1. On account of difference between the learned Members of Pune Bench, the following question has been referred to me Under Section 255(4) of the Income Tax Act: Whether on the facts and in the circumstances of the case, the assessee is entitled to depreciation on plant and machinery and furniture and fixtures.
2. The facts of the case briefly stated are that the assessee company is engaged in the business of laying pipe lines. A search was carried on the premises of the assessee Under Section 132 on 18.12.92. During the course of search, the assessee agreed to surrender Rs. 30 lakh for the period relevant to the AY 1993-94 as under: 3. The assessee, in the return for AY 1993-94, disclosed the above amount as income and also claimed depreciation on the value of plant, machinery, furniture and fixture declared Under Section 132(4). In other words, he claimed depreciation on Rs. 7 lakh and Rs. 3 lakh respectively. The Assessing Officer, in the course of assessment proceedings, asked the assessee to furnish necessary details of assets on which depreciation was claimed. The assessee was not able to furnish the same and in its letter dated 27.12.95 wrote as under: We are unable to furnish inventory in respect of WW, plant and machinery and Furniture and Fixtures declared at the time of search action Under Section 132.
4. The Assessing Officer disallowed the claim for depreciation as the assessee had failed to furnish necessary details. He held that assets on which depreciation was claimed were not in existence.
5. The disallowance of claim was challenged in appeal before the Commissioner of Income-tax (Appeals) who, after considering the facts and circumstances of the case, allowed the claim of the assessee. The revenue, being aggrieved, carried the matter in further appeal to the Income Tax Appellate Tribunal.
6. After hearing both the parties, a difference arose between learned Members of the Bench who heard the appeal. The ld. A.M., in his short and brief order, observed that two requisite conditions for allowing depreciation allowance Under Section 32(1) of the Income Tax Act were as under: i) That the depreciable asset is owned wholly or partially by the assessee; ii) That it is used for purposes of assessee's business or profession.
The ld. AM also noted reply of the assessee vide letter dated 27.12.95.
He also noted that assessee was required to furnish details with evidence regarding particulars of assets, its date of acquisition and its actual cost. In this case, the assessee failed to furnish these details. He further observed that amount of Rs. 7 lakh and Rs. 3 lakh represented "undisclosed income" and assessee did not produce any evidence to show that these amounts represented cost of plant and machinery and furniture and fixture to qualify for depreciation. He further observed that merely on account of disclosure of undisclosed income, assessee's claim for depreciation could not be allowed in the absence of evidence to show that requisite conditions of Section 32 of the Act were fulfilled. He, therefore, held that the order of Commissioner of Income Tax (Appeals) could not be sustained. He allowed the appeal of the revenue on this ground in his proposed order.
7. Ld. J.M., in his separate proposed order, also noted facts relating to disclosure made by the assessee Under Section 132(4) and his statement in letter dated 27.12.95 filed before the Assessing Officer.
The ld. J.M. further extracted relevant portion of Commissioner of Income Tax (Appeals)'s order allowing claim of the assessee. He also noted submissions of both the parties. He observed that from facts in the case, it was clear that amount of Rs. 7 lakh and Rs. 3 lakh was offered for taxation and department has accepted the offer. It was further true that above amount represented part value of existing plant and machinery and furniture and fixture. Thus, plant and machinery and furniture and fixture were owned by the assessee. Immediately after search, the assessee increased value of existing plant and machinery in books of account by Rs. 7 lakh. Similarly, value of existing furniture and fixture was increased by Rs. 3 lakh in books of account. The ld.J.M. in his proposed order has further observed: In my opinion, once the department has accepted undisclosed investment in plant and machinery and furniture and fixtures and taxed the same, therefore, there was no justification m rejecting the rightful claim of the assessee. In my view, as regards depreciation on plant and machinery and furniture and fixture, the department cannot take an altogether different view stating that the assessee is neither owner of the assets nor it had used the same for the purpose of business. In other words, the department had accepted the investment made by the assessee in plant and machinery and furniture and fixtures, therefore, there was no justification in disallowing depreciation on the same having declared the investment in plant and machinery and furniture and fixture, the assessee could not be asked to prove the ownership of the assets.
8. In support of the above view, the ld. J.M. placed reliance on the decision of Kerala High Court in the case of CIT v. Geo Construction Corporation (supra). Relevant extracts from the decision are quoted by him. In the light of observations of Hon'ble Kerala High Court, the ld.J.M. held that assessee was entitled to claim of depreciation in question. He ordered accordingly.
9. The Third Member case was fixed for hearing and both the parties have been heard. The ld. Representatives reiterated the respective submissions accepted by the ld. Members in their dissenting proposed orders. The ld. Counsel drew my attention to the order of the revenue authorities Under Section 132(5) restraining the assessee from using assets found during the course of search. He, therefore, argued that existence of assets could not be in doubt. He also drew my attention to statement of chart wherein the value of machinery and plant was enhanced by Rs. 7 lakh and that of furniture and fixture by Rs. 3 lakh.
It was claimed that all the conditions of Section 32 were satisfied.
Ld. Counsel accordingly supported the order of the Judicial Member. The ld. CIT, D.R. opposed the above submissions and reiterated that conditions of Section 32 were not satisfied and the assessee was not entitled to the claim of depreciation.
10. There is no dispute that assessee made disclosure of Rs. 7 lakh and Rs. 3 lakh under the head plant and machinery, furniture and fixture respectively. The disclosed amount has been accepted. On equitable principle, the assessee is entitled to relief. However, depreciation cannot be allowed merely based on equity or on commercial principle. It has to be allowed as per statutory provision. Mere disclosure of amount and investment in some assets whose description is withheld is not sufficient to claim deduction of depreciation. The assessee has to satisfy the conditions laid in Section 32 of the Income Tax Act.
Further reference to Rule 5 of I.T. Rules read with appendix to rules would show that depreciation at different rates is allowed on different items of plants and machinery. The twin conditions are required to be satisfied: 1. Ownership of asset and; 2. user of the asset for the purposes of business. In this connection, the query raised by the Assessing Officer and asessee's reply dated 27.12.95 are relevant. The assessee had specifically stated that he is unable to furnish inventories in respect of plant and machinery and furniture and fixture declared at the time of search action Under Section 132 of the Income Tax Act. That being the position, I am a little surprised at the finding recorded by the ld. J.M. in the proposed order that amount disclosed represented enhanced value of existing plant and machinery, furniture and fixtures and that after the search, the value was modified and changed in the books of account as per declaration Under Section 132(4) of the Income Tax Act. The above finding, based on changed stand, in my view, does not reconcile with the admission made in letter dated 27.12.95. The assessee could have very well explained what was disclosed by the assessee and whether whole or part of it represented machinery, furniture and fixture available with it, whether it represented the difference in the value of machinery/fixture already disclosed by the assessee. No clear stand was taken. It could have given inventory or detail of above assets sought to be disclosed. Why that afterthought plea was permitted to be raised is not at all clear from record. In the depreciation chart only amounts disclosed has been added without further claim. Be that as it may, the assessee, in my view, is not entitled to claim depreciation even if the finding of ld.J.M. in the proposed order is accepted without any objection to the changed and new claim made by the assessee. As admitted earlier, assessee is to prove ownership of assets and depreciation is to be allowed with reference to its cost or written down value, so the relevant question is: what and when assets were acquired and at what cost? No such particulars are available on record nor any furnished by the assessee as noted in detail and admitted by both the Members. Did the disclosed income represent total value of assets or merely the difference in the actual cost and the cost disclosed? The claim could not have been allowed without answering above questions. None of the questions could be answered as the assessee was unable to furnish any relevant particulars. Without details of assets neither depreciation could be worked out nor allowed. Therefore, merely saying that assessee is entitled to depreciation as disclosure of Rs. 7 lakh and Rs. 3 lakh has been accepted in the sense that above amount has been charged to tax, in my opinion, is not correct. Even if this ground is accepted by stretching and by imagining all facts in favour of the assessee, the assessee must prove that second condition relating to user of asset for the purposes of business is also satisfied. The assessee failed to furnish detail of the assets. Now, without details, how and on what basis, the Assessing Officer could examine that so-called assets were used for the purposes of the business. No enquiry into the claim is possible. Therefore the assessee can not be said to have established second consideration. The assessee refused to give any detail as to what was plant and machinery and fixture and how these items were used for the purposes of business. Without detail, how question could be examined and proper finding recorded therein. Therefore, to enable the Assessing Officer to examine the question of ownership and user of asset, the statutory provisions and rules insist that assessee should furnish prescribed particulars of assets. Without detail of particulars, the question as discussed above cannot be examined.
Therefore, in my view, it is difficult to hold that assessee satisfied conditions of Section 32 and was eligible for claim of depreciation.
11. Ld. J.M., while deciding in favour of the assessee, has relied upon the decision of Hon'ble Kerala High Court in the case of CIT v. Geo Tech Construction Corporation reported in 244 ITR 452. In the said case, the court observed that the Tribunal had recorded the finding that there was positive material to show the existence of the asset at the work site and about its positive user, it could not be termed to be one without any basis or illegal. Accordingly, claim for depreciation was allowable. In the present case, without particulars of assets, the existence of the asset is very much in doubt. Besides, the assessee must fail, as second condition relating to user of asset has not been established as discussed in detail. In the case in hand, controversy whether it was passive or actual use of asset is not relevant at all.
Further argument that beneficial provision of Section 32 of Income Tax Act is entitled to a liberal construction is also not in dispute.
However, liberal construction can not imply that conditions of Section 32 are to be given a go bye. Therefore, in my view, the decision in the case of CIT v. Geo Construction Corporation 12. For all the above reasons, I agree with the order proposed by the ld. AM.13. Matter may now be placed before the regular Bench for decision in accordance with law.
1. As there is a difference of opinion between the Judicial Member and the Accountant Member, the matter is being referred to the President of the income-tax Appellate Tribunal with a request that the following question may be referred to a Third Member or to pass such orders as the President may desire: Whether on the facts and in the circumstances of the case, the assesses is entitled to depreciation in respect of income disclosed Under Section 132(4) under the head 'plant and machinery' and 'furniture and fixture' without furnishing details thereof, though disclosure was accepted and taxed by the department?