ITO's order on this point and reverse the Commissioner's decision.

1. I have had the pleasure of going through the order written by the learned Vice President and I agree with him on other issues, except on the point of depreciation, in that the Vice President has held that the assessee is not entitled to depreciation on the barges that were gifted by the assessee by a gift deed dated 29-3-1974.

The assessee's previous year ended on 31-3-1.974 and on 29-3-1974, that is, three days prior to the end of the accounting year, the assessee gifted 17 barges under a revocable gift deed and gift-tax was paid by the assessee. The valuation adopted of the barges has not been challenged by the department. Therefore, it can be held that the assessee showed the current market value of the 17 barges.

2. The assessee claimed depreciation amounting to Rs. 1,09,114 in respect of these barges. It is pertinent to note that the ITO did not elaborate the point as to why he rejected the claim of the assessee, but he relied evidently on the directions given by the IAC under Section 144B. However, the claim of the assessee was accepted by the Commissioner (Appeals) and the department came in appeal before the Tribunal, inter alia, on other grounds.

3. According to the learned departmental representative, the assessee was not the owner of the barges for the entire year. To be precise, the assessee was not the owner of the barges from the first day of the accounting year to the last day of the accounting year and, according to the learned departmental representative, the asset has to be owned 'throughout the year' so as to enable the assessee to claim depreciation under Section 32 read with Rule 5. The learned departmental representative had referred to the decision of the Calcutta High Court in Century Enka Ltd.'s case (supra) and, according to him, we can take guidance from the said judgment, though it was a claim under Section 80J and the issue was regarding the capital employed. The departmental representative insisted that in order to get the benefit of depreciation, the assessee must be the owner of the asset for the entire year and that the asset should be used by him for the purpose of his business.

4. The version of the learned representative of the assessee was that Section 32 read with Rule 5 definitely helps the case of the assessee as the words in Rule 5 are 'at any time during the previous year'.

According to Shri Inamdar, Section 34 has no application in the present case. He also mentioned the fact that the department is accepting the claim of the assessee where the assessee is owner of the asset for a part of the year and the asset is used for business of the assessee.

According to him, there is no justification not to follow the same.

5. Two things are undisputed, one that the barges were owned by the assessee for the whole year except three days when the gift was made by the assessee and two, that the assets, namely, barges, were used by the assessee for its business. There is no controversy over these facts.

Since Section 32 is already reproduced in the earlier part of the order, it is not reproduced here. Now, whether the interpretation given by the learned departmental representative is acceptable and to my mind, it is not because Section 32 does not specifically say that the buildings or machinery or plant or furniture should be owned by the assessee 'throughout the year', i.e., from the first day to the last day of the previous year. When the section itself does not speak of such words, it is not advisable to substitute some words of our own so as to limit the benefit to be given to the assessee.

It is pertinent to note that Rule 5, which has been reproduced by the learned Vice President in his order, specifically says '...at any time during the previous year'. If the intention of the Legislature was to hold that the asset should be owned by the assessee from the first day to the last day of the previous year, then there was no necessity or justification to use these words 'at any time' in the rule and, therefore, I am of the view that the interpretation suggested by the learned departmental representative that the asset should be owned 'throughout the year' does not appeal to me. Therefore, I uphold the order of the Commissioner (Appeals) who has allowed depreciation on the barges.

6. The case of the assessee is not covered under Section 34, as it was a gift and not a sale. Section 34(2)(ii) speaks of building, machinery, plant or furniture sold, discarded, demolished or destroyed in that year. None of these is applicable to the present case, as the assessee had gifted the barges to the donee.

7. It was pointed out by Shri Inamdar that the department is adopting a practice that if the assessee has owned the asset for a part of the previous year and the asset is used for the business, then the assessee is entitled to depreciation. In this regard, I would like to rely on the judgment of the Supreme Court in CIT v. Balkrishna Malhotra [1971] 81 ITR 759. The Supreme Court has held : ...Interpretation of a provision in a taxing statute rendered years back and accepted and acted upon by the department should not be easily departed from. It may be that another view of the law is possible but law is not a mere mental exercise. The Courts while reconsidering decisions rendered a long time back particularly under taxing statutes cannot ignore the harm that is likely to happen by unsettling law that had been once settled____ To my mind, the observations of the Supreme Court are aptly applicable to the present case.

8. The departmental appeal on this point will have to be dismissed.

THIRD MEMBER ORDER 1. There was a difference of opinion between the learned Members who heard the appeal originally. The point of difference has been stated as under : Whether, on the facts and in the circumstances of the case, the assessee would be entitled to depreciation on an asset even though it owned it only for a part of and not the full previous year 2. Briefly stated, the relevant facts are that the assessee is a company and the proceedings relate to its assessment for the assessment year 1974-75 for which the previous year is the financial year, i.e., from 1-4-1973 to 31-3-1974. During the previous year, the assessee gifted 17 barges which it owned on 28-3-1974, to two institutions.

Thus, the assessee owned the barges for 362 days of the previous year as the barges were gifted three days before the end of the previous year. Though not very material for the purpose of this appeal, it may be stated for the sake of completeness, that the gifts made were revocable gifts.

3. The ITO completed the assessment under Section 143(3) read with Section 144B of the Act. He has disallowed the depreciation on the written down value of the abovesaid 17 barges on the ground that the assessee did not own these barges on the last date of the previous year. The Commissioner (Appeals) has considered this issue in paragraphs 11 and 12 of his order. Observing that it is not said any where in Section 32(1) that the asset should be owned by the assessee on the last date of the accounting year, he held that the assessee was entitled to depreciation on the barges even though the same were gifted away on 28-3-1974. He also held that Section 34(2)(ii) did not cover the assessee's case and depreciation cannot also be disallowed on that ground. Accordingly, he has held that the assessee is entitled to depreciation in respect of the barges as claimed.

4. The learned members who have heard the appeal originally, have differed on the issue as stated earlier. The learned Vice President has considered this issue in paragraphs 9 to 14 of his order. The learned Judicial Member's order which runs into eight paragraphs in entirety deals with this issue. Shri K.A. Sathe, the departmental representative, has strongly relied on the order of the learned Vice President in support of his contention that the assessee is not entitled to the depreciation on the abovesaid 17 barges. Fairly admitting that the provisions of Section 34(2)(ii) are not applicable in this case, Shri Sathe submitted that there are three conditions laid down for the allowance of depreciation, namely, (i) the prescribed particulars should be filled, (ii) the assessee must own the asset, and (iii) the assessee must use it for the purpose of its business or profession. It is submitted that though Section 32(1) is silent as to when and for how long the asset should be owned by the assessee and used for the purpose of the business or profession as such, it is evident from the scheme of the Act that the asset on which depreciation has to be allowed should be owned by the assessee and used in the business or profession throughout the previous year, i.e., on each day of the previous year. In this context, Shri Sathe has invited our attention to Rule 5 to show that as regards the use of such asset for the purpose of the business or profession throughout the previous year, the Legislature has given a concession as a result of which, depreciation will be allowed to an assessee even though the particular asset was not used for the purpose of the business or profession throughout the previous year. Absence of a similar rule as regards the ownership, he contended, means that the condition that the asset must be owned by the assessee throughout the previous year remains as such and must be fulfilled by an assessee before he qualifies for depreciation. According to the departmental representative, indirect support for the view he was propounding can be derived from the decision of the Calcutta High Court in the case of Century Enka Ltd. (supra) where their Lordships have declared Rule 19A ultra vires to the extent they provided for computation of capital as on the first date of the previous year without taking into account the average amount of increase or decrease in the assets and liabilities during the previous year. The ratio of the decision is that the use of the capital throughout the previous year is an important factor. Though Section 34(2)(ii) is not applicable as such, Shri Sathe submitted that the fact that depreciation is not allowable in the year in which the assets are discarded, demolished, sold, etc., is indicative of the Legislature's intention that the assessee must own the asset throughout the previous year for its qualifying for allowance of depreciation. Lastly, my attention is invited to a. decision of the Supreme Court in the case of Sri Ramamohan Motor Service v. CIT [1973] 89 ITR 274 for the proposition that a person who claims the benefit under the section must strictly comply with the requirements of that section. Substantial compliance will not be enough.

5. Shri S.N. Inamdar, the learned Counsel for the assessee, on the other hand, strongly relied on the order of the learned Judicial Member. He contended that it was not quite correct to say that the opening part of Section 32 indicated that the asset on which depreciation is to be allowed must be owned by the assessee and used for the purpose of the business or profession throughout the previous year. According to him, the section is silent on the face of it but the other clauses under the said sub-section and the definition of the expression 'written down value' in Section 43(6) of the Act clearly indicate that the assessee would be entitled to depreciation even if it owned the asset for a part of the previous year. In this connection, Shri Inamdar took me through the provisions of Section 32(1)(iia) (iii) to show that there was intrinsic evidence indicating the Legislature's intention to the contrary. Section 43(6), according to the counsel, provides that 'written down value' means in the case of assets acquired in the previous year, the actual cost to the assessee. It is stated that wherever the Legislature intended that the situation should prevail throughout the previous year or at any time during the previous year or on any particular date, it has said so specifically and not left it to speculation. In this context, the counsel invited my attention to the provisions of Sections 2(18)(b)(A), 2(18)(b)(B)(i), Explanation 2 to Section 64, Section 79(a), Section 104(2)(iii), Explanation to Section 40A(2) and Section 28 of the Act itself.

According to the learned Counsel, the absence of any such specific expression in Section 32(1) means and can only mean that the assessee will be entitled to the depreciation even if it owns the asset at any time during the previous year subject, of course, to other conditions.

The decision of the Calcutta High Court in the case of Century Enka Ltd. (supra), it was pointed out, supported the claim of the assessee rather than that of the department. For this purpose, the counsel relied upon the observations of the Calcutta High Court at pages 131-132 in that case where it has been observed that when a particular legislative enactment has received authoritative interpretation whether by judicial decision or by long course of practice, it is reasonable to hold that that interpretation or that practice is correct interpretation of the provision. It cannot, perhaps, be disputed that the department has been allowing depreciation right from 1922 or even earlier on assets which were owned and/or used by the assessee for a part of the year. Lastly, the counsel has invited my attention to a decision of the Patna High Court in the case of CIT v. S.K. Sahana & Sons [1946] 14 ITR 106 where this question, it is stated, has been directly considered in favour of the assessee.

6. In reply, Shri Sathe submits that he is not asking for addition of some words in Section 32(1) and the department's case is based on a pure and simple interpretation of the provisions of Section 32(1).

Specific mention of such expressions as 'throughout the previous year', 'at any time during the previous year', 'on any particular date or any part of the previous year' in the various sections referred to by the counsel, according to Shri Sathe, does not improve the assessee's case inasmuch as that has been done by way of abundant precaution and/or to ensure that the taxpayer does not escape. The decision of the Patna High Court in the case of S.K. Sahana & Sons (supra) is stated to be distinguishable inasmuch as the decision in that case has been that there is no scope for apportionment of depreciation proportionately with reference to the period of ownership in the previous year. That is why the department has denied the assessee's claim for depreciation altogether in this case and has not allowed it proportionately.

7. Having heard the parties and after going through the decisions relied upon and the relevant provisions of the Act, I am of the view that the assessee is entitled to succeed in its claim for depreciation.

Section 32(1), which provides for depreciation on various assets, does not certainly lay down that the asset should be owned by the assessee throughout the previous year. On the contrary, the provisions like Sections 32(1)(iia), 32(1)(iii) and 43(6) contemplate the allowance of depreciation in the cases of assets acquired during the previous year which would mean that the assessee owned the assets not throughout the previous year, but only for a part of the previous year. That apart, Rule 5, which provides for allowance of depreciation in the event of the assessee using the asset for some time in the previous year only, to my mind, is indicative of the Legislature's intention. Except in a few exceptional cases, generally, the period of ownership of an asset and the period of its use in the business or profession will coincide.

Rule 5, admittedly, provides for allowance of depreciation even when the asset is used for the purpose of the business or profession for a part of the previous year. To say that in spite of this rule the depreciation will not be allowed to an assessee because it was not the owner of the asset throughout the previous year is, to ray mind, too technical a view which is not justified. That apart, the use of the expressions, such as, 'throughout the previous year', 'at any time during the previous year', 'on a particular date', etc., in the different sections referred to by the assessee's counsel indicates that the Legislature, whenever it wanted to be particular about a particular situation, it has taken care to introduce that expression in the section. Again, the decision of the Patna High Court in S.K. Sahana & Sons' case (supra), though old, according to my understanding, supports the assessee's contention. It is true that it has been held in the Patna High. Court's decision that there is no scope for apportionment of the depreciation pro rata when the period of ownership of the assessee over the assets continues--a decision which fully supports the assessee's proposition. For this and other reasons given by the learned Judicial Member, with which 1 agree, I hold that the assessee is entitled to the depreciation under Section 32(1) on the aforesaid 17 barges which were gifted by the assessee on 28-3-1974 to the two institutions.

8. Before concluding, it may be desirable to make clear that the provisions of Section 34(2)(ii) are, admittedly, not applicable in this case and the provisions of Section 32(2)(iii), on the other hand, indirectly support the assessee's claim. The question that one should ask himself before deciding the issue is whether the assessee owned the particular asset in the previous year. The answer to this question cannot, certainly, be in the negative. This has to be seen particularly with reference to Section 28(0 which provides for computation of income under the head 'profits and gains of business or profession', if the business or profession was carried on by the assessee at any time during the previous year. The expression 'at any time during the previous year' which is used in Section 28, under the scheme of the Act as I understand, would govern all the sections which provide for computation of income under Section 28 after giving various allowances and/or deductions.

9. My order will now go to the Bench for deciding the appeal according to the majority view.


Save Judgments// Add Notes // Store Search Result sets // Organizer Client Files //