ITR/39/1999 1/6 JUDGMENT IN THE HIGH COURT OF GUJARAT AT AHMEDABAD INCOME TAX REFERENCE No. 39 of 1999 For Approval and Signature: HONOURABLE MR.JUSTICE D.A.MEHTA HONOURABLE MR.JUSTICE Z.K.SAIYED ============================================================================ 1 Whether Reporters of Local Papers may be allowed to see the judgment ? 2 To be referred to the Reporter or not ? 3 Whether their Lordships wish to see the fair copy of the judgment ? 4 Whether this case involves a substantial question of law as to the interpretation of the constitution of India, 1950 or any order made thereunder ? 5 Whether it is to be circulated to the civil judge ? ===================================================== THE COMMISSIONER OF INCOME TAX - Applicant(s) Versus M/S.CROWN PRODUCTS - Respondent(s) ===================================================== Appearance : MR BB NAIK for Applicant(s) : 1, NOTICE SERVED BY DS for Respondent(s) : 1, ===================================================== CORAM : HONOURABLE MR.JUSTICE D.A.MEHTA and HONOURABLE MR.JUSTICE Z.K.SAIYED Date : 12/05/2008 ORAL JUDGMENT (Per : HONOURABLE MR.JUSTICE D.A.MEHTA) ITR/39/1999 2/6 JUDGMENT 1. The Income Tax Appellate Tribunal, Ahmedabad Bench-C has referred the following question for the opinion of this Court under sec. 256(2) of the Income Tax Act, 1961 (the Act), at the instance of the Revenue. “Whether, the Appellate Tribunal is right in law and on facts in confirming the order made by the CIT(A) allowing the assessee's claim for depreciation and investment allowance at the higher rate on proportionate basis when the provisions of Rule 5 had been deleted with effect from 2.4.1987 ?” 2. The assessee, a registered firm claimed depreciation for a period commencing from 3.11.1986 to 31.3.1988 in relation to Assessment Year 1988-89. On 26.3.1991, the Assessing Officer framed assessment and in relation to claim of depreciation stated; “during the year the assessee has claimed depreciation at a higher rate on proportionate basis. Proportionate deduction is allowable for A.Y. 1989=90 only. Therefore, assessee's depreciation claim will be allowed after revision.” 3. The assessee carried the matter in appeal before the Commissioner (Appeals). Vide order dated 21.5.1991 Commissioner (Appeals) allowed the claim of depreciation in the following terms: ITR/39/1999 3/6 JUDGMENT “Further in view of the provision of Rule 5 of Income-tax Rules, 1962 and as well as considering the judgment of Gujarat High Court in the case of VXI India Ltd. reported in 168 ITR 805, the appellant is entitled to depreciation for the full period of 17 months. The ACIT is directed to allow the appellant's claim.” 4. The assessee succeeded before the Tribunal in the Appeal filed by the Revenue. The Tribunal has concurred with the view expressed by the Commissioner (Appeals) without recording any independent opinion. 5. Mr B.B. Naik learned Standing Counsel appearing for the Revenue pointed out that the Proviso under Rule – 5(1) of Income Tax Rules, 1962 (the Rules) has been deleted with effect from 2.4.1987 and therefore, even if the claim made by the assessee is to be considered, the action of the Assessing Officer was correct. That the claim for depreciation for a period of more than 12 months is allowable only for Assessment Year 1989-90 considering the provisions applicable for transitional previous year. It was submitted that one Rule – 5 of the Rules was substituted with effect from 2.4.1987 both, Commissioner (Appeals) and Tribunal, were in error in allowing the claim for a period of 17 months. 6. Though served, there is no appearance on behalf of respondent – assessee. ITR/39/1999 4/6 JUDGMENT 7. At first blast, the submission made on behalf of the applicant – Revenue appears to be attractive. However, when considers the scheme of the Act, it becomes apparent that the issue requires a closer scrutiny and for the reasons stated hereinafter, the issue is required to be decided by the Tribunal afresh. 8. Section – 32 of the Act deals with depreciation in respect of the assets mentioned therein which are used by the assessee for the purposes of business or profession. By virtue of Taxation Laws (Amendment & Miscellaneous Provisions) Act, 1986 with effect from 1.4.1988 clause (ii) of sub-section(1) of Section 32 of the Act has been substituted and the concept of block of assets introduced. The position in law, therefore, is that for and from Assessment Year 1988- 89 instead of granting depreciation on each individual asset at the prescribed rate, depreciation is required to be granted on the block of assets at the prescribed rate. However, as noted hereinbefore, Rule-5 of the Rules has been substituted with effect from 2.4.1987 by the Income-Tax (Third Amendment) Rules, 1987, whereunder, the existing Proviso stands deleted. The deleted Proviso reads as under: “Provided that in a case where the assessee has been allowed to vary the meaning of the expression 'previous year' in respect of any business or profession under sub-section (4) of section 3 and, thereby, his income from ITR/39/1999 5/6 JUDGMENT such business or profession for a period of thirteen months or more is included in his total income of any previous year, the allowance referred to in this sub-rule, calculated in the manner stated hereinabove, shall be increased by multiplying it by a fraction of which the numerator in the number of complete months in such previous year and the denominator is twelve.” 9. On plain reading, it is apparent that in a case where the assessee has been allowed to vary the meaning of the expression 'previous year' in light of section 3(4) of the Act and income of such an assessee for a period of thirteen months or more is included in his total income of any previous year depreciation allowance shall have to be calculated by increasing the allowance by using multiplying fraction as provided in the Proviso. 10. Hence, if provisions of Section 32 of the Act and Rule-5 of the Rules are read in isolation, what is contended by the Revenue may become acceptable. But, section 3 of the Act, more particularly sub- section (4) of the said section, has not been either amended or substituted with effect from 1.4.1988 or 2.4.1987. In fact, section 3 of the Act has been substituted by the Direct Tax Laws (Amendment) Act, 1987 with effect from 1.4.1989, that is, as applicable for Assessment Year 1989-90 and subsequent Assessment Years. Thus, once an assessee is entitled to vary the previous year in terms of Section 3(4) of the Act, the larger income from business or profession stands included in the total income of the ITR/39/1999 6/6 JUDGMENT extended previous year, and is brought to tax. Accordingly, the corresponding depreciation for the extended period cannot be denied. The position in law is well settled that depreciation allowance is a provision for normal wear and tear of assets which have been used during the previous year for earning income which is brought to tax. 11. In the aforesaid circumstances, provisions of Rule, in this case, substituted Rule 5 of the Rules, cannot override the provisions of the Act. This is the position settled in law. In the circumstances, the Tribunal shall have to decide the issue afresh in light of the legal position stated hereinbefore after ascertainment of correct and complete facts as applicable for the Assessment Year under consideration. 12. In the result, the question is left unanswered leaving it open to the Tribunal to adjust its decision in accordance with the aforesaid legal position. Reference stands disposed of accordingly with no order as to costs. (D.A. MEHTA, J.) (Z.K. SAIYED, J.) mandora/